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SEBI Chairman's Speech At The AMFI Mutual Fund Summit

Last week, the Association of Mutual Funds in India (AMFI) held its annual Mutual Fund Summit.

The objective of this year's summit was to "define the roadmap for the industry with key focus on customer expansion and ease of doing business by leveraging on digital technology".

Shri Ajay Tyagi, Chairman of SEBI (Securities and Exchange Board of India) inaugurated the Summit and presided as the Chief Guest.

Listed below are the salient aspects of his speech delivered at the aforesaid Summit.

- Over the years, Mutual Funds have become one of the key players to channelize investor savings to the capital market (both equity and debt).

- They have a significant impact on the savings, investments and liquidity in the Indian financial system.

- Hence, it is essential that the mutual fund industry maintains the investor confidence.

- Also, there is a need to improve upon the regulatory framework for mutual funds.

- In last 5 years, the total assets managed by the Indian mutual fund industry (AUM) have more than doubled to around Rs.23 lakh crores.

- Even the investor base has increased from around 5.99 crore folios in July 2017 to about 7.59 crore folios in July 2018.

- However, compared to US and other advanced economies, India still has a long (long) way to go. India's AUM is only 11% of the GDP vis-a-vis near 100% in the US.

- 50% of the AUM is managed by the top 4 Asset Management Companies (AMCs). While the top 7 AMCs manage 70% of the AUM. Given that there are 40+ AMCs, means that large part of the money is concentrated in a few hands only.

- Even from the revenue perspective, top 7 AMCs corner more than 60% of the total revenue earned by the mutual fund industry.

- From profitability point of view also, large AMCs enjoy a very high Profit Before Tax (PBT) margin of 40-50%.

- Given this scenario of high concentration, it is important to create healthy competition in the mutual fund industry.

[Note: I had highlighted this fact more than two years ago:  Mutual Fund AAUM Data Reveals Very Disturbing Facts.]


- As regards investment risk, more particularly in debt funds, 91%+ of the long term debt investments are in highly-rated 'AA- and above' instruments; whereas almost 100% of the short term debt investments are in 'A1+' instruments.

- At Rs.11.50 lakh crores out of total Rs.12.30 lakh crores Debt MF AUM, the non-retail participation in the Debt MFs is very high.

- Only 7% of the corpus in debt funds and only 2% of the corpus in liquid funds is from the retail category.

- In contrast, near about 51% of the AUM in equity oriented funds have retail participation.

- Since mutual funds are custodian of public money, they must maintain the highest levels of integrity and good governance.

- One of SEBI's major focus area is geographical diversification i.e. mobilizing household savings from across the country. As such, the mutual fund industry should expand their reach from B-15 to B-30 cities in India. In this regards, SEBI has permitted MFs to charge additional Total Expense Ratio or TER (up to 0.3%).

- The mutual fund industry should work upon 'ease of doing business' so that right from investing to redemption the transaction process is simplified. 

- Direct plans need to promoted and publicized more. Such plans have lower fund management charges and also reduce the chances of mis-selling.

- ETFs are yet to gain popularity in India. Compared to 15% of the AUM in ETFs in the US, in India the investment in ETFs is a mere 4%. Since ETF has lower Total Expense Ratio (TER), investors should explore these passive funds vis-a-vis focusing only on the actively-managed funds. (Know more about ETFs here ETFs and MFs are same and yet different!)

- In recent years, the mutual fund industry has done well to spread the awareness about the concept of mutual funds. In this regards, the investors should also be made aware of the risks of short-term outlook and be advised to hold their investments for long term.

- For healthy development and long term sustainability, the mutual fund industry has to show good governance, discipline and right conduct.

Reportedly, there was also mention about a new policy for the close-ended equity funds, as such schemes were prone to mis-selling. I have been repeatedly warning about this since years:
Hazardous close-ended mutual funds can destroy crores
Never Invest In The 'Close-ended' Equity Scheme NFOs

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