Industry players say they have learnt from the bitter experience of 2008 and have far better checks and balances in place to avoid an encore.
Earlier this month, G Mahalingam, Sebi's whole-time member, said at a CII conference, “We need to bear at the back of our mind that a huge amount of liquidity gush is keeping us afloat. These are good times so let us start implementing some of the good practices, principles and good disciplinary mechanisms so that we can weather bad times easily and investors continue to stay with the industry.”
Mahalingam, who was formerly with the Reserve Bank of India (RBI), asked the industry to focus on metrics such as minimum capital, loss-absorbing capacity, liquidity management, leverage ratio, risk-adjusted returns and commission structures.
The signal was clear that the MF industry, which is adding up assets and investors at a fast pace, should not be distracted from basic principles.
Business Standard spoke to industry executives on the issue but none preferred to come on record.
"The regulator's concerns are quite legitimate. Having said that, the sector has undergone tremendous changes over the past one decade. Learnings of the 2008 financial crisis have been immense and are being well-executed wherever possible to avoid a repeat. Investors' behaviour in terms of investments has also seen a sea change. We have been cautious, given the robust influx of money pouring in and have stepped up our engagement level — internally and externally — with distributors and advisors," said the chief executive officer (CEO) of a large fund house.
He added that the issue of mis-selling had been significantly addressed by the sector over the years but there was more distance to cover.
"Engagement with investors is the key. Efforts in this direction will continue. I’m personally attending several of the investor awareness programmes across the sector. In case of a crisis like before, the sector is better prepared to deal with any such eventualities," said the CEO cited above.
Against high lump-sum investments during the 2004-2008 bull run, currently, more and more investors are preferring the systematic investment plan (SIP) route to invest money in MFs.
According to top executives, when it comes to returns, these are times when investors should tone down their expectations. They said the element of risk-adjustment has always been a priority and will remain so.
"We are here to offer returns which take care of the risks first. I may not like to believe that the sector is blind to the current risks and is chasing returns only. We can't afford to be reckless with investors' money even if there are strong inflows per month," said a chief investment officer (CIO) of a fund house.
Meanwhile, top fund managers such as Mahesh Patil, co-CIO of Aditya Birla Sun Life Mutual Fund and Navneet Munot, CIO of SBI Mutual Fund, among others, have been maintaining a view for well over a year that investors need to moderate their expectations of returns. Further, in case of mid- and small-caps’ exorbitant returns in recent years, quite a lot of schemes have stopped taking fresh flows — as part of a cautionary stand.
In the previous few years, there were several cases of default in the debt instruments. In a majority of the cases, the sector was able to deal with such instances in a respectable manner. The Sebi had been warning the industry on the debt management processes as well.
It is worth noting that fund houses have strengthened their research and analysis teams, empowering their fund managers with a stronger back-up. Processes have gained importance over an individual fund manager's preference to build portfolios.
Further, impetus on asset allocation has once again gained momentum. Sector officials say a large chunk of money is coming into balanced funds, which essentially means that the degree of maturity among investors is on the rise and they understand risks. Balanced funds with asset allocation dynamics are being pushed more during such times and are being well-accepted by investors.