Addressing Issues in MF Market

What is the issue?

Equity markets are facing a hard time in attracting the retail customers as they are used to predictable returns.

What is the status of Indian Equity market?

• Mutual fund industry discloses monthly portfolios and daily NAVs, follows mark-to-market accounting and promises swift redemption at the latest NAV in its open-end schemes.
• Many sordid details of the IL&FS group’s financials have tumbled into the public domain after the default. Click here to know more
• As the credit ratings for IL&FS and its group entities fell steeply from investment to junk grade, debt mutual funds that held these bonds took immediate hits to their Net Asset Values (NAVs).
• A decision by DSP Mutual Fund, which also had exposure to IL&FS paper, to sell its DHFL bonds at a discount set off an irrational panic about the NBFC sector.
• Now calm appears to be returning to the market after government’s offer of liquidity support after superseding the IL&FS Board.

What are the fundamental issues in equity market?

• In India there is fallibility of rating agencies in assessing the credit-worthiness of borrowers.
• The fact that bond deals happen mostly through the private placements also makes them susceptible to misinformation.
• In the case of debt mutual funds, AMCs seem to have no well-thought out communication strategy to reach out to their investors in the event of sudden risks.
• Unlike listed companies, most mutual funds in India do not have an ‘Investor Relations’ section on their home page that immediately directs the user to an important update.

What measures are needed to address fundamental issues?

• It is important for the mutual fund industry to introspect the issues in the industry and fix the gaps in its credit appraisal processes before it actively promotes debt products to risk-averse retail investors.
• The fact that the IL&FS bonds figured in many liquid, ultra-short duration and short-duration funds, which are marketed as alternatives to bank deposits, makes it even more critical for MFs to improve their risk management skills.
• The fund industry will need to be far more proactive and elaborate with its communication to appeal to retail investors.
• The lack of uniform valuation norms for corporate bonds and their sporadic liquidity, are issues that need to be taken up on a war footing if the open-end fund structure is to work smoothly for debt funds.

How mutual funds can be made accessible to retail investors?

• Retail investors are used to the predictable returns of bank deposits or post office schemes, to understand the strange workings of the Indian debt market.

• MF industry can certainly do its bit to make life easier for retail investors by not mixing and matching both retail and institutional investors in the same debt schemes.
• As smart institutions investors often get wind of trouble early and rush to redeem, it is retail investors who are left holding the baby.
• The best solution to this problem would be for AMCs to create separate products for first-time retail investors testing out debt schemes.
• If these schemes can be managed with minimal credit and duration risks, and deliver less volatile returns, common man would choose the mutual funds.

Source: Business Line