They are inclusive, stringently regulated, have wider participation & offer propositions catering to multiple sets of risk-reward buckets. But How safe are they? Concerns surrounding the safety net have lately become more prominent amidst surmounting noise around specific credit event, liquidity crisis within NBFC & HFC space coupled with overall volatility being witnessed in broader capital market.
Mutual funds in India have a multi decade & far reaching story now which is on a pedestal gaining noteworthy momentum in light of financialization of the economy. Their trajectory has evolved over a period in many ways and in fact they are one of the matured investment vehicles for taking exposure in the market in developed world.
Coming back to the safety, while there could be many perspective towards this aspect, it needs to be evaluated basis regulatory oversight, true to label approach, their ability to defend from unsystematic risks, transparency quotient and liquidity scale of the schemes by the virtue of underlying construct.
Rationalization of the industry
In recent times, regulatory vigilance on mutual funds has further intensified and lot more hygiene has been brought in to ring fence the interest of investors. Rationalization of conventional practises seem to be the flavour ranging from creating required uniformity in scheme definition, investible universe, adherence to the mandate to a very recent rationalisation of fees in sync with the asset base.
Awareness building of AMFIs ‘Mutual Fund Sahi Hai’ campaign and various incentive structures, have tremendously scaled the visibility with an increase in overall penetration and reach in Tier 2 & Tier 3 markets. Furthermore, consistency and clarity in the construct, regularized framework and introduction of total return index for benchmarking would go long way in easing of dilemma around peer fund comparisons, potential risk & generic mandate of the scheme.
Another key aspect is diversification. While the systematic or market risk is something that one lives by, mutual funds offer reasonable cushion to mitigate unsystematic risk or diversifiable risk in the portfolio. Unsystematic risk is the risk of uncertain outcomes emanating from exposure in specific security which tends to get mitigated to an extent through their exposure in pool of securities.
Further segregation of fund categories basis their construct, mandate and composition offer multi layered risk - reward opportunities keeping an overview of end objective, risk appetite, broader expectations and investible horizon. Such varied bucket of offerings creates much needed flexibility for an advisor or investor to structure a blended portfolio construct with complimentary positionings.
Investors falling within a safety bucket on a risk scale could avoid high beta or aggressive fund positionings by restricting their exposure to relatively stable and conservative fund offerings with similar objective. To simplify this further, a risk averse investor would be better off not investing in focussed, high beta, sectoral or thematic kind of funds and should ideally evaluate large cap or multi cap funds given his sensitivity towards possible portfolio drawdowns and erosion in gains or invested capital on an ongoing basis.
An overlay of SRO (Self-Regulatory Body) i.e. AMFI for mutual funds along with market regulator have successfully managed to keep the entire space compliant and created necessary ring fencing to ensure investor is protected against any possible misconducts at any given point of time. Entire enforcement on publishing of fund or scheme data, incentive earned by distributor to sharing of remuneration of management team has managed to keep the entire segment vigilant.
Mushrooming of various Fintech’s, leading research providers, execution platforms and extremely well equipped and connected advisors across geographies offer additional layer of comfort and ensure investor is always abreast with know-how of the industry per say and stays in complete grip of his invested portfolio. Such level of transparency has further smoothened out entire decision-making process at various levels for the investor.
While liquidity is an outcome of portfolio composition and larger scheme construct, mutual funds at large have fared quite well on this aspect as well. Stringency on this aspect is likely to improve further with clear investible universe identified for every category of funds.
There is always an open tap for investors as far as open-ended funds are concerned, liquidity is either thin or not present for closed ended schemes. Investors need to be cognizant of overall liquidity profile of the portfolio and finalization of schemes shall also be an outcome of their liquidity or cash flow requirement.
Mutual funds enjoy wider acceptance and this acceptability may not really be contentious, it is quite imperative to be sensitized about various factors that may potentially alter entire risk reward scenario which could arise on multiple counts. Fund manager from time to time make necessary alignment to their views basis the market dynamics where underlying portfolio composition would eventually mirror the shift in views through selection or reshuffling of portfolios.
There is no clear winner and they keep rotating hence one needs to ensure constant engagement with respective advisors on continuity of suitability of funds already invested in or any perceived or realised changes warrant amendments within the portfolio.The writer is Chief Investment Officer, WGC Wealth