Market regulator SEBI on Friday asked the mutual fund (MF) industry and its industry body AMFI to take the lead and “proactively” conduct objective and credible industry-wide stress tests themselves. 

An industry-wide stress test would help strengthen the MF ecosystem and is a prudential exercise that must be done to prepare for the bad times in the current good times, Ananth Narayan Gopalakrishnan, Whole-time Member, SEBI said on Friday.

“When things are looking good, that is the time to reflect what the risks are so that you don’t come to a situation where we have to go through a painful process”, he said in his inaugural address at the  16th Mutual Fund Summit, organised by industry body Assocham in New Delhi.

At the Summit, titled “Unlocking the Potential: Exploring Investment Opportunities for Viksit Bharat”, he also said that the SEBI research team has done preliminary analysis on this front.

“They have considered how many days it would take for all the mutual funds to cater to a hypothetical sudden and large 10-20 per cent redemption over a short time, given the current average level of delivery volumes of secondary markets”, he said.

He said that SEBI findings will be reviewed and published shortly. The preliminary findings are encouraging with some caveats, he added.

“Initial findings suggest that despite a substantial increase in MF holdings of stocks over time, the number of days to cater to sudden 20 per cent redemption has not changed much between March 2020 and March 2024”, he said.

In the earlier round of stress tests mandated by SEBI, the tests were limited to mutual fund players with large exposure to smallcap and midcap space. Now SEBI wants it to be an industry-wide exercise. 

“Individual (scheme-wise) stress tests are useful to describe idiosyncratic redemption risks from one scheme in one fund house. To capture system-wide risks, it is also important to model stress scenarios for the entire composite MF ecosystem”, Gopalakrishnan said.

MF RISKOMETRE

Gopalakrishnan said there is also a need to explore a better way of conveying risks of different mutual fund schemes to investors. 

“While the existing riskometer is a simple and dramatic improvement over the earlier one, it does not adequately differentiate risks between the many types of schemes that are offered today. All of them are clubbed as high risk”, he noted. 

On the back of robust retail investor inflows, MF assets under management have grown from ₹ 23.8 lakh crore as of March 2019 to ₹61.2 lakh crore as of June 2024, recording an impressive CAGR of 20 per cent per annum. 

Gopalakrishnan also suggested that the MF industry must focus on streamlining operations and improving efficiency for investors. 

“At a time when instantaneous fund transfers have become ubiquitous in our country, perhaps we should look to improve our internal processes and the security settlement ecosystem to ensure that funds are passed on to investors on the day of the settlement itself rather than a day after or two days after,” he added. 

Gopalakrishnan asserted that there is no room for complacency. There are plenty of opportunities but at the same time there are risks to recognise and manage, he said.

From less than 2 crore unique investors as of March 2019, the MF industry has grown to 4.7 crore unique investors as of June 2024, recording an impressive CAGR of 18 per cent during that period, he added.

Since March 2019, MF has net garnered ₹2.6 lakh crore each year. Of this ₹2.2 lakh crore has been deployed towards risk-oriented schemes. I.e. equity, hybrid schemes, equity-oriented ETFs and index funds.

In comparison, average Foreign Portfolio Investors (FPI) inflows since March 2019 was ₹ 61,000 crore a year — less than a third of domestic flows. This is reflective of the trend of domestic savings dominating external and foreign savings, SEBI official said.

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