The mutual fund industry rolled out risky investment products in its race to gain higher yields, raising questions on the distinction between lending and investing.
Ajay Tyagi, Chairman, SEBI, said recent events in the debt segment have put the spotlight on several risky investments made by the industry in its quest for higher yields.
The safety of investments cannot be compromised for higher yields, he said at the Association of Mutual Funds in India (AMFI) summit here on Tuesday.
“There is a clear distinction between lending and investing. Mutual funds do not have risk capital and are essentially pass through vehicles, wherein the NAV ought to reflect the correct value of assets held at any time,” he said.
The AUM of debt-oriented schemes as a whole fell 18 per cent last September and October and that of money market schemes tumbled 25 per cent. This was despite the total exposure of all mutual fund schemes to the stressed securities being only around 1 per cent of the AUM of all debt-oriented schemes.
This led to general erosion of trust of investors in debt schemes and concern regarding mutual fund industry’s exposure to debt and money market instruments having structured obligations or credit enhancements in various forms and complex structures.
Fault-lines exposed
The debt market events of last year have exposed the fault-lines in the industry and showed that a credit event in even one issuer or a group can have a contagion effect leading to liquidity risk across the market, said Tyagi.
While it has been around a year since the defaults started, the AUM of open-ended debt schemes is yet to reach the level seen at August-end. Such instances do not reflect well on the industry practices.
“While SEBI stepped in to protect investors’ interests, the need may not have arisen if many of these measures were taken by the industry itself,” he said.
Trustees of mutual funds are not expected to be passive participants in the mutual fund ecosystem; rather they should act as first-level gatekeepers to take remedial steps ánd inform SEBI, and not wait for the regulator to step in and take corrective measures, he said. In recent inspections, it has been seen that the difference in the total expense ratio (TER) between direct and regular plans is not equal to the distribution expenses and commission paid. Such practices are not desirable and defeat the very purpose of direct plans, he added.
Referring to the industry’s tagline, Mutual Funds Sahi Hai , Tyagi said retail investors repose a lot of faith and trust in mutual funds. “We ought to remember that it takes years to build trust in an industry and a single event may erode it,” he added.