MFs must build buffer to meet redemption pressures: SEBI

The bull-run in mutual fund collection is finally being tested after poor returns in equity schemes and the unprecedent ban on six debt schemes by Franklin Templeton leaving investors in lurch.

Mutual funds are facing the brunt of one of the most serious credit crises, and it will take sustained efforts to win back the full confidence of MF investors in the debt space, said Sandeep Sikka, Executive Director and CEO, Nippon India Mutual Fund, and Chairman of CII Mutual Fund Summit.

G Mahalingam, Whole-Time Member, SEBI, said the recent regulatory nudges have brought in ‘liquidity buffers’, which the overnight funds and liquid funds need to hold. Mutual fund investments needs to gauge the liquidity pressures and build up the buffer by constructing a ladder of liquidity maturities.

If the mutual funds’ focus is shifted to volume-based industry from margin-based, the changes could be accommodated without much of a problem, he said.

Sikka said despite the ongoing challenges in the last decade, the industry has achieved growth in three core areas of AUM, investors, and overall regulatory environment.

With technology becoming more integrated within the business model, the scope for better distribution, investment, risk management, and cost reduction has a new perspective and control, said a CII report.

Poor governance

The liquidity crisis is an event manifested by poor governance in certain organisations. The mutual fund business models are largely intact and the fundamental models of risk-adjusted returns will play out over time. It is important that the industry focusses on “risk-reward” mechanisms across the value chain, it added.

The time is ideal to encourage the industry to self-regulate, especially on internal governance and strengthening processes to ensure stronger resilience to such events in the future, said the report.

The involvement of too many technicalities and absence of simple on-boarding processes discourage new MF account openings.

The geographic and linguistic diversity of India creates a unique set of challenges for the mutual funds sector, creating a hindrance in reaching people in ‘B15’ and’B30’ cities, it said.