By Vidhu Shekhar
Kya mutual fund sahi hai? A close friend of mine, someone whom I have known for several years, asked me this question the other day. As an old soldier who has spent time in the trenches and is fiercely loyal to the industry I serve, my response was instinctive: “Of course. How can you doubt that mutual funds are not right for you?”
My friend works with a listed company and has seen the benefits of capital markets first-hand. He believes in the markets, and was one of several million Indians who pumped in more than Rs 8,000 crore through mutual fund SIPs even in March when the as Covid-19 crisis was unfolding around us.
We are still in the early days of this crisis, and my hope is, when we look back five years from now, we will see this as a period when our faith in the markets was proven right. The investment management industry in India has grown significantly in a decade since the last Global Financial Crisis. India has continued its steady transition from a state-managed economy to a market-driven one. More and more of the capital required for economic growth now comes from markets – retail mutual funds, Alternative Investment Funds or private equity.
Capital market intermediaries have occupied the space vacated by banks. However, even as this transition has picked up pace, those in the industry have had to contend with questions of misaligned incentives, professional incompetence and unethical behaviour.
Like other industries, the investment industry is also going to be reshaped by this crisis, and it is important to rebuild on a solid foundation.
The primary source of our current anxiety seems to be the trouble in our debt markets. For the equity market, it is easier to understand and explain why valuations will go down in a crisis like this. Debt funds, on the other hand, have been sold as a safe option. The IL&FS crisis exposed problems in our credit markets, and triggered a flight to safety that resulted in increased borrowing costs to many issuers. This impacted NAVs of debt funds and eroded investor trust.
As insiders, we know where the problems are: when times are good, problems are hidden by the short-term returns generated by markets. It is much easier to measure returns than it is to measure and manage risks. Investors feel happy and congratulate themselves for being smart. They, and their advisers, confuse luck with skill, and think that good times will go on.
Advisers are busy bringing in new customers. Asset managers, even when they understand that the risks are high and valuations are stretched, do not want to refuse new business – after all, their compensation is tied to the AUM they manage. When crisis strikes, they are left scrambling to offer explanations as to why the rosy picture they painted just the other day is now so different from the reality that their customers are facing.
Having meditated in all these issues, my response to my friend went something like this: “Yes, you have reasons to be unhappy. Perhaps we misled you into thinking that investing in mutual funds will be a bed of roses. Perhaps, we didn’t do a good job of understanding your financial goals and creating a portfolio that will serve your long-term needs. Perhaps, there are ways for us in the industry to reduce costs and improve the way we serve you. But the answer to these problems is not to hide behind the safety of fixed deposits or guaranteed retirement products. If you wish to achieve your life goals with some degree of certainty, you need to have a measured exposure to financial markets, and mutual funds are still the best way to achieve this exposure.”
The responsibility of ensuring that our industry works in the interest of the ultimate beneficiary rests on all of us who are part of this profession. In the long run, the only currency we have is the currency of trust. The responsibility of earning this trust doesn’t rest on the regulator alone. Every member of the profession is individually and collectively responsible for earning and keeping this trust.
(Vidhu Shekhar, CFA, CIPM, is the India Country Head for CFA Institute. Views are his own)