At the heart of the complex web of bits and bytes that is the modern financial system is the ability to exchange and transfer capital (money) between various participants in an economy. Borrowers, lenders, investors and entrepreneurs form the four corners of this very busy square. Traffic flow and participants can either be controlled and owned by the government as it was in India till 1991, or it can be regulated by a set of independent regulators appointed by the government, as it is today in 2021.
When we see the hectic activity in the Indian financial system today, we tend to forget what it was like just 30 years ago — in terms of scale, products, efficiency, cost and service. The sole job of a financial system is to trundle money around to find its optimal use in terms of returns at a low-cost and safety of transactions. But the centrally planned Indian economy used the state-owned financial institutions such as banks and insurance companies to gather household savings for its own use, hard coding this into the reserve ratios in banks and investment guidelines in insurance firms.
Mis-selling by banks has been flagged, caught and proven multiple times in the past decade, but nothing other than half-hearted circulars have emerged from the Reserve Bank of India (RBI). For a regulator, that is also the central bank for a $3 trillion economy, busy with large issues like monetary policy and government debt, the consumer protection department is where staff is sent to be sidelined.
When the Yes Bank AT1 Bonds were extinguished, retail investors who had been sold these as FDs with a higher rate of interest, had thought that the RBI will do something about it and protect their interest. RBI, according to news reports, took the view that the risks were explained and there was no mis-selling. Investors wrote to Sebi as well and some of them have gone to court over being mis-sold. Curiously, it is the capital market regulator that has come to the aid of retail investors. Sebi took the complaints seriously, did a full investigation and found Yes Bank and three of its officials guilty of mis-selling in a 12 April 2021 order. It has fined Yes Bank Rs 25 crore, and Vivek Kanwar (managing director of the private wealth management team) Rs 1 crore. His team members Ashish Nasa and Jasjit Singh Banga have been fined Rs 50 lakh each. The case against Rana Kapoor will be taken on a parallel track since he is already in jail and unable to join the investigation fully.
Sebi found the following:
Yes Bank showcased the bond as a ‘Super FD’ and ‘as safe as FD’
The term sheet was not shared with all the investors
No sign off was taken from investors on their understanding of the features and risks of the product
Risk profiling of customers was not done, specially those who were more than 70/80/90 years of age
In the ‘verbal pitch’ shared by the private wealth management team with the Relationship Managers, the AT1 bonds were compared with fixed deposits on rate differential only, but omitted the risk differentials
There was a push from the MD & CEO of Yes Bank to down sell the AT1 bonds which led the private wealth management team to recklessly sell the bonds to individual investors
97% of the 1,311 individual investors who were sold these bonds were existing customers of Yes Bank
277 of these closed their FDs prematurely to invest in these bonds
Yes Bank and its officials had a fiduciary responsibility towards their customers and that was broken by selling them high risk bonds without explaining the full risk
Yes Bank did not have a system in place to ensure that a term sheet would be shared with retail investors nor was there any provision for taking a confirmation from investors with respect to their understanding of the risks
Policymakers, regulators and others working the space of consumer protection along with financialisation of Indian household savings must read the entire 61-page order carefully to see how an investigation must be done when dealing with disaggregated retail investors who do not have the ability to fight large corporations. In fact, I wrote a paper along with the team at Dvara Research that found retail investors were wary of buying AT1 bonds if the risk factors were clearly marked out. It seems that even this basic hygiene of just writing down the risk in the same manner that the returns were marked, was missing in the Yes Bank case.
Sebi has used RBI’s own regulations to find that Yes Bank was guilty of mis-selling. The order says that while initially RBI only allowed AT1 bonds to be sold to institutions, in a September 2014 order, it allowed them to be sold to retail as well, but with disclosures on the risks that such bonds carry. A specific sign off was required from retail investors saying that they understood the risks. RBI rules mandate that “all the publicity material, application form and other communication with the investor should clearly state in bold letters (with font size 14) how a subordinated bond is different from fixed deposit, highlighting that it is not covered by deposit insurance.” In addition, Sebi has used its own powers under the Sebi Act and under the Prevention of Fraudulent and Unfair Trade Practices Regulations and the fact that Sebi has oversight of listed bonds to carry out the investigation and pass this order.
The Sebi order has several non-linear take-aways. One, the naming of specific wealth managers and finding them guilty, rather than penalizing the lower staff should worry bank boards and managements that the long hand of Sebi can now reach them under the various regulations in place. I have always maintained that catching one junior bank employee will not solve the systemic problem of bank mis-selling in India. This has to be a board driven initiative.
Two, for Yes Bank this is an opportunity to transform the way banks in India treat their customers. Post the Rana Kapoor regime, the management has now been taken over by a bank consortium and there is a professional board in place. This crisis is a great opportunity for the bank to set a standard in customer protection by putting in place protocols that reinforce the fiduciary responsibility of a bank towards its customers.
Three, this may not end well for Sebi if the past is any indication of future events. Steps taken in earlier years with a view to protect retail investors have usually ended badly for those taking bold steps. In 2009 CB Bhave, the then chairman of Sebi did two big things in investor interest. One, he removed the front load in a mutual fund. Two, he went to court against the insurance regulator (IRDAI) saying that the Ulip was actually a mutual fund masquerading as an insurance since 90% of the premium was in a mutual fund like product. The government in 2010 issued an ordinance to rule that IRDAI controls the Ulips. Bhave was then moved out soon after. I fear that the investor-first team lead by Sebi chairman Ajay Tyagi is at risk in a similar fashion.
In fact, the recent Ministry of Finance intervention over the valuation of AT1 bonds that Sebi was putting in place in retail investor interest points to the road ahead. Bank lobbying derailed the move to provide safe spaces for pure retail investors to put their money to work.
Finance Minister Nirmala Sitharaman must look at the story from the point of view of retail investors and not from the lobbying by firms, other regulators and bureaucrats who have caused an open loot of retail money through regulated entities like banks and insurance companies over the years.
Monika Halan is India’s trusted personal finance writer, speaker and author who helps families get their money decisions right.
The Franklin Templeton (FT) story gets worse every few weeks. Reena Zachariah reports in The Economic Times that the fund house is trying to make a domestic capital market regulatory issue into a foreign policy issue for India. She reports that the global and Indian senior management of the fund house has reached out to the India’s US Ambassador to complain about India’s capital market regulator Sebi. The trigger, says the newspaper report, seems to be the show-cause notice to FT staff who pulled money out of the distressed schemes ahead of the freeze in April 2020 and a disgorgement bill of Rs 440 crore in management fees to be clawed back. The threat of exit, even if made as an arm-twist move, by FT brass has caused a fund house risk (the risk of the fund house shutting down or exiting the business) for investors.
Quick recap: In April 2020 FT froze six debt funds due to corona induced liquidity issues. In my opinion then, this was a good move since large investors have earlier exited distressed debt schemes due to better access to information and advice, leaving the pure retail investor holding the worst paper in the portfolio. By freezing the schemes, both large and small investors were on the same page, and as the money would be recovered, both would get it back pro rata. The case then went to court and a good summary of events can be read in this report by Manoj Nagpal.
But since then several worms have been pulled out of the can. But what has moved the story from a pure mis-managed scheme and true-to-label issues to a very serious regulatory issue and an even more serious foreign policy issue, are two things. One, In a superb story Jayshree P Upadhyay wrote how the fund house allowed senior insiders and their families to exit the distressed schemes ahead of the scheme freeze. This now becomes a possible insider trading issue that has serious consequences for the fund house. Sebi, according to newspaper reports, has sent a show cause notice to the fund house. This has triggered the invocation of the Indian ambassador to the US by the management leaders of FT to complain about Sebi and to threaten a closure of business in India. This makes it a foreign policy issue.
Two, by making it a foreign policy issue, FT has crossed another line. According to the Economic Times story cited above, the complaint to the Indian US Ambassador is around the disgorgement of fees for the six mismanaged schemes, plus fines and some other regulatory strictures. The letter cited by the paper reads more like a threat. It says that FT is one of the few foreign owned fund houses in India that has not decided to cease operations (possibly referring to Fidelity’s exit in 2012) and were it to pull out there would be job losses. The unsaid is that there would be a loss of face for India globally.
When Fidelity exited India in 2012 the commentary was that tighter Sebi rules around charges and disclosures were making the industry and business unviable. Instead of looking at Fidelity’s high costs, the narrative was on Sebi being a very strict regulator. FT is possibly thinking of similar narrative today of the regulator getting blamed for taking action on insider trading and for tighter regulation. But what FT needs to remember is that not only did the industry grow exponentially to about 5 times the 2012 AUM, but the market regulator has increased the pace and depth of regulation to which the industry is subject to make funds investor friendly for no loss of pace of growth of the industry. Also, there is a hungry breed of domestic asset managers who are in the process of applying for or readying the mutual fund offerings. A new wave of passive fund managers should be en-route as well. By trying to step over Sebi’s head and hoping to make it a bi-lateral foreign policy issue, FT has showed very poor judgement. Worse, it now makes investors in FT subject to a fund house risk.
What happens if FT carries out its implicit threat and actually exits India? Nothing much really for the industry, but for investors there is a fund house risk due to the threat of exit. According to Amfi data, FT is the 11th largest out of 43 asset management companies (AMCs), with around 3% of the assets under management of the industry. If FT decides to sell, it has two options. One, it can shut shop and return the money at current NAV to investors. Remember that the mutual fund industry in India is set up with the money held in a trust in the name of retail investors. It does not belong to the AMC – they cannot run away with it. Two, FT can sell the AMC to another sponsor. Also remember that the AMC is just a fee-for service provider whose job is to manage money. Another sponsor can buy out the AMC business from FT. Given Sebi’s regulations on one scheme per category, it would not make sense for another large AMC to buy FT schemes since they all have their own categories filled and will have to merge these schemes. It would make sense for a new sponsor (domestic or foreign) wanting to enter the business to buy the AMC. Maybe we’ll see Fidelity coming back. Or maybe one of India’s largest business houses will sniff this as an opportunity to get size and scale in the Indian mutual fund market.
But for investors in FT schemes, there is now, what is called, a fund house risk. This is the risk of the fund house exiting the business and either returning investors’ money or finding a buyer. For investors this would mean taking a call to stay with the fund house and wait for the new buyer or to exit. Exit means a reinvestment risk and a tax impact for any capital gains. It is not certain that this is what FT will do, but by threatening to quit and taking the battle out of the Indian regulatory jurisdiction to the US, the fund house just moved the uncertainty level up several notches for the Indian investors.
Monika Halan is India’s trusted personal finance writer, speaker and author who helps families get their money decisions right.
Retail investors are the last to know when things go wrong with their money. This is especially true of difficult-to-value-and-trade (in India) financial products such as bonds. The story gets even more complicated on how to treat bonds that behave like (or worse than) equity – for example AT1 bonds. AT1 bonds are issued by banks to shore up core capital base to meet BASEL III norms. These are unsecured, perpetual, high-risk bonds. Banks can skip paying interest on these bonds if their capital ratios fall below certain threshold level. These bonds are junior to equity and get extinguished in case of a bank failing. In English this means that these bonds need not pay interest and need not return capital if the bank finances are under stress. Retail investors into Yes Bank AT1 bonds lost their entire savings when they bought these bonds when they were told by the bank managers that these were FDs with a higher interest.
Mutual funds also have AT1 bonds in their debt funds, introducing risk worse than equity into products that retail investors consider safe. These risks were marked out in this story in 2016. One estimate says that there were 25 schemes by end June 2020 with between 15% to 60% of their assets in these risky bonds. That’s a lot of very high-risk bonds in a debt portfolio!
A March 10, 2021 circular issued by Sebi lays out the rules of the game so that worse than equity risk is not introduced into debt funds. The circular says:
No mutual fund will own more than 10% of these bonds issued by a single issuer across all its schemes.
Not more than 10% of a scheme to be invested in these bonds.
And not more than 5% of a scheme in the bonds of a single issuer.
If a scheme and fund house already have investments that are higher than these limits, these will be grandfathered – the fund need not sell them, but not buy more.
For retail investors this is important because Sebi is putting limits on how much of these very risky bonds a fund house can buy. And for funds that are already holding more bonds than now allowed, Sebi is giving a leeway of ‘grandfathering’ their holdings. They are not being forced to sell, but cannot buy more till they fall below the new regulatory thresholds.
A second part of the circular says that:
The tenor of the bonds will be considered as 100 years since they are, well, perpetual.
Closed end schemes will not invest in perpetual bonds, because they will not have a tenor of a 100 years
Sebi’s goal seems to be to protect investors into debt funds from finding too much risk in their portfolios. Some debt funds were found to be treating these long-term bonds as short term by taking the put and call dates as the tenor of the bond. Put and call dates are those dates on which the bank can call back these bonds and pay investors back or investors can sell these bonds back on a ‘put option’ date. See this from an investor point of view, you buy a short-term debt fund to have certainty of money and a return that is slightly higher than a bank deposit. But to include highly risky, long-tenure bonds in the portfolio of short term bonds, as Franklin Templeton did, makes investors open to risks they did not want to take. Also valuing a perpetual bond on the call/put date is a real sleight of hand and a very sharp practice by the fund houses doing this.
This action by Sebi is in continuation to its October 2020 circular that put in place rules so that retail investors cannot buy these bonds directly. A minimum ticket size of Rs 1 crore, a minimum lot size of Rs 1 crore and restricting sales to only institutional buyers were all aimed to preventing a Yes Bank like mis-selling episode. Surprisingly, action was taken by the capital market regulator to what is a banking regulator problem. RBI took the view that retail investors were disclosed the risk of these bonds by Yes Bank and were not mis-sold. This paper (I am one of the authors) marks out how better disclosure would have prevented most of these sharp sales by Yes Bank officials.
But things unraveled on 12 March 2021 when the Department of Financial Services, Ministry of Finance overruled Sebi and in a memorandum as reported in the newspapers, told Sebi to withdraw the valuation rule as it would lead to market disruption. Next, the industry body Association of Mutual Funds in India (Amfi) made a press statement standing with Sebi! Amfi, actually has no option but to do this since these issues have been debated and discussed for months before the circular was issued two days back. The issue of AT1 bonds in mutual fund portfolios and how to value them has been a subject of much discussion within Sebi and with the mutual fund advisory committee (I am a member on this committee) over the past few months.
The Ministry of Finance has done two things wrong. One, it has not seen the retail investor interest in the action of Sebi and seems to be responding to the banking lobby. Two, by undermining the regulator in this manner it is setting a precedent for others to follow by messaging Delhi directly rather than work with sector regulators. It would have been better semantics had the government resolved the issue rather than take it public in this manner. Very unfortunate for retail mutual fund investors in particular and regulatory autonomy in India in general. The finance minister Nirmala Sitharaman needs to set this right.
In March 2020 we understood risk a little better in both equity and debt mutual funds. Better returns have been one of the reasons that investors released the safety belt of the fixed deposit to ride market-linked returns in both equity and debt. But higher returns and liquidity come with a greater risk. Investors need to be able to evaluate risk better before they fully let go of the low post-tax return FDs or traditional bundled life insurance policies.
There are two ways to take risk into consideration when investing – one through a fee-only financial planner who does the risk analysis for you and chooses the products to build a portfolio that suits your ability to handle the risk. The other way is for you to evaluate the risk and return parameters and build your own portfolio.
Having an easy way to understand risk became reality on 1 January, 2021 when Sebi’s new rules on marking and updating risk in mutual funds became live through a new version of the old risk-o-meter. This risk-o-meter is an upgrade over the previous one in three ways.
One, there are now six categories of risk instead of five. Risk metrics go from low to very high. The last one is a new category to indicate schemes where investors money is exposed to what is extreme risk for a retail investor.
Two, the way that risk itself is calculated now has a proper methodology. Debt funds will be judged on three metrics of liquidity, credit risk and interest rate risk. You can watch this video to understand these risks better. Or read this. And this.The final score will be a mix of the risk of these three attributes.
Equity risk will be mapped on volatility, market cap and impact cost. For example, the risk of a sharp fall in value is higher for a small cap stock than a large cap stock. The new risk-o-meter will take the holdings of such stocks in the portfolio into account.
Three, the risk score will be disclosed by the 10th of each month on the individual fund and AMFI website. Then every year on 31 March, the fund will disclose how many times the risk metric changed over the year. If you find your fund’s risk rating changing often, it will be a red flag to see why this is happening.
I’ll tell you how I will use the risk-o-meter. I want my debt funds to be fully safe – that’s why I moved out of FDs to debt – for higher returns, flexibility along with low risk. I do not want to expose my debt funds to needless risk and will choose the very low and low risk funds only. The risk-o-meter will mark risk clearly in debt funds that take very high risk on buying lower quality bonds or those that have a large liquidity risk (these two are related since bond markets for non-triple A bonds are not very deep in India).
In equity, the risk metrics will be mostly high and very high for most schemes and I will need to do further work to see that the portfolio has slices of large, mid and small cap and foreign funds. I will look at the overall portfolio risk that I carry to see if this is in tune with how I see my own ability to suffer a capital loss.
Just looking at the risk-o-meter will not be enough to judge whether or not you should invest in a scheme, but gives you one more tool to evaluate risk. If you work with a planner, ask her to indicate the portfolio risk basis the risk-o-meter to understand whether the overall portfolio risk metric is in line with what you think it should be.
Sebi has been the most proactive regulator in making disclosures meaningful for investors. Do engage with the risk-o-meter to understand your own schemes and portfolio. The markets are on an happy upward sprint today, but always remember that March 2020 week when your equity lost 30% of its value and six debt funds got frozen. That is the risk that you need to remember when you are investing in a bull market.
Monika Halan writes on household finance, policy and regulation. She tweets at @monikahalan.
The reason that globally rules on who can set up a bank and what regulatory hoops they need to constantly jump through are much tougher than for a biscuit or a car company or even a telecom service provider has to do with the nature of banking itself. If a non-bank fails, the problem is only for the employees, the shareholders, the raw material and parts sellers and for those who liked the biscuit or car and now can’t have it. But when a bank fails, it takes down the savings and deposits of average households who trusted the bank. Worse, a too-big-to-fail entity can take down the whole system.
The report released by the Reserve Bank of India’s (RBI) Internal Working Group last week has generated a flood of opinions on why manufacturing firms should not be given a bank licence. But the issue is deeper than just that. There is a premise that expanding the number of banks and a supply of credit will fix India’s problem of being credit starved. But banks have turned risk-averse and even the existing flow of liquidity from RBI is deposited right back through the reverse repo window rather than being lent out to the non-triple-A-plus rated entities. Just expanding the supply of banks is not going to improve the flow of credit to the corporates, including the small and medium scale firms.
As much as $2.8 trillion, or money almost equal to the GDP of India, was available to buy shares of Alibaba Jack Ma’s Ant Group last week, making the $34.4 billion IPO, which has now run into trouble with the Chinese regulators, hugely oversubscribed. Ant is a Chinese company that began life as an escrow account to facilitate transactions on Alipay in 2004. Sixteen years later it has morphed into a gigantic multi-tentacled entity that leverages its wallet information to make loans, sell mutual funds, insurance and wealth management products, serving over a billion people. It partners with over 100 banks and over 170 asset managers, and reported an operating margin of 34% in the first half of 2020. It is mostly as much a platform as Uber or AirBnB are, but it does have proprietary offerings across credit and insurance. As the name suggests, Ant’s business philosophy rests on no client or need being small enough to be ignored. This is as bottom of the pyramid as it gets. And the treasure is equal to the GDP of the fifth-largest country in the world.
The success of Ant in serving more than a billion Chinese people and then harvesting that value on the stock market raises the question—but what about India? Why do we not have similar entities that serve a very similar demographic that regular banking has ignored for decades? It is a market where small businesses are cash starved, where the central bank has to huff and puff for transmission of credit to go beyond the best-rated largest firms. The answer has to do partly with the Chinese state looking the other way while Ant sometimes walked the grey areas of regulation and partly to do with the “if we stay in the cave, we won’t get wet” attitude of the Reserve Bank of India (RBI).
Two reasons prevent an Ant-like entity that will stitch together the entire financial life of a person onto a screen from payments, cash flow, savings, investments, insurance to wealth management. One, KYC (know-your-client) is not a one-time, portable process. It is not portable across regulators, worse it must be repeated every time one opens a new bank account with another bank. The Securities and Exchange Board of India (Sebi) has solved this problem and KYC where one part of the securities system is valid for operating in another part of the market. RBI hides behind an archaic privacy law that prevents one bank from sharing KYC information with other banks or with other regulators when they want to check the details. Of course, the same rule does not prevent rampant cross-selling of third-party products sharing bank account details to the last rupee with sharp shooter salesmen. The CKYC (Central KYC, the brain child of an UPA- 2 FM), which hoped to do the job, is useless since it just brainlessly uploads data without verifying it. This is “garbage in and garbage out” as one regulator puts it.
Two, the various regulators have their own unique ways of looking at the market and this prevents a common interface where a person can look at her entire financial life and transact on one screen. Even PayTM, where Alibaba and Ant have a large stake, is unable to give the one-screen solution due to the regulatory mess that India finds itself in, where regulators fight on turf and mostly have ignored individual needs.
But the outlook is not fully bleak if we start connecting some of the dots that are riding on the existing public goods of Aadhaar and the national payments system. Two pieces that are work in progress could change the current logjam. One, four financial sector regulators have come together to put in place an entity called “account aggregator” which is essentially a “switch” that allows data to flow between the users of and the providers of data, after getting consent from the owner of data. Read herefor more on account aggregators. This will potentially allow the owners of data to leverage their digital exhaust for their own use. The onboarding of the GSTN data will possibly solve the credit flow to small enterprises. Two, a single repository of all financial assets is underway where mutual funds, stocks, copies of bank FD originals, insurance policies, National Pension System units, bonds will all sit. A user will be able to open one screen to look at her entire financial life. A small tweak in nomenclature from “depository” to “repository”, it seems, got the buy-in from some reluctant regulators.
All this is work in progress, but if this works, India will have built a public infrastructure on which firms can build value-adds—just as we have done with Aadhaar and payments. The power of an individual losing his financial identity rests with one firm in China. But in keeping with the democratic traditions, this power will not rest with one or two large firms in India, but will be the remit of a public institution. If things go according to plan, and mistakes will be made, in two to three years, India should have not just one Ant-like firm, but several. The success of Aadhaar and payments in creating digital public utilities give me hope that the next stage of digital utilities will indeed happen.
Monika Halan is consulting editor at Mint and writes on household finance, policy and regulation
It is almost as if you can see the conflict: there is the desire to do the right thing by the customer, but the DNA of an institution that does not believe in consumer rights comes in the way. The insurance regulator is torn with this dichotomy, of watching its capital market counterpart take giant strides in investor protection and disclosures, wanting to do the same, but not being able to. Insurance industry insiders say that the Insurance Regulatory and Development Authority of India (Irdai) chairman is keen to bring about change in favour of the consumer but is hampered by the tight ring of bureaucracy of a PSU monopoly mindset that thrived in a supply-starved market of the 1970s of a socialist India.
Two moves that should have brought accolades need to do much more in policyholder interest, but are good announcements of a regulator beginning to think about customers rather than agents, brokers and firms. One, the idea of a standard term life cover that can be bought off the shelf with standard features and no frills. Each insurance firm from 1 January 2021 will have to launch a standard pure term (only insurance cover, no investment) cover called Saral Jeevan Beema (read the circular here: bit.ly/37I6ii8). Great move, but it is unclear why there is a ₹25 lakh upper limit for the sum assured, and then the asterisk that firms can offer more cover if they like. It seems that firms will have to offer a cover of up to ₹25 lakh and can offer a higher one if they choose to. Pure covers have a rule of thumb of 10 times your income. So, an income of ₹2.5 lakh a year will need a ₹25 lakh cover. To me it looks like a carve out for insurance firms so that they don’t really have to offer a policy to the market that is actually buying term covers—those covers are of a much higher value— ₹50 lakh or more.
The closer you examine the financial sector, the more you get to believe that parts of the industry believe that if there is a way to do something wrong, why do it the right way? Not for all the firms in the market, but a few aggressive ones. And these cause regulators to go on tightening rules that finally hurt the market as the compliance costs and complexity keeps growing. The first 10 days of October saw the market regulator in an overdrive to push through long-pending reform that make the mutual fund product safe for retail investors. The speed could have some connection with the date of whole-time member Madhabi Puri Buch’s term completion coming closer, though she recently got a one-year extension. Buch has been a prime driver of change in the last couple of years and has also energized the mutual fund department into a data-crunching, evidence-building and change-enforcing machine. These are all good things for investors, of course. Three changes and what they mean for you.
As an investor in a multi-cap fund, you could be feeling really confused about the uproar caused by the 11 September 2020 Sebi circular on making these funds more ‘true-to-label’. What happened is this: the circular changed the earlier rule of allowing a multi-cap fund to invest across market caps as they liked and has put in minimum limits across market caps. A multi-cap fund, from February 2021, must have a minimum of 25% in large-caps (defined as the first 100 stocks by market cap), 25% in mid-caps (101st to 250th stock by market cap) and 25% in small-caps (251st stock onwards). The rest of the 25% can be invested in any of the above three categories, technically allowing a 50% large-cap exposure in a multi-cap fund. You can read the circular here.
The upset is because multi-cap funds will now be forced to invest into the small-cap market, reducing the elbow room available with the funds to manage as they liked. There are three things that you as an investor need to consider before you get caught up in the hysterical outpouring seen last week about this circular. One, financial products are invisible. It is in their description they are created in the minds of investors. Therefore, product labels are very important in an industry that manufactures and sells products that are invisible and whose moment of truth is not immediate, but far in the future. The moment of truth of another invisible service like a mobile data plan is at once. A physical product like a plate of sushi is also immediate. But an equity-linked investment will by its very nature have its moment of truth in the future. Put these two things together and you need mutual fund labels to describe correctly what the investor is buying. Calling a credit risk fund, a credit opportunity fund is a sleight of hand to make risk sound like an opportunity. It has taken a lot of internal push to get the industry to agree to call a ‘risk’ a ‘risk’ and not an ‘opportunity’.