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After SIP, asset allocation products could be next big thing for mutual funds

Industry looking forward to getting govt nod for pension funds

A step in the right direction! In October, Sebi issued new reforms on categorization of mutual fund schemes and narrowed down on just five main categories (equity schemes, debt schemes, hybrid schemes, solution-oriented schemes and other schemes) to curb the unnecessary cluster within mutual fund houses.

This indeed is a big shakeup for the mutual fund industry, in which they have to classify their existing schemes according to the new categorisation, appeal to Sebi (if required) and painstakingly e-mail investors about the same. This will surely help investors, who are confused with the multiple schemes and probably help put a leash on misspelling, as schemes will have common parameters through means of categorisation.

With the start of the New Year, there will be many “me too” funds launched. The Sebi order applies only to open-ended schemes, which means there is a high chance of multiple schemes in the closed-ended category springing up in the New Year. Closed-ended schemes usually have a lock-in period of three or five years, where investors who bought during the new fund offering can redeem only once the product matures or on the stock exchanges, where they are listed. Fair bit of misselling may happen if the commissions are high. Investors who buy closed-ended schemes may realise that liquidity is poor in case they need redemption in a hurry. If an investor needs more money, his only option is to sell on the stock exchange, which can be at a discount to the NAV (as is the present case).

From a retail participation point of view, with the decline in interest rates both in terms of savings rate as well as fixed deposit rate, investors have little choice but to reallocate their wealth to other asset classes, such as equity to improve returns over the long term. That is also one of the reasons why the mutual fund industry is looking forward to getting a nod from government for pension funds.

I believe, investment in the equity market through mutual funds over a long period, as suited for a pension plan (depending on the age profile of the investor), could allow investors to make the most of the rising market. The mutual fund industry is well regulated by Sebi as well as through various guidelines issued by Amfi from time to time. They have, over the years, introduced regulations, which ensure smooth and transparent functioning of the industry. This makes it safer and convenient for investors to invest through mutual funds.

Management of funds by professionals or experts is one of the key advantages of investing through a mutual fund. They regularly carry out extensive research on companies, industry and the economy, thus ensuring informed investment. Secondly, they regularly track the market. Mutual funds help investors invest very small amounts (like Rs 100, Rs 500 etc) in SIP, as against larger one-time investment required if we were to buy directly from the market.

Hence retail participation will continue to improve in the Indian markets. Ideally speaking, investors need better awareness with regard to inflation and how much it eats into their chunk of savings. With most of their savings stashed away in popular asset classes, such as gold and real estate, investors are slowly turning towards mutual funds, as we see a large number of mutual fund folios and domestic retail inflows into financial markets.

A clear shift has been noticed in the savings patterns of Indians, as the following data points suggest, over the past few months. According to Amfi, total inflows into mutual funds across equity, balanced and equity ELSS categories since January 1 this year stood at Rs 1,77,223 crore till November end. Close to 50 per cent of these inflows have been parked in debt to balanced funds, and the rest have gone into equity-oriented schemes.

Asset allocation may become popular in the near future. Everyone has dreams and desires, but not every plans investments according to goals. Most people just invest in an unplanned manner. Goal-based investing adds direction to an investment. Having a purpose behind every rupee that you invest is known as goal-based investing. In the coming year, I foresee fund houses introducing more of such funds. Goal-based investing adds direction to an investment. For investors, goal-based investing offers a structured, well thought-out process for investing, where they know the purpose behind their hard-earned money being invested. Mutual funds may start playing advisory role to tap these investors looking for goal-based investing.

A fresh consultation paper will be released soon, wherein Sebi expects clear segregation between two activities of an entity i.e. providing investment advice and distribution of the investment products/ execution of investment transactions. Mutual fund distributors (MFDs), while distributing their mutual fund products, can explain the features of products to client and shall ensure the principle of ‘appropriateness’ of products to investors.

To further augment corporate governance of CRA & AMC, Sebi has announced measures that will ensure that only more serious players will venture into the CRA business. Segregation of CRA activities other than the rating of financial instruments and economic/ financial research into separate legal entities means the common scrip-level valuation as hinted by RBI and SEBI across multiple players in the financial industry would be now done by separate legal entities, whose activities are not influenced by ratings of the business of financial instrument.

Similarly, to avoid potential conflict of interest a sponsor, AMC or its associates will not be allowed to have more than 10 per cent stake or representation on the board of AMC /trustee company of any other mutual fund. With more disclosures by issuers of listed debt, hopefully meaningful data will be available to investors of such debt to analyse the financial health of the issuers.

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