SEBI member Ananth Narayan G pitches for risk education, awareness in mutual funds

Ananth Narayan G, Whole-Time Member, Securities and Exchange Board of India.

Indian retail investors are yet to understand the concept of risk, which the Indian mutual fund (MF) industry must work on next as part of its financial market literacy programme, Ananth Narayan G, Whole-Time Member, Securities and Exchange Board of India (SEBI), said.

During his keynote address at the Moneycontrol Mutual Fund Summit in Mumbai on October 11, Narayan explained that during the past many years, the MF industry in India has been successfully able to make investors understand the concepts of compounded annual growth rate (CAGR) and relative returns.

“However, people are yet to imbibe risk as a metric. We made a small start in terms of using risk-o-metres, and we have tried to make them as simple as possible. But there are better ways to measure and explain risk,” Narayan noted.

A scheme's risk-o-metre is its risk indicator, depending on its month-end portfolio.

Apple = Bitcoin?

Narayan, who has also been a member of various advisory committees constituted by SEBI and the Reserve Bank of India (RBI), in his address said that the MF industry must avoid technical jargon while educating people on the concept of risk.

Also read | Moneycontrol MF Summit: Rural markets, the new frontier for MFs

“What we need to be able to explain is, what is a 15 percent annualised volatility? What does it mean in terms of what the investor feels in her bones?" he said.

Giving an example of the US-listed Apple Inc, Narayan explained that while the tech giant has delivered 25-26 percent annualised returns over the past 10 years, the stock’s annualised volatility, in reality, competes with Bitcoin.

Narayan was of the opinion that the MF industry needed to make retail investors understand what risk is and get people to appreciate how they can reduce risk.

Importance of asset allocation

During his address, Narayan highlighted that the key positive outcome of risk acceptance and measurement would be investors appreciating the importance of risk management.

“Suppose you buy one particular stock, which gives you a 15 percent annualised return with a 30 percent annualised volatility. Is that the best investment opportunity? If one is able to understand this, then the efficient market hypothesis will tell that it is not the case. For a 15 percent annualised expected return, you can construct a portfolio of investment assets, which gives you that return at far lower volatility at far lower risk,” he said.

To drive home his point, Narayan underscored that Nifty’s volatility over the last 10 years was about 18 percent, while individual stocks’ volatility is typically 30-35 percent. “Mutual funds are doing a great job, as they are actually providing a lower portfolio risk and, therefore, reducing the volatility in many ways.”

Also read | Moneycontrol MF Summit: Dream goal - MF industry charts plans for 5-fold jump to 20 crore investors

Narayan also highlighted that investors must be made aware of their risk appetite and how to construct an asset portfolio that ties up with that risk, and then be patient with it.

“This is the kind of education that we need going through to people so that they have to rely less on finfluencers (financial influencers) and other charlatans who are giving them ‘get rich quick tomorrow’ kinds of philosophies and inducing them into the market,” he said.
The SEBI whole-time member, during his speech, also emphasised that capital formation, which is the core of the capital market regulator’s mandate, relies on trust in the ecosystem.

Miles to go

Lauding the efforts of the MF industry, Narayan highlighted that as of March 2020, assets under management (AUM) of the industry stood at about Rs 22 trillion, which almost reached Rs 48 trillion today. Further, the unique investor count in MFs as of March 2020 stood at about 2.2 crore, which has increased to about four crore now.

Sharing another piece of data, Narayan noted that for the first time, the number of unique participants via SEBI-regulated entities entering the securities market ecosystem crossed the 10 crore milestone in September 2023.

Also read | SEBI is like the police that make an appearance in the final scene in a Bollywood movie, you are the hero: Ananth Narayan G

“But I have to underline that celebration remains only for a few seconds. In terms of financial inclusion, while we celebrate four crore mutual fund investors, there are some other sobering facts. The number of accounts that we have where PAN has been linked to Aadhaar as per CBDT is 51 crore,” Narayan said.

Narayan reminded the MF industry that while they have made great strides over the past many years, they still have a long way to go in terms of the sheer size of the opportunity as well as financial inclusion.