FY2018: The year of the mutual fund?
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At the 4th edition of the annual Mint Mutual Fund Conclave last week, the overarching theme was the question: should FY 2018 be called the year of the mutual fund? For an industry that just two years back was still calling itself ‘nascent’ 24 years after privatisation, it is a giant leap forward to have assets under management that have tripled in the last five years. Mutual fund assets are now one-fifth of bank deposits and almost two-thirds of the assets under management by the life insurance industry. G. Mahalingam, whole-time member of the Securities and Exchange Board of India (Sebi), in his keynote address, said that possibly the external factors that helped this growth, such as easy money policy overseas for the last few years and more recently, demonetisation, are coming to an end, and now the real mettle of the industry will be tested. He said that several regulatory measures that are coming in the days ahead will ensure that the industry is investor-friendly. One, the scheme merger announcement will be made soon by Sebi. Two, the work on the total expense ratio (TER) going down must begin. Third, investor-friendly disclosure measures such as using the total return index should be taken. “Good times are the best times to swallow bitter medicine,” he said.
The industry view across the debate in the two panels that followed, seemed to be in favour of some of the medicine, but not all. Take for instance the soon-to-be-here Sebi regulation on the merger of mutual fund schemes. The regulator has been nudging the industry to clean up the mess of similar schemes for some years now. Too many similar schemes were launched historically to harvest new fund-related charges, they resulted from the takeover of fund houses and a too-fine slicing by the industry of a still-to-be-understood product. This has resulted in an ugly sprawl of schemes. Not just investors, but even sellers find it difficult to make sense of the plethora of me-too schemes from the same fund house. In fact, one large distributor laconically said to me earlier that he does not even go beyond the basic five or six broad categories to shortlist schemes: “Sab shor hai (it’s just noise).” Sebi is likely to allow a well-defined set of categories of mutual funds, such as large-cap, mid-cap, balanced, liquid, and short-term, among others, and within each category, a fund house can have only one product. Ideally, as suggested here, the approval should be on tap, but Sebi seems to not be ready for that yet. The definition of the asset allocation of some categories, for instance the balanced fund, has been an area of friction in the industry. Some of the older balanced funds have an equity allocation of up to 80%, but Sebi wants new balanced funds to stick to the 50:50 asset allocation between debt and equity. Sebi’s forthcoming rules seek to put an end to this anomaly, removing the “caste system where some are brahmins and others are not,” said Nilesh Shah, managing director, Kotak Mahindra Asset Management Co. Ltd. Whether the older schemes get a ‘grandfathering’ (of a special case of allowing an existing balanced fund with an 80:20 allocation) is still to be seen.
While Mahalingam was clear that investor-friendly disclosures like the use of a total return index is good, the panel was deeply divided on this. DSP BlackRock mutual fund took the lead sometime back and switched from a price index to a total return index, but the rest of the panel seemed to close ranks behind this being an unnecessary upgrade in disclosure. A total return index takes into account the dividends, interest and other payouts of a security and hence is a better representative of the actual benchmark return. The outperformance over a simple price index may not seem that big, when compared to a total return index.
No investment-related conversation today can be complete without discussing valuations and both the panels spent plenty of time on that. Are valuations stretched and how long will it take for earnings to appear? The Chief Investment Officer panel was clear that markets will go through phases where earnings look stretched, but if equity is a long-term play, then investors will finally do well if they stay the course. The stretched valuations are a cause for worry for the SIP (systematic investment plan) investor today. A healthy and growing SIP book is pumping more and more money into a market that is concentrated in the top 100 stocks. The biggest company by market cap is worth Rs5.32 trillion, the 100th company is worth Rs26,000 crore, the 1000th company is Rs367 crore and the 1,500th is just Rs22 crore. As the SIP book builds to even stronger flows, this money will further stretch valuations. Just earning growth is not the answer, India needs plenty of companies listed across the market cap bands. The panel view was that the three ways to get more quality paper and more stock into the market is through IPOs (initial public offerings), disinvestment and the dilution of promoter holding. Will it happen? The process has already begun, they said.
The last word must go to Anuradha Rao, managing director and chief executive officer, SBI Funds Management Co. Ltd, who said that “your kids will hate you if you leave them a property they don’t need or will live in.” She said that the new generation is not so focussed on gold ornaments and would rather wear pretty stuff that has no value for thieves. The money must go into financial assets such as mutual funds—leave those for your kids, not property or gold. I totally agree.
Monika Halan works in the area of consumer protection in finance. She is consulting editor Mint and on the board of FPSB India.
She can be reached at firstname.lastname@example.org.