Exchange-traded funds (ETFs) and index funds are ideal for retail investors, but these products also have shortcomings such as the gap in pricing and the net asset value, said Usha Thorat, chairperson of the SEBI mutual funds advisory committee and former RBI deputy governor on December 14.
In her keynote address at the Moneycontrol Mutual Fund Summit, Thorat highlighted that the post-COVID years have seen a phenomenal growth of investors in mutual funds as also in the assets under management (AUM) to Rs 40 trillion currently.
“The Reserve Bank of India (RBI) data on household savings shows that bank deposits grew at 9.54 percent in the last two years, insurance by 6.2 percent, but household investments in mutual funds actually grew at a CAGR of 32.3 percent, and the household investments constitute about half of that at Rs 21 trillion,” said Thorat.
The chairperson of the SEBI advisory committee also emphasized the responsibility of mutual fund houses while voting as these entities were becoming bigger and bigger shareholders in corporate equities.
In terms of suggestions for regulations, Thorat said that the system should be looking at a roadmap for the gradual exit of institutional investors from the mutual fund industry.
“When you see that mutual fund penetration is just 10 percent of household savings, there is clearly a need to focus on mobilising more and more of those financial savings of households. There are also lots of pluses of having institutional investors, but they're also the ones who pull out normally in the moment of any stress and the retail investors are left behind,” Thorat said.
“When there is a crisis, in a way life becomes very cushy for institutional investors. So, whether we should really be looking at this kind of a roadmap is what my first question is,” she added.
On passive funds such as ETFs and index funds, Thorat said that AMCs are permitted to charge up to one percent as expense fees.
“But the actual expense that is being charged is as low as just .01 percent or .09 percent. At the same time, these products have certain shortcomings. There's a gap between the pricing and the NAV and there is poor secondary market liquidity. Industry leaders must see that the infirmities in these markets, and then the way retail investors come into this market, can be really increased,” she said.
Thorat also highlighted that there was a need to have better clarity on the role and responsibilities of the sponsor of the trustee companies and the asset management companies. “The accountability for any wrongdoing and violation should be clearly laid on the floor at the incidence of any particular entity.”
The expert closed her address with an appeal to the mutual fund houses that needless litigation appeals only weaken the regulation.
“One cannot be quibbling with the wording of the regulation, when it's very clear that the investors' interest has been clearly compromised,” Thorat said.
