Indian Mutual funds: Evolution and stricter SEBI regulations

Access to affordable financial services – especially credit and insurance – enlarges livelihood opportunities and empowers a nation’s citizens and industries. Mutual Funds have been phenomenal in mobilizing capital and resources and channeling it into productive investments. With constant evolution and growth of the fast-paced economy in the last few decades, mutual funds have evolved as a key player in the capital markets and have played a significant role in financial inclusiveness for Indian masses. They are being seen as safe investment opportunities with good returns for the investors as shown by the June 2016 quarter reports stating an all time high in investor sentiment regarding mutual funds.

Evolution of Mutual Funds in India

It was in 1963 that the Unit Trust of India was established and that laid the foundation of the growth of economy. It was done at the initiative of Reserve Bank of India and the Government of India. The evolution and growth of mutual funds is categorized into four distinctive phases which has promulgated credit financing and evolved with changing political and economic scenarios.

1964 to 1987– This is considered the first phase after the Unit Trust of India was founded by the Act of the Parliament. However, even though it was under the administrative control of RBI initially, in 1978, it was put under the Industrial Development Bank of India (IDBI). With proper impetus and channeling of funds, by 1988, assets under UTI crossed over 6,700 crores.

1987-1993- The year 1987 marked the entry of Public Sector Funds that included the LIC, public sector banks and General Insurance Corporation of India (GIC). Amongst the first ones to establish mutual funds were SBI in 1987 and over the successive years other PSU banks joined the bandwagon within this phase. These included Punjab National Bank, Bank of India, Bank of Baroda, and GIC started the mutual fund in 1990. With accumulated assets of over 47,000 crores at the end of this phase, the growth of Indian economy was visible.

1993- 2003– This is a benchmark phase of the Indian economy with the entry of the Private sector infused funds in the mutual funds industry. This led to more choices for fund managers and investors. The SEBI Regulations pertaining to Mutual Funds came into play in 1993 which were revised in 1996 as SEBI Mutual Funds Regulations. With a more open economy, foreign investments increased and set up funds in India. In 2003, the total assets accrued came to be Rs. 1, 21,805 crores.

2003 to current- This is the fourth phase and since the repealing of the UTI Act of 1963, there have been separate mutual fund entities in UTI- Specified Undertaking (worth Rs.29, 835 crores) which covers the Assured return schemes and this does no longer come under the administration of the Mutual Funds regulations.

Although financial liberalization reforms began in the 1990s, it was only after a decade that it has opened up the economy considerably, bringing in fresh investments from FIIs into the capital and the mutual funds market.

Mutual Funds are emerging as a new and very strong counterbalance to Foreign Portfolio Investors (FPIs) as they infused Rs 75,000 crore in the equity markets during the first 11 months of the fiscal year.

SEBI and AMFI together regulate the entire mutual fund industry and have come up with strict AMC regulations, investor education programs and other initiatives to protect investor interest.

Let’s look at some of their initiatives, which have made Mutual funds a go to place for retailers to invest their money.

Changes introduced by SEBI:

Transparency on NAVs: Before 1993, there was complete blanketing on the investment of funds by the Mutual fund companies. However, after the setting up of SEBI, private MF houses started the weekly disclosure on the NAVs. SEBI noted it and changes were made.  Today the NAVs are declared on an everyday basis while the mutual fund portfolios are disclosed on a monthly basis.

Disclosure on risks: It is compulsory to disclose the risks, investment patterns and objectives, fees and the tax implications of each mutual fund. Better standardization of the documents is a norm today. As per current laws, half-yearly financial results and account statements need to be sent to the investors, apart from the commissions that have to be paid out to the distributors.

Diversification in Mutual Fund products:  Although the Assured Return funds and US-64 were hugely popular in the 90s, they failed within a few years. By 1994, there were about 26 tax savings schemes promoted by public sector MF services and when the private companies launched their schemes, it added to the product listings. From tax-saving to mid-cap and fixed income schemes, investors got a choice. Later in 1998-99, sector funds emerged with fixed maturity plans (FMP), Monthly income plans (MIP) and gilt schemes.

Higher investor safety with low risk: SEBI has tweaked and changed regulations to ensure that investors are protected. It has stipulated stringent rules that limit the portfolio investment. This includes that the fund managers cannot invest more than 10% of the NAVs in one specific company apart from sector/index funds. While a debt fund is not allowed to put in more than 10% of the assets in unrated bonds and only 15% in rated bonds. No fund can invest anything above 25% in sponsors group of companies.

Proper documentation: As per SEBI rules and guidelines, the investor’s copy of PAN card, address and identity proof have to be submitted. This has been done to keep the accounts and identities clear and stop black money transactions. SEBI is working to formulate guidelines on the mutual fund distributors so investors can stay safe.

Right selling tactics: No more fancy names and celebrity advertisements can be done. SEBI has strict policy on ensuring that the there are no tall claims. The names spell out exactly what is holds and transparency has been encouraged.

Color coding with Riskometer:

However, to ward off investor fears and to ensure better clarity, Association of Mutual Funds in India (AMFI) introduced color coding on the classification of risks involved with the various funds. The meter, termed as Riskometer actually color codes the different mutual funds in brown (high risk), yellow (medium risk) and blue (low risk). However, it is broad ranged and only after the actual portfolio is seen and ways of investment are scrutinized that the individuals can choose the best fund for their investment.

  • Low risk mutual funds: The money market bond funds that have lower than 90-day maturity are low risk. The medium term mutual funds with term of 91 days to 36 months are included under this criterion.
  •  Medium risk category: Gilt funds, arbitrage funds, hybrid funds and income funds that mature after more than 36 months or are debt-related with 20% equity based funds are considered moderately risky.
  •  High risk mutual funds: Index funds, international funds, equity based funds and balanced mutual funds are under the high risk category.

Your monthly dose of SIP:

With better insight and higher clarity on mutual funds, investors trust in Mutual funds as a safe avenue has surged. That is one of the reasons that Systematic Investment Plans (SIP) has gained considerable popularity. As per the data from 2015-16 CAMS shows that new registrations are up 26% from previous fiscal year.It has been noted that the rise in SIPs shows renewed interest in stock market and positive investor sentiments towards funds driven by enhancement in macro-indicators and heightened economic activities. The main reasons behind the emergence of interest in SIPs is due to the dip in saving and deposit interest rates which is motivating the small investors to peruse other safe havens for alternate investments. Additionally, harping on the safe investment of mutual funds as compared to trading in open stock market is another factor that first-time investors put capital in equities using mutual funds as the means of achieving the same profits.

Staying bullish on MF:

A decade ago, it was common for investors to buy in the bullish market or when the markets peaked but the fear seems to have gone as mutual fund investors do not worry about correction in the stock market. With SEBI and other regulatory bodies keeping a sharp eye for irregularities and keeping pace with the evolving markets, Mutual funds have made in-roads as safer avenues for small and medium investors.

With plenty of regulatory developments in the last few years, the changes have brought about investor maturity and now MFs tend to be in the long term financial planning strategies. Additionally, advancements in technology have touched the capital markets and have enabled higher registration while cutting down on registration time. Now most of the mutual funds including SIP are using National Automated clearing House (NACH) instead of Electronic Clearing Services. Faster processing has added to the ease of the investors. It is taking lesser number of days than before, which has increased investors’ interest.

Today, India has emerged as an important economic force for global investments in the emerging capital markets with higher impetus by government policies and better regulations.

Foreign institutional investors (FIIs) meet nearly 3/4th of the daily turnover of the stock market and these foreign funded investments cater to government securities through derivatives, primary and secondary markets. Looking at the steady rise of the NSE Nifty and BSE Sensex to over 12% since last year has given a huge boost to the mutual funds in all categories. The benchmark indices have been crossed with large margins, giving investors a reason to smile. However, patience is the key for better profits and seeing the confidence in the market today, mutual funds have become an important mainstay of the investors.

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