Mutual funds are not there to provide risk capital: Sebi chief

Mumbai: Mutual funds are not banks and are not around to provide risk capital, said Securities and Exchange Board of India chairman Ajay Tyagi. The capital market regulator's comments come in the wake of criticism against debt mutual funds, which have been blamed for investing in companies beyond their capacity and not following the best risk practices.

"There is clear distinction between lending and investing..Mutual funds do not have risk capital and are essentially pass through vehicles wherein NAV(net asset value) ought to reflect the correct value of assets held at any time," Tyagi said at the industry body AMFI's conference on Tuesday.

The Sebi chief said the industry needs to adhere to its regulations and play as per the rule book. Some mutual funds were criticized for entering into a standstill agreement with the promoters of Essel Group that allowed delayed repayment. Mutual funds have also sought Sebi's view on whether they can be part of the inter-creditor agreement process for resolution of Dewan Housing Finance Corporation.

Sebi is in the process of examining the issue, Tyagi had said earlier.

Sebi said based on its study of liquid schemes, the average holding in liquid instruments in 20% of the instances was less than 5% of AUM (assets under management) as compared to an average net redemption in these schemes of around 19%.

"A certain element of self-discipline by the industry could have averted such a situation.The recent events also threw into the spotlight several risky investments made by
the industry in the quest for higher yields.The safety of the investment cannot be compromised for want of higher yields,"Tyagi said.

In the closed door meeting with mutual funds, Tyagi said during its inspections the regulator noticed that the difference in the TER (total expense ratio) between direct and regular plans is not exactly to the extent of distribution expenses and commission paid.

"Such practices are not desirable and defeat the very purpose of direct plans.We have recently specified that all fees and expenses charged in a direct plan in percentage terms under various heads including the investment and advisory fee shall not exceed the fees and expenses charged under such heads in a regular plan.This is expected to ensure that the difference in expense ratios between the two plans is not misused for charging additional expenses under other heads," Tyagi said.

The regulator has been pushing the industry to promoter direct plans for investors to benefit from lower TER.

Tyagi also said mutual fund trustees are not expected to be passive participants.

"Where there are concerns and lapses, we expect the trustees to step up their efforts as the first level gatekeepers,take remedial steps and immediately make necessary intimations to SEBI and not wait for SEBI to step in and take corrective measures,"Tyagi said.