Mutual funds face the daunting task of putting in place a risk management tool as prescribed by the SEBI as most of the departments in fund houses work in silos.

Following the havoc unleashed by Franklin Templeton last year and the entry of several new players, SEBI had announced a comprehensive risk management framework in September with a compliance deadline from January.

Fund houses have multiple departments such as sales, fund management, investment processing and customer servicing with no single view on risk.

Many departments work in the extremely customised environment on different platforms and some are still stuck in the manual mode, making it difficult to identify the ensuing risk patterns and trends. A lack of collaboration across teams resulting in duplicity of work and ineffective risk protection is another challenge.

Aravind Varadharajan, Managing Director (APAC), MetricStream, a global enterprise and risk solutions company, said MFs have to spend more time looking for information than making strategic decisions and this may lead to an exponential increase in cost and resources.

Comprehensive platform

The risk platform being worked out should have a centralised repository of regulatory obligations and controls offering a unified view of risk data across the organisations. It should offer an automated control assessment and testing to provide a real-time view of compliance statutes besides automatic integration with regulatory feeds by pulling out regulatory updates, he added.

SK Mohanty, Whole Time Member, SEBI, in a recent event, said a large number of small investors are heading to markets and trades are conducted online on interoperable systems. This is giving rise to the risk of online frauds and sufficient checks and balances need to be in place for mitigating the fraud risk, he added.

Nirakar Pradhan, CEO, PRMIA India, an independent risk management company, said the SEBI guidelines are quite exhaustive with several mandatory and recommendatory items that would entail additional costs depending on the complexity and scale of operations.

There have been radical uncertainties all around, especially due to the Covid pandemic, investment product innovation, the rise of newer asset classes, distribution landscape, technological evolution and market penetration, he added.

Fund houses need a technology that is agile, scalable, easily adaptable (especially for the business users as they use the system on a day-to-day basis), and flexible with configurable workflows that require minimal or no customisation.

Advanced technologies such as Artificial Intelligence and machine language will come in handy to anticipate and mitigate emerging risks by pouring through mountains of data to uncover risk intelligence for better decision-making, said Varadharajan.

AI engines will automatically scour internal data and external feeds to identify potential risk trends. Natural language processing tools will co-relate data from thousands of issues and identify the best mitigation strategies, he said.

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