Equity inflows into mutual funds are down to a trickle; in June, Nomura reported, they collapsed to a four-year low of Rs 13 crore. The number 13 should have spooked some, but fund managers have had so much luck all these years bamboozling small savers that they will shrug it off. Returns from equity schemes, in most periods over the last ten years, have been less than ordinary relative to the risk, but one isn’t hearing of any salary-cuts or smaller bonuses. In the year to July 8, close to 80% of 328 equity-oriented schemes reported negative returns; in two years, as many as 65% did, while, in three years, 41% of the schemes posted negative returns. The average returns from large cap schemes too have been negative for the past year, flat over two years and a positive 3.36% over three years.
Should the Sebi chief really be perplexed at the rise in retail trading in equities since the lockdown began? It is not only that investors have more time on their hands, they don’t believe it can be so hard to make money. To be sure, the confidence may be misplaced, but then fund managers haven’t exactly covered themselves with glory. If returns on equity portfolios have been less than ordinary, the performance in the fixed income space hasn’t been anything to write home about.
This has been especially so after the failure at Franklin Templeton (FT) in late April, when six debt schemes were closed. How hard can it be, investors must be wondering, to stay with blue-chip or, at least, top-grade names, and not risk one’s shirt by straying into the muck? Or, at least, do some homework? What must have added insult to injury is AMFI’s attempt to downplay the default, saying the total amount was less than 1.4% of the industry’s assets-under-management (AUM). How do investors care whether it is 1.4% or 14%? For them, Rs 26,000 crore is a lot of money. Also, if AMFI insisted there was no problem of liquidity, why ask RBI to step in?
Over the past couple of years, MFs have been in the headlines for all the wrong reasons. It turned out they had invested in paper issued by third-rate promoters who couldn’t pay them back in time; and, also to some questionable NBFCs. Why RBI should be bailing them out because they lent money to all the wrong companies and NBFCs, chasing yields, is another question altogether. Going by the many requests to the regulator, asking it to allow side-pocketing and standstill agreements, it would appear MFs are constantly looking for leniency. Each time there is a default—and only the weakest promoters do that—it turns out the mutual funds have an exposure either via debt or equity.
That India’s corporate bond market is small and shallow is no secret. While trading in AAA bonds is limited, because few investors want to part with these, the market is virtually illiquid for paper rated below AA. But, this is not news, and no MF can pretend it is not aware that it is impossible to sell paper that is below a certain grade. FT saying that it was compelled to close six schemes because of the lack of liquidity in the debt market is unacceptable.
In the past, MFs have been pulled up for encouraging investors to constantly switch schemes, and even for not always selling or redeeming units at the correct net asset value (NAV). Ten years back, in June 2010, the then Sebi chief CB Bhave had pointed out that 60% of MF schemes were giving sub-optimal returns. In August 2009, Sebi had abolished entry loads, or the upfront fees that investors pay, though investors were allowed to pay the agents any amount they felt was right in return for their services. The move to ban entry loads was harsh, no doubt, especially since agents selling ULIPs were earning hefty commissions. Nonetheless, the AUMs have risen four-fold, to about Rs 25.49 lakh crore from Rs 6.3 lakh crore on June 30, 2010; of course, with help from the markets because the Sensex has gone up by 97% over this time.
One is not sure though if the industry’s reputation has at all grown over this time. Once Sebi’s findings on the Franklin mess are out later this month it could be a good time to re-look the rules and regulations and come up with some new one ones. While fund managers need to be careful with their stock-picking, the bigger problem today appears to be with the selection of paper for the debt portfolio. It is probably a good idea for them to collectively commission credit ratings and pay for them; rating agencies will probably do a better job. Given the debt environment right now is more than challenging, perhaps investments below a certain grade need to be disallowed; this would lower returns for investors, but the capital would be protected. MFs today are in a happy place with the interest rate on fixed deposits falling sharply. While the regulator needs to make it harder for fund managers to take on undue risks in the chase for returns, investors must accept MFs are risky products. They need to be choosy. As they say, boys will be boys, some will be cowboys.