Margin-squeezed MFs should get ready for volume game: G Mahalingam

Suresh P Iyengar Mumbai | Updated on February 27, 2020

G Mahalingam, Whole-Time Member, SEBI   -  Bijoy Ghosh

The recent credit fund crisis has triggered the importance of maintaining liquidity buffer such as reserve ratios, says G Mahalingam, Whole-Time Member, SEBI

The mutual fund industry should gear up to play the volume game rather than targeting higher margins as the investor base is set to widen overtime with the better market penetration.

G Mahalingam, Whole-Time Member, SEBI, said the mutual fund industry may feel the margin squeeze as the need to maintain adequate liquidity grows and tighter regulations are implemented.

Going ahead, it will be more of a volume game for the mutual fund industry rather than fighting for that extra margin, he said at the 14th CII mutual fund summit ‘Industry Progress Amidst Economic Restructuring’.

The cost of meeting regulatory changes may look very high today but regulations are made for 10-20 years and the cost would even out slowly, he added.

Even as the mutual fund industry has grown to become one-fourth of the banking sector there are no criteria to maintain SLR (statutory liquidity ratio) and CRR (cash reserve ratio) in mutual funds but the liquidity crunch during the recent credit fund crisis has triggered the importance of maintaining liquidity buffer, he added.

This again will increase the cost for mutual funds but it will boost investors confidence. While selling credit funds to investors, the industry should clearly explain the risk attached, he said.

Corporate governance

Directing mutual funds to keep away from structured products to generate that extra alpha, Mahalingam said the industry should play an important role in corporate governance and actively participate in the proposal being put on vote.

There has been 12 per cent abstention in voting on corporate proposals by mutual funds. Being a very informed investor, the industry should participate more in voting on corporate proposals and bring down the abstention to 1-2 per cent over 3-4 years, he said.

While globally passive învestments is facing criticism for not delivering returns, Mahalingam said it has not caught Indian investors interest yet and investors should be made aware that it cannot deliver any alpha but returns would be equal to the index it tracks.

Minority investor interest

Earlier, Sundeep Sikka, Executive Director and CEO, Nippon India Mutual Fund, said of the 27,000 corporate proposals put on vote, mutual funds have voted against 1,000 protecting the minority investors' interest.

Despite the market reach, he said just only 3 per cent of Indian population invest in mutual fund and with SEBI nudge to look beyond top 30 cities will help growth in the industry’s asset under management.

Published on February 27, 2020

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