SECURITIES market regulator Sebi is in the process of firming up a policy to push retail participation in mutual funds in an effort aimed at neutralising or lowering the impact of large outflows by corporate or institutional investors as happened recently.
The regulator is now weighing the option of segregating the investments of corporate and retail investments so that retail investors are not impacted if corporate investors exit from schemes early, a source said. What this could mean is that fund houses would be told to float separate schemes targeting institutional and retail investors, a practice which is prevalent overseas. “In such a scenario, if a large corporate investor pulls out money from a scheme, then the other corporate investors need to worry and not retail investors as is the case now,” said a person associated with the proposed changes that are underway. Sebi is already in talks with the industry as the regulator and the government look at addressing the issue, which exposed the weak links in the financial sector.
The mutual fund industry was rocked last month after large corporate investors pulled out some investments in debt schemes due to a liquidity crunch which gripped the financial markets and also on concerns related to the credit quality of the debt paper in some of the fixed maturity plans (FMPs) floated by some fund houses. The redemptions coupled with the erosion in the value of the portfolio of schemes due to the battering of stocks led to a steep fall of close to Rs 97,000 crore in the assets under management (AUMs) of the industry from Rs 5,29,000 crore in September to a little over Rs 4,31,000 crore in October — a period during which most fund houses witnessed on an average redemptions of 20%.
The large redemptions made by corporate investors had put some of the fund houses under severe pressure, prompting the Indian central bank to open a special facility to banks to lend to asset management companies in need of funds to meet redemption needs.
55% of total AUM with large investors
THIS has raised concerns within the policy establishment in India on the impact that large corporate or institutional investors can have on mutual fund schemes if they choose to pull out their money prematurely.
Such a move by large investors leaves retail investors for whom the mutual funds were designed as an investment vehicle vulnerable, without severely penalising those corporate investors who exit early. According to one estimate, corporate investors account for a little under 55% of the total assets under management of mutual funds. These investments are spread across mainly short term products such as liquid or liquidity-plus schemes which invest mainly in gilts and other securities and FMPs where the investment is in pass through certificates issued by realty firms, commercial paper and debentures.
The regulator’s worries centre around the fact that such a substantial share of institutional money in mutual funds if pulled out abruptly can cause instability and dent the confidence of investors. “This is an issue on the table and we are weighing some options,“ an official who did not want to be identified said. Sebi has already stopped approving fresh filings for FMPs which provide an early exit clause to investors.
The disproportionate share of corporate funds in mutual funds can be attributed to the tax arbitrage opportunity on offer. For investors of FMPs — the tax incidence works out to a little over 22% for long term while investments in safe avenues such as fixed deposits would have been taxed at a higher rate.
Fund houses also provide a lot of incentives to corporate investors in terms of entry loads and other benefits to grow their assets. This helps them boost their AUMs and in turn their valuations. Since many asset management companies do not invest in a distribution network, corporate money comes in handy. This is reflected in the fact that at least 80% of the retail assets of Indian mutual funds is accounted for by eight major cities and towns in India. And of the total assets of the industry, equity schemes account for just about one-third with debt schemes making up for the bulk of it. Corporate money in equity schemes is reckoned to be just under 5%.
The regulator is now weighing the option of segregating the investments of corporate and retail investments so that retail investors are not impacted if corporate investors exit from schemes early, a source said. What this could mean is that fund houses would be told to float separate schemes targeting institutional and retail investors, a practice which is prevalent overseas. “In such a scenario, if a large corporate investor pulls out money from a scheme, then the other corporate investors need to worry and not retail investors as is the case now,” said a person associated with the proposed changes that are underway. Sebi is already in talks with the industry as the regulator and the government look at addressing the issue, which exposed the weak links in the financial sector.
The mutual fund industry was rocked last month after large corporate investors pulled out some investments in debt schemes due to a liquidity crunch which gripped the financial markets and also on concerns related to the credit quality of the debt paper in some of the fixed maturity plans (FMPs) floated by some fund houses. The redemptions coupled with the erosion in the value of the portfolio of schemes due to the battering of stocks led to a steep fall of close to Rs 97,000 crore in the assets under management (AUMs) of the industry from Rs 5,29,000 crore in September to a little over Rs 4,31,000 crore in October — a period during which most fund houses witnessed on an average redemptions of 20%.
The large redemptions made by corporate investors had put some of the fund houses under severe pressure, prompting the Indian central bank to open a special facility to banks to lend to asset management companies in need of funds to meet redemption needs.
55% of total AUM with large investors
THIS has raised concerns within the policy establishment in India on the impact that large corporate or institutional investors can have on mutual fund schemes if they choose to pull out their money prematurely.
Such a move by large investors leaves retail investors for whom the mutual funds were designed as an investment vehicle vulnerable, without severely penalising those corporate investors who exit early. According to one estimate, corporate investors account for a little under 55% of the total assets under management of mutual funds. These investments are spread across mainly short term products such as liquid or liquidity-plus schemes which invest mainly in gilts and other securities and FMPs where the investment is in pass through certificates issued by realty firms, commercial paper and debentures.
The regulator’s worries centre around the fact that such a substantial share of institutional money in mutual funds if pulled out abruptly can cause instability and dent the confidence of investors. “This is an issue on the table and we are weighing some options,“ an official who did not want to be identified said. Sebi has already stopped approving fresh filings for FMPs which provide an early exit clause to investors.
The disproportionate share of corporate funds in mutual funds can be attributed to the tax arbitrage opportunity on offer. For investors of FMPs — the tax incidence works out to a little over 22% for long term while investments in safe avenues such as fixed deposits would have been taxed at a higher rate.
Fund houses also provide a lot of incentives to corporate investors in terms of entry loads and other benefits to grow their assets. This helps them boost their AUMs and in turn their valuations. Since many asset management companies do not invest in a distribution network, corporate money comes in handy. This is reflected in the fact that at least 80% of the retail assets of Indian mutual funds is accounted for by eight major cities and towns in India. And of the total assets of the industry, equity schemes account for just about one-third with debt schemes making up for the bulk of it. Corporate money in equity schemes is reckoned to be just under 5%.
