The Reserve Bank of India (RBI) has cautioned about “idiosyncratic” features of debt asset management funds, including dominance of corporates and high net-worth investors (HNIs), which may possibly make such funds more “susceptible to runs”.
Corporates and high net-worth individuals comprise more than 90 per cent of the aggregate assets under management for debt funds. As much as Rs 9.99 lakh crore of the corpus of Rs 11.80 lakh crore in debt funds is accounted for by them.
As per RBI, corporate dominance in investments may lead to concentration in fund management as smaller fund houses are unable to compete on expense ratios. “Between March 2019 and March 2020, the share of the top 5 funds in the total liquid fund corpus increased from 55 per cent to 61 per cent,” the RBI said in its latest Financial Stability Report released last week.
Moreover, a large fund size is also incentive compatible from an investor point of view, as such funds have significant systemic spill-overs, potentially “improving possibilities of bailouts”, the RBI said. The RBI has warned about corporate dominance in the past also.
The debt fund segment witnessed turmoil when Franklin Templeton closed six credit risk schemes in April this year in the wake of Covid disruption and financial sector defaults. The RBI then constituted a special liquidity window for mutual funds to mitigate the effects of Covid-19 and insulate them from the spillovers of the credit risk fund redemption pressures “in the interest of overall financial stability”.
Extant regulations specify single investor concentration norms for diversifying the investor base. However, when the investor profile is dominated by risk averse investors, as is the case in money market or debt mutual funds, there is a strong possibility of a few corporates distributing their surplus over four or five fund houses and, hence, exits during times of stress could still be concerted, the RBI said.
The debt fund management industry is extremely competitive and portfolio performance plays an important role in incremental fund flows. “Such behaviour typically masks illiquidity premium as (short-run) excess returns. Excess returns, although substantial, turned negative in the wake of Covid-19-related dislocations. Given the recent churn in debt MFs, risk appetite of the sector and consequent investment allocation assumes importance,” the RBI said.
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