The Securities and Exchange Board of India is worried over the growing concentration of the mutual fund industry’s assets under management among a top few players and is examining proposals to cut a key fee charged by funds to investors.
Chairman Ajay Tyagi said on Thursday that capital market regulator is examining whether the high profitability of a few funds is because of the high total expense ratio — the fee that mutual funds charge investors to manage the schemes. It will also come out with a policy on close-ended schemes, he said.
“Is this concentration due to lack of adequate competition in the fund space? Are such disproportionately high profits due to high Total Expense Ratio (TERs), especially in equity funds?” said Tyagi at the annual mutual fund summit organised by AMFI, an industry trade body, on Thursday. “You would appreciate that from an overall industry perspective, some thinking is definitely required to bring in elements that facilitate a healthy competition in the industry.”
This is the first time Sebi has publicly spoken about the concentration of assets under management among top players though smaller asset managers have been crying hoarse about the domination of their larger peers and their influence over norms on the industry’s sales practices for some time now. Sebi recently set up a panel to study whether total expense ratio needs to be cut further. The total expense ratio includes the fund management fees and sales and marketing costs.
Policy on Close-ended Plans Soon
Stressing on the need for more competition, Tyagi said the top four mutual funds account for almost 50 % of the industry AUM and the top seven players account for around 70% of the money managed. Forty-one mutual funds manage Rs 25.05 lakh crore of assets under management (AUM) or investor money.
“Concentration in the industry is evident not only in the assets under management figures but also in the revenue and profit margins of the mutual funds,” the Sebi chairman said. “It is observed that the share of revenue of these even large AMCs is more than 60% of total industry revenue. Profit margin (PBT as a percent of revenue) of large MFs has also stood at a very healthy 40 – 50 %.”
RISKY DEBT INVESTMENTS
Tyagi also spoke of risks linked to mutual funds’ exposure to lower-rated debt securities. He said the exposure of mutual funds to long-term papers rated “AA -” and above is more than 91%. Almost 100% of their exposure is to “A1 +” rated short-term debt instruments, he said.
“When they hold these debt instruments, either long term or short term, in their books, they have to be cautious of credit risk and how they value that on their books,” Tyagi said.
He said retail participation in debt funds was poor. Out of the total Rs. 12.30 lakh crore debt AUM, around Rs. 11.50 lakh crore is held by non-retail investors.
On the sidelines of the Association of Mutual Funds of India (AMFI) summit, Tyagi said Sebi will soon come out with policy on close-ended schemes. ET reported on August 22 that Sebi would not give mutual funds the approval to launch regular close-ended equity schemes as it fears these products have been miss old to investors. The market regulator also feels the performance of such schemes has been neglected by fund houses.
Tyagi emphasised the need for mutual funds, trustees and fund managers to ensure there is no conflict of interest in transactions.
“An arm’s length relationship with respect to related party investments as avoiding conflict of interest is the need of the hour,” he said. “Some recent cases, the details of which I need not get into, do not augur well with the public service character of the industry and have to be avoided at all costs.”
PROMOTING DIRECT PLANS
He asked mutual fund houses to gather more assets under management via direct plans. Investors have an option of investing through regular and direct plans. In regular plans, investors go through the distributors and end up paying their commissions. Investors bypass distributors in direct plans and hence such schemes are cheaper.
“More investment through direct plans has many advantages such as lower transaction cost, more transparency and lower instances of mis-selling,” he said.
“There is a strong case for AMFI and the fund houses to educate investors about direct plans, and to suitably advertise and promote them.” – www.economictimes.indiatimes.com [24-08-2018]
Source : Financial Express