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Last Updated : Sep 01, 2019 12:04 PM IST | Source: Moneycontrol.com

MF wrap: SEBI sounds warning bell to mutual funds on excessive risk practices

A substantial part of the initiatives taken by SEBI is related to debt funds

Himadri Buch @himadribuch

The Securities and Exchange Board of India (SEBI) has once again put on its sparring gloves to rein in mutual funds for their questionable practices.

This was hinted in many words by SEBI Chairman Ajay Tyagi at the AMFI AGM on August 27.

The SEBI chairman touched upon glaring deficiencies noted in the regulator’s inspection reports in areas of expenses charged to investors, the out of way risk-taking in liquid funds and asserted trustees to play an active role in the governance of mutual funds.

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The MFs were pulled up for overcharging investors in direct plans wherein a subscription is made without a distributor.

It was reported that SEBI inspection reports found that direct plan investors were charged some part of the distribution and selling commission expenses despite coming in without a distributor intermediation.

The regulator said that during its inspection, it noticed that the difference in the TER (Total Expense Ratio) between direct and regular plans is not exactly to the extent of distribution expenses and commission paid.

TER is a measure of the total costs associated with managing and operating an investment fund, such as a mutual fund. These costs consist primarily of management fees and additional expenses, such as trading fees, legal fees, auditor fees, and other operational expenses.

Tyagi also said that the average holding in liquid instruments in 20 percent of the instances, was less than 5 percent of AUM (assets under management) as against an average net redemption in liquid schemes of around 19 percent.

In June, SEBI had directed fund houses to invest at least a fifth of their portfolios in cash and equivalents which will, in turn, reduce liquidity risks in liquid funds.

This means, liquid funds have to hold at least 20 percent in liquid assets such as cash, government securities, treasury bills and repo on government securities.

Liquid funds are also not be permitted to invest in short term deposits, debt and money market instruments having structured obligations or credit enhancements. Liquid schemes are largely used by corporates to park surplus cash and it does not levy any exit load which facilitates easy cash management.

The SEBI chairman sounded out the trustees about their direct responsibilities in the governance of MF operations.

The trustees were exhorted to look into excessive risk-taking by MFs beyond their investment mandate as seen in recent liquid funds fiasco.

“SEBI has been hosting regular annual trustee meetings directly with trustee bodies since 2009 to apprise and strengthen their role in MF governance,” a former SEBI official said.

“In these trustee meetings, their doubts are resolved and queries attended to,” he added.

Background

As a capital market regulator, SEBI’s objective is to promote growth of the securities market through greater investor participation.

MFs are one of the most important institutions through which money collected from various investors, especially retail investors, are channelized into the capital market.

The importance of MFs can be seen through the sheer size of the AUM of the industry which stands at more than Rs 24.5 lakh crore as on July-end.

Therefore, promoting growth of the MF industry while protecting the interest of its investors has been an important focus areas for SEBI.

Recent initiatives by SEBI:

In the last year, SEBI has taken multiple initiatives with respect to various aspects of the MF industry.

A substantial part of the initiatives taken by SEBI is related to debt funds.

SEBI has been improving transparency and disclosures to the investors enable better investment decisions and protection of investor interest.

Towards this end, several initiatives have been taken by SEBI including daily disclosure of TER of all schemes on AMC and AMFI websites, disclosure of TER break-up in the half-yearly consolidated statement, disclosure of performance of all schemes of all MFs on the AMFI  website on a daily basis, standardization of performance disclosure post consolidation/merger of schemes, among others.

It is widely expected that with 2016-17 inspection report on MFs now under active review by SEBI, the glaring deficiencies will put the regulator on a course of corrective action, by persuasion efforts to MF industry and necessary regulatory changes that may be in the offing.
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First Published on Sep 1, 2019 11:57 am
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