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A lot has been happening from the regulator’s end in the world of mutual funds. The regulatory approach has always been at the forefront of big developments in the mutual fund industry with the introduction of the New Asset Class being the latest example.
Discussing some of the biggest challenges and developments, four stalwarts of the industry: Dhirendra Kumar, CEO, Value Research, D P Singh, Deputy MD & Joint CEO, SBI MF, Monika Halan, Writer & Author and Venkat N Chalasani, Chief Executive, AMFI engaged in an insightful discussion at the Cafemutual Confluence 2024. Prem Khatri, Founder & CEO, Cafemutual moderated this session. Here are some highlights of the discussion.
On introduction of NAC by the regulator
Dhirendra feels that this will protect investors from falling prey to unregulated schemes.
He also thinks that NAC can potentially offer benefits of PMS with tax efficiency of mutual funds.
However, he also asked the investors to wait for 3-5 years to invest in NAC to make sure that the perceived benefits materialize.
Monika commends the mature approach of the regulator to introduce NAC and feels that the motivation for the introduction of NAC is to allow fund houses to run strategy-based schemes.
When asked whether the regulator’s reputation would be affected if NAC goes wrong, Venkat clarified that SEBI does everything on a consultation basis and the NAC has been introduced after a lot of consultation with stakeholders of the MF industry.
DP added that many fund houses were consulted before the introduction of NAC. He feels that the reason for NAC has been to create a bridge between PMS and MF investors and also protect their interests.
On measures by SEBI, which have changed the course of the MF industry
Dhirendra picks the measures to increase fee transparency and product disclosures like risk-o-meter and voluntary disclosure like factsheets.
DP believes that the ban of upfront commissions was a blessing as it was a tool of mis-selling. He also picked the ‘Mutual Fund Sahi Hai’ campaign for increasing the trust and respect for mutual funds. He also said the B30 incentive was an important regulatory decision, which led to the growth of the MF industry in small cities and towns.
Venkat picked ‘Mutual Fund Sahi Hai’ as it made a niche product accessible to retail investors. He also picked the introduction of the Corporate Debt Market Development Fund (CDMDF) for increasing the liquidity in the corporate bond market.
Monika thinks the aligning of the incentive structure and removal of NFO charges, entry load and upfront commission have played a major part for the growth of the mutual fund industry.
On uniformity in KYC norms
Monika said that the problem lies in the KYC norms of banking and other parts of the finance industry. She thinks that CKYC did not work as it was not authenticated and only the Ministry of Finance can solve this problem.
Dhirendra said that the compliance of KYC norms with the PMLA act is making the process complicated. He also added that if there is no additional KYC requirement in MFs for people with bank accounts, it can be a big boost for the MF industry as the non-uniformity in the working of KYC process is making new client onboarding difficult.
Venkat said that there has been a lot of confusion in the media related to KYC but the process has a clear rationale: once identification and address of a new investor is validated, he is able to transact with any AMC. However, if new investors submit documents which cannot be verified online, they are required to register every time they transact with a new AMC. He attributes this complex KYC process as a way to protect investor interests and prevent money laundering. He also hopes to see a uniform KYC process across the financial sector in the near future.
On the future of regulations
Monika lauds the regulators for allowing innovations to happen in the MF industry and introducing them at the right time. She also added that India is at the start of a big wave of growth of the Indian economy.
DP pointed to the fact that currently a bank account can be opened only with Aadhaar but for investment in mutual funds, PAN is also required. This makes PAN-Aadhaar linkage essential leading to practical issues as the names on both are different for many people. He also said that the increase in cash limit from Rs. 50,000 to Rs. 2 lakh can increase volumes in the industry.
On how MFDs can stay relevant
Dhirendra emphasized that technological development is necessary for MFDs to stay relevant. He warned that if MFDs do not embrace technology, they will become obsolete dinosaurs in the next 5 years. He also added that the latest technology offers great opportunities but is also the biggest threat for distributors. He advised MFDs to keep winning the trust of clients and staying relevant to be their top priorities.
On MFs moving towards passives
DP Singh said that the new investors are coming who do not have the habit of taking advice and are moving towards index funds. He added that passives allow AMCs to get more investors in the market.
Dhirendra said that SEBI allows only one fund in each equity and debt category for active funds while there is no such rule for index funds.
On passives outperforming actives
When asked if active funds justify their fund management charges as passive schemes are starting to give better returns, DP Singh clarified that performance and returns are not the same. He gave an example where in a small cap, an active manager selects companies with good fundamentals which may offer lower returns. Compared to that, an index fund will invest in all kinds of companies which would lead to better returns over a 1-2-year period. However, in this case, the fund manager cannot be blamed as he has protected the investor’s interest. Over the long term, he may be proven right.
Monika added that it will take a 1-2-year bear run to show the better performance of active funds compared to passives. She advised to not compare active and passive funds until there is a reversion to the mean.
You can watch the complete session by clicking here.
