The regulator is currently working on various proposals to contain mis-selling while CII is working on a policy paper for the mutual fund industry which is expected to come out in a couple of months
Market regulator Securities and Exchange Board of India (SEBI) seems to be in no mood to increase the penetration of the mutual fund industry and is first working towards eliminating toxic products and addressing the issue of mis-selling.
Speaking at the sidelines of a CII conference on mutual funds, KN Vaidyanathan, executive director of SEBI said,"Financial inclusion is a noble goal which I think is a long way off. It should not run ahead of ourselves. I don't think as a country we are ready for financial inclusion. Financial inclusion connotes including the bottom of the pyramid. The bottom of the MF industry should not be exposed to mutual funds."
Mr Vaidyanathan also spoke about the proposed guidelines for right selling versus mis-selling which will chalk out measures to prevent mis-selling at the institutional level. The guidelines will be first implemented by national distributors and banks and then for independent financial advisors. Moneylife had first reported about SEBI's plans. (Read here: http://www.moneylife.in/article/81/5764.html).
The regulator is working on two key aspects of mis-selling like distorted commissions and selling & alignment of products with customer risk profile. These proposals are expected to come out in the next three months and will be evaluated by the mutual fund advisory committee. The mutual fund industry is also planning to create a blueprint in terms of a policy paper for the entire industry.
"The industry needs to refer to a policy paper. What is the role and function and where does the mutual fund industry stand. I am happy that CII has already started working on it and hopefully in a couple of months we will be able to have a policy on this," said UK Sinha, chairman of UTI Mutual Fund.
Besides, the regulator is also working on a platform with registrar & transfer agents CAMS and KARVY which will provide a single view of all mutual fund investments to investors.
Charges fund companies with launching too many schemes but having very little connect with investors
Securities and Exchange Board of India (SEBI) chairman CB Bhave has spoken on why the mutual fund industry finds itself in its current mess. Speaking at the CII Mutual Fund Summit yesterday, he said, "The rationale of this industry as professional fund managers and aggregators of savings is to provide better returns through expertise and cost reduction. So why is it that we have difficulty in convincing investors that they can get better returns? Is something lacking in our delivery? Unless this fundamental issue is addressed, we cannot move forward.
Unless it is carried through to the investors with all the conviction that it is in their interest, they will not come. We need to focus on why is it that the communication is not going through and where do we have difficulty in communicating."
Mr Bhave also highlighted that various incentive structures in place in different institutions are posing a lot of problems for the industry. "Such incentive structures tend to drive institutions away from addressing customers' needs. This focus on short-term incentives ultimately results in a loss to investors."
He also pointed out the frivolity in launching a slew of products in the name of innovation. "Between the few mutual fund companies in the country, we have a few thousand schemes. I have no idea which scheme is good for me. Are these schemes really so different from each other? How much innovation is real and how much is driven by the tendency to look at short-term benefit?"
About 60% of schemes in the market today are suboptimal, pointed out Mr Bhave. "Investments in such schemes will not allow you to justify your claim that you are giving the benefit of aggregation of savings. The basic argument of why this industry exists is that we are able to aggregate savings on such a large scale that our costs of operating the portfolios are much less than what the individual's cost will be. And if that is not right, then who are we serving? Unless we ask these questions to ourselves, we will not find the right answers for long-term growth."
In a rare outburst, heads of various mutual funds express displeasure with the regulator at an industry summit; also admit that rethinking is required about their own business
Five days after the law ministry and finance ministry took the wind out of the sails of the Securities and Exchange Board of India (SEBI) on the issue of regulating Unit-linked Insurance Plans (ULIPs), the heads of mutual funds have probably started seeing their regulator in a different light and are emboldened to call a spade a spade. While the mutual fund industry has been limping over rocky terrain after the slew of regulatory changes introduced in July last year, fund companies were conspicuous by their silence on the extent of the impact felt by the industry.
However, during a summit discussion on challenges being faced by the industry yesterday, the chiefs of various asset management companies (AMCs) openly admitted to weakness in the industry's functioning and put the blame squarely on market regulator SEBI.
HN Sinor, CEO of AMFI (Association of Mutual Funds in India) set the tone by admitting that the industry has lost momentum post the changes. The newly elected chief of AMFI pointed out that there is a need for policy rework for the industry and that a roadmap should be drawn for the next five years to set things in order.
Speaking about the entry load ban and other initiatives taken by SEBI since last August, Mr Sinor said, "Commission payouts are an integral part of this industry.
A fresh review is needed in this regard. Such attempts (at regulatory change) could disturb the industry." Mr Sinor also suggested setting up of an ombudsman for the industry. The CEO's Interactive Roundtable at the CII Mutual Fund Summit 2010 that followed witnessed an even more frank discussion about the mess that the industry currently finds itself in.
UK Sinha, chairman and managing director of UTI Asset Management Co Ltd, commented that the mutual fund industry is becoming a 'shock absorber', what with all the changes being brought upon it. "The de-growth in assets under management is a worrying issue. The environment is not at all conducive or friendly," admitted Mr Sinha.
Ashu Suyash, managing director and country head, FIL Fund Management Pvt Ltd, pointed out that the industry players should have been given a reasonable time to adjust to the regulatory changes. "It has had a negative medium-term impact on the industry. The focus of AMCs has now changed from growth to survival," she said.
Sandeep Sikka, CEO of Reliance Capital Asset Management Ltd, was also critical of the developments in the industry. Commenting on the regulatory involvement post the financial crisis, he said, "We have now moved from the point of less regulation to over-regulation in the industry."
Vivek Kudva, managing director, Franklin Templeton Asset Management India Pvt Ltd, pointed out that mutual fund products are sold, not bought. "The financial crisis has shown us that there is a role for advisors." Asking customers to cut a separate cheque as commission to the advisor is an inhibitor for this industry, said Mr Kudva. He pointed out that people do not do the same while buying electronic goods-a cheque is not made out to the manufacturer and dealer separately.
Not all brickbats were directed at the regulator, though. There were rare moments of introspection too. Mr Sikka, while addressing the issue of product innovation, made it clear that there is actually a need for the industry to be simple, instead of innovative. "The industry has innovated itself beyond its own understanding," he quipped. This is a rare admission. In the 2005-2008 period, AMCs were manufacturing and hard-selling mutual funds as if these were variants of soaps and shampoos. Distributors were offered lucrative incentives to sell new funds who in turn encouraged gullible investors to switch from existing units to new ones, deceiving them with the argument that the new units were cheaper because these were priced at Rs10. This glaring mis-selling is not talked of anymore but is one of the principal reasons for the poor fund performance and therefore the consequent disillusionment of retail investors with funds. It is quite intriguing to see CEOs of fund companies raising the issue of simplicity after having foisted complexity all these years.