Sebi said the ongoing credit crisis that resulted in returns of various debt mutual fund schemes taking sharp hits has brought to surface the kind of liquidity pressures that the industry could face.
“There was a debate if mutual fund industry should be at par with banks having an SLR( statutory liquidity ratio) and CRR( cash reserve ratio). Should mutual fund industry have an SLR at all?,” Sebi whole time member G Mahalingam said at the CII Mutual Fund Summit on Thursday.
Last year in September, the regulator brought in compulsory liquidity buffer in overnight and liquid funds, where in funds were mandated to invest 20% in liquid assets.
“Now, this is a nudge which is coming from the regulator. But, what I would wish is that the industry itself is going to operate on a cycle where it actually is able to gauge what is going to be the liquidity demands on a stress scenario, and it is able to build up the liquidity buffer by building up a ladder of liquidity maturities,” Mahalingam said. He said it would squeeze the industry and over a period of time, mutual funds would be volume based and not margin based.
Analysts said an SLR requirement could impact returns on debt mutual fund schemes
“SLR will help create liquidity and is a good idea, but one must keep in mind that it could lead to lower yields,” says Kaustubh Belapurkar, Director Research, Morningstar India.
Mahalingam also warned mutual funds against mis-sell credit risk funds–which invest more than 65% of their corpus in lower-rated bonds– to investors by assuring them unrealistic returns.
“We’ve gone through stressful times. Clearly, the industry needs to ask a question to itself, how do I sell the credit funds? How do I market it to consumers? Do you market it saying it will fetch you 50 bps (basis points) extra, or do you also tell him that there is a risk which is inherent and hidden there?, said Mahalingam. “I think it is the bounded duty of the industry and the distributors to bring clearly this risk into perspective so that the retail investor does take a calculated call. We don’t want to deal with complaints later that I was told that I will get a return of 10-11 % return.”
The Sebi official said mutual funds will have to do a more responsible sales job while selling credit risks funds because of the risks involved. He said investors are going to crowd the industry in search of alpha as the interest rate trend downwards. Alpha refers to the extent of outperformance of a product over its benchmark.
“Alpha is going to become a demanding factor. But then from regulators perspective I would like to say, this cannot be the sole obsessive factor for the industry. I think the greek language has other alphabets too such as beta and gamma and I think we need to focus on other things other than alpha,” Mahalingam said.
The Sebi official also said mutual funds must keep away from structured obligations which don’t make things clear.
The regulator said mutual fund industry should play a leading role in corporate governance with regard to voting in corporate resolutions.
“Whether it’s Crompton Greaves, Religare or Fortis. I think these are shocks for the industry and gone are the days when we can tell that these are few in number so we can afford to neglect them. Mutual funds will have to play a constructive role. I took note of the fact that there are 12% abstentions by the mutual fund industry. This should be reduced to single digit over a period of next three to four years. It should come close to one to two percent. Others like insurance and pension fund industry should take a leaf out of the mutual fund industry and play a constructive role in corporate governance,” Mahalingam said.
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