Securities and Exchange Board of India (SEBI) Chairman Ajay Tyagi expressed concerns over the growing concentration of assets under management (AUM) among the top seven players.
"The top seven AMCs [asset management companies] currently manage 70 percent of industry AUM. The top seven AMCs accounted for 60 percent of entire industry’s revenue. The profit before tax as a percentage of revenue of large mutual funds has also stood at a very health rate of 40-50 percent," Tyagi said.
He emphasised on the need of having more competition to ensure uniform growth among industry players.
"We need to examine whether the high profitability is due to high TER [total expense ratio]. We need to bring in a healthy competition in the industry which is lacking as of now," said Tyagi.
He was speaking at the second Association of Mutual Funds in India (AMFI) Summit held in Mumbai on August 23.
He commended the industry for achieving stellar growth over the last few years, but added that the Indian mutual fund AUM to GDP ratio continued to be lower at 11 percent of GDP as compared to global standards.
The global average AUM to GDP ratio is around 62 percent. He said the industry has a lot of catching up to do to improve penetration into the market.
Speaking about the role that risk management and valuations assume, Tyagi said that the two are important considering the growing size of the industry. He pointed out that valuation is important for mutual funds as it has direct ramifications on the entire industry.
He pointed out that in debt funds, more than 90 percent of assets are invested in instruments rated AA – and above and almost 100 percent in A1 plus short term rated instruments. He expressed concerns about the credit risk that the fund houses are taking in its debt portfolio.
He said retail participation in debt funds is very abysmal. Of the Rs 12.30 lakh crore total debt AUM, around Rs 11.50 lakh crore is held by non-retail investors.
Debt funds have to be more vigilant about the risks they are taking and how these risks are being valued. He said the industry needs to think of more innovative means to deepen the bond market. Products like debt ETF, bond index tracking funds could be a solution. He also alluded to the recent cases of corporate governance issues in mutual funds.
"Fund houses have a strong public interest and need to maintain integrity. The recent instances of deviations do not augur well for the industry and have to be avoided at all costs. Board of trustees have an important role to play here so that AMCs adhere to the highest standards," Tyagi said.
Promote direct plans
He stressed that AMCs should promote direct plans that were launched in 2012 more actively in investor awareness campaigns. Tyagi noted that direct plans are more cost effective and transparent.
He stressed that the industry needs to promote passive funds. Currently, passive funds account for 4 percent of total industry AUM. In US, passive funds account for 15 percent of mutual fund industry assets.
Tyagi said that the industry needs to use investor awareness corpus available with AMFI in a more meaningful manner. While the SEBI chief commended the industry on raising awareness about mutual funds, he nudged the industry to highlight short term risks associated with mutual funds in investor awareness campaigns at ground level and in advertisements to set the right expectations among investors.
SEBI’s main focus area has been to increase the penetration of mutual funds in smaller towns. He said the industry has achieved good growth in B15 markets in recent years. The share of B15 AUM has increased from 12.7% in 2013 to 17.7% in 2108. He said the time is ripe for the industry to concentrate on B30 markets. There is need to bring long term savings from smaller towns. He said the additional expense of 30 basis points to get inflows from smaller towns should help facilitate this growth.
Ease of doing businessSEBI has taken a few initiatives like payment through e-wallet, instant liquidity, standardisation of schemes and introduction of Total Return Index for benchmarking schemes to help improve investor experience. He said the industry needs to supplement this growth by adopting digital technology right from onboarding clients to processing of redemption requests to further ease the transaction process.