Governing the management of the “Mutual Fund”

moderator
By moderator August 8, 2019 12:42

Governing the management of the “Mutual Fund”

The News:

In a recent development, the Security and Exchange Board of India (SEBI) introduced more stringent regulations to govern the management of the mutual fund.

What is a mutual fund?

  • Mutual fund, in simple terms, is an investment vehicle comprising of the capital of various investors who share a mutual fiscal goal.
  • In this, pool money is collected by the agent from investors, who invests the money on their behalf and charges a small fee for managing the money.

Types: 

 SEBI has categorized mutual fund under four broad categories:

  • Equity Mutual Funds

  • Debt Mutual Funds

  • Hybrid Mutual Funds

  • Solution-oriented Mutual Funds

Background:
  • The decision came as a reaction to a series of credit-related events that put investor money at risk.

  • In the last few months, the mutual fund industry came under SEBI’s scrutiny after some mutual funds had to postpone redemption of their fixed maturity plans (FMPs).

  • Some mutual funds entered into “standstill agreements” with several companies. In those agreements, debt instruments the funds had invested.

  • This step went against the interests of investors in the mutual fund.

What’s in the new Regulations?

  • According to the new SEBI regulations, liquid mutual fund schemes will have to invest at least 20 percent of their funds in liquid assets like government securities.

  • They will be barred from investing more than 20 percent of their total assets in any one sector. The current cap is 25 percent.

  • When it comes to sectors like housing finance, the limit is down to 10 percent.

The Significance:

  • A modicum of liquidity: The mandated investment in government securities will ensure a modicum of liquidity.

  • Bringing discipline: The reduction in sectoral concentration will discipline funds and also force them to diversify their risks.

  • Better evaluation: Now assets of mutual funds will be valued on a “mark-to-market” basis in order to better reflect the value of their investments.

  • Building confidence: Most importantly, the SEBI regulations for mutual funds will help restore investor confidence

What’s the issue?

  • One of the new regulations provides to increase the exit load on short-term investments in liquid mutual funds to discourage sudden demands for redemption.

    • This clause could possibly hinder fund flow into the bond market, which in India is already quite undeveloped when compared to the rest of the world.

Conclusion:

Given the current situation, investor confidence is shaken by defaults, which can leave serious consequences for the economy. Viewed from this perspective, the latest rules should be welcomed by the industry, as it will help in building investor’s confidence in the industry. In addition to this, there is a need for collaborative efforts across all key stakeholders in order to harness the future growth potential and reach out to the customers.

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moderator
By moderator August 8, 2019 12:42