A Regulated Recovery

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The Reforms Introduced By Sebi Are A Shot In The Arm For The Ailing Mutual Fund Industry, Says Tuhin Dutta

 

Illustration: Naorem Ashish

NOT INVESTING in mutual funds? Is the hangover left by the 2008 global economic crisis still weighing you down? Don’t let it. The Securities and Exchange Board of India (SEBI) Chairman CB Bhave has introduced several corrective measures, and most veteran analysts now see the preslowdown buoyancy returning soon to the Rs 800,000-crore industry. They say the beating that sales of equity schemes — which invest in the stock market — took after the market regulator banned entry loads, was just a rough phase on the bumpy road to recovery.

It is true that many of those who lost heavily during the slowdown began pulling their money out from their equity investments the moment things started to look up, because nobody was taking any chances in the initial days. And this is the way it has been since last August: there has been a net outflow — except during January, February and May this year when the mood suddenly lifted for a while. Analysts attribute the net inflow reported in these three months to the stringent guidelines issued by SEBI, and they believe things can only move forward till the old confidence in the industry is fully restored. Says Dhirendra Kumar, Chief Executive Officer of Value Research, a mutual funds-focussed research firm: “The new regulations are to ensure that nobody ever gets fooled again. I am absolutely certain that if you have a product which has made its mark over the last five to six years, and has the investors’ confidence, its future prospects are bound to be bright. Just now 85 percent of the industry is beating the benchmark.”

The Rs 8 lakh crore industry must stop chasing shortterm gains for better results

At a recent mutual funds summit organised by the Confederation of Indian Industry in Mumbai, Bhave had described the industry as shortsighted — one that had all through been content with chasing short-term gains. Among the problems that investors faced, said Bhave, was the bewildering maze of schemes — around 3,000 — confusing investors no end. Currently, fund houses are competing with each other to increase their assets under management, or the money that investors put into mutual funds. This has led to higher marketing and advertising costs, putting profitability under pressure — with many fund houses even posting losses.

Barring some of the larger asset management companies which have deep pockets and, thus, higher sustainability, most are barely making a profit, according to one analyst. But after SEBI stepped in investments seem to be coming back, as the equity category witnessed in May. Adds Kartik Varma, co-founder of iTrust Financial Advisors: “Mutual funds are a useful and proven way to create longterm wealth. But investors need to recognise that wealth creation doesn’t happen by blindly putting money into funds.” Others agree, with a senior official of a leading funds house holding that along with the new guidelines, what is required is extensive cost cutting at a time when entry load has been banned. In other words there is no more scope for extravagance or the industry’s penchant for instant gratification — one of its biggest failings so far.

Writer’s Email: tuhin.dutta@fwtehelka.com

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CORRECTIVE MEASURES

Despite opposition from the industry, SEBI mandated that investors must not be made to pay any initial charge (entry load), and that henceforth it is they who would decide how much commission the agent was to be paid

To restrict mis-selling of schemes through announcement of higher dividends, SEBI directed mutual fund companies to announce dividend only from profits and not from unit premium reserve, which is the unit holder’s money

SEBI has questioned the need to continue with 3,000 schemes, which makes it cumbersome for investors to select a suitable one

Bhave introduced the Applications Supported by Blocked Amount (ASBA) facility, under which the application money for public issues remains blocked in the applicant’s bank account till allotment of shares is finalised. This enables investors to earn interest on the amount

Time frame in rights issues whittled down from 16 weeks to six to reduce market risks faced by issuers and investors

In consultation with the Reserve Bank of India, SEBI introduced currency derivatives as well as interest rate derivates to enhance market participation

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