The ‘Skin in the Game’ regulation has come as a blessing in disguise for the mutual fund industry as their investments have grown multi-fold last fiscal.
Nippon Mutual Fund and Tata MF investments in their own schemes have grown 48 per cent and 45 per cent in the financial year ended March, 2024 to ₹338 crore and ₹141 crore against ₹229 crore and ₹97 crore in FY’23, according the Association of Mutual Funds in India.
ICICI MF and SBI MF investments delivered 42 per cent and 37 per cent increases in return to ₹701 crore (₹494 crore) and ₹674 crore (₹493 crore), respectively.
The growth of mutual fund investments in their own schemes was driven by the long term investment horizon, performance of the scheme performance on the back of bullish market in last 2-3 years.
In 2014, the skin in the game made it mandatory for AMCs to invest one per cent of the amount raised in the new fund offer or ₹50 lakh, whichever is less, in the growth option of the scheme. The investment can not be redeemed unless the scheme is wound up.
In 2021, the amount an AMC invested in a mutual fund scheme was linked to the scheme’s risk-o-meter score. SEBI made it mandatory for the fund house to maintain the investment percentage throughout the tenure of the scheme.
Subsequently, AMCs have to invest 0.13 per cent in very high-risk funds, while their investment in high-risk and moderately high-risk funds will be 0.11 per cent and 0.09 per cent. In moderate-risk schemes, AMCs have to invest 0.07 per cent and for the low-to-moderate risk and low-risk schemes, the mandatory investment limit has been set at 0.05 per cent and 0.03 per cent.
The mandatory investments need to be made from the net worth or by the AMC sponsor to fulfil the investment obligations. The AMCs should make up the shortfall in minimum net worth later in two consecutive quarters.
Anil Rego, Founder and Fund Manager at Right Horizons, said favourable market conditions, such as bull markets or sector-specific growth trends, have amplified the return on investments made by mutual funds in their own schemes.
The sustainability of the growth depends on long-term disciplined investment strategies, effective risk management, adherence to regulatory standards and consistent performance across market cycles, he said.
Bull markets and favourable economic environments may contribute to initial rapid growth, but sustaining growth over the long term requires resilience against market downturns and economic cycles, he added.