MFs' back-office services may come under Sebi watch

Fund accountants and administrators, who have been providing back-office services to the mutual fund industry for close to a decade now may soon come under the regulatory framework of market regulator the Securities and Exchange Board of India (Sebi).

Sebi is planning to introduce the concept of professional fund accountants and administrators in the country. At present, it is the custodial service providers that provide administrative support to fund houses.

Basically, fund administration services involve security pricing, net asset value (NAV) calculation, maintenance of books of accounts, NAV reporting and preparing financial statements, among others, for fund houses. These are critical functions, as they have to be done on a daily basis.

At present, custodians are registered with Sebi, and governed by the custodian regulations. However, these regulations do not cover fund accounting and fund administration activities, which are value added services provided by custodians.

In case of a lapse on part of the fund accountants, knowingly or unknowingly, the regulator is powerless to act against them in the absence of any specific regulatory framework. Also, since asset management companies (AMCs) enter into a bi-lateral agreement with the service provider (i.e custodian), fund houses are required to comply with the Sebi regulations and not the service provider.

Barring a few top fund houses which do fund accounting in-house, most fund houses have outsourced their back-office activities to custodians.

The thinking within Sebi is that since these service providers are appointed by the AMC, the valuation methodology may lack an independent view.

In some markets such as Indonesia and Thailand, regulations require fund accounting and administration to be performed by a registered professional entity which independently performs these activities and reports to the regulator.

According to industry sources, the regulator had recently discussed this issue with market participants. “As far as the functioning of the AMC is concerned, this will bring in more transparency,” said a senior official with a foreign custodian bank.

“In terms of day-to-day functioning, there will not be much of a difference, but it will increase our accountability and there could be some restrictions as well,” the official added.
Source: http://economictimes.indiatimes.com/MFs-services-under-Sebi-watch/articleshow/5201415.cms

‘Transparency, lower costs will help draw more investors to MF’

Indian equity markets have corrected in the past days following a sharp rise till mid October after hitting the lows in March this year. Suresh Soni, CEO of Deutsche Asset Management (I) Pvt Ltd, feels that despite the economic recovery showing signs of revival, some amount of fear with respect to impact of deficient rainfall and a likely rise in inflation in coming months will have some impact in the markets. However, he also feels that key drivers for the markets ahead will be corporate earnings, domestic demand, global liquidity and commodity prices. Soni spoke to Chirag Madia of FE over the impact of introducing ban on entry load in the mutual fund industry. The ban will bring in a change from the earlier days when concentration was a lot more on selling equity scheme. Also the fall in total cost of transaction will motivate new investors to invest in equity mutual funds.

Excerpts:
In the last few trading sessions, we have seen breadth of the markets remaining weak with a downfall after the surge in the Indian markets. How do you see the Indian markets’ performance in the coming days?

Equity markets don't move in a straight line. We had seen a sharp rise in the markets till mid-October after hitting the lows in March this year. There has been some correction since then and the markets have fallen by around 10%. We are not particularly worried by the magnitude of the fall and would term this as a normal correction after the sharp rise. While the economic recovery is still underway, there are some apprehensions with respect to the impact of deficient rainfall and likely rise in inflation in coming months. There will possibly be a period of consolidation and then based on the outlook for earnings growth from companies markets will move ahead.

How do you look at the Indian markets from a short-term as well as long-term perspective and in which direction the markets are heading in the current scenario?

From a near-term outlook, the markets may see some consolidation. However, we remain positive on the medium-term outlook. Indian economy is demonstrating strong resilience and we have seen significant turnaround in the industrial activity. We are seeing strong growth numbers in sectors such as automobiles and consumer durables.

Now the results season is almost over and we have seen monetary policy of the central bank last week. What will be the major factors that will be moving the domestic markets?

Over the last six months, the markets have risen on the back of strong liquidity flows, improved industrial performance and reasonably strong corporate earnings growth. Global liquidity and domestic demand has been supportive of markets so far this year. Going forward, we think that the key drivers for the markets would be corporate earnings, domestic demand, global liquidity and commodity prices.

Which are the sectors which you are looking at as fund houses now?

The economy is beginning to demonstrate growth. We are also witnessing aggressive investments infusing into the infrastructure sector. The infrastructure sector remains a key growth area. Apart from that we are positive on capital goods sector as well. We also see significant investment opportunities on a bottom up basis in specific stocks.

As you said infrastructure sector will remain a key growth area in the next few years. Why your fund house has not launched any infrastructure fund or any theme-based fund as in the past few months, many fund houses launched infrastructure funds?

At DWS, we do not launch funds unless we see a clear investment opportunity, product gap or a strong theme. Currently, we are working on some new products and are in talks with the regulator. Once we get necessary approval, we will talk about that.

Indian mutual fund industry is going through a transition period. How much has the industry changed since the ban on entry load in the mutual fund industry by the market regulator, Securities and Exchange Board of India (Sebi)?

We think that the move from a long-term outlook is a welcome move. Sebi's move brings a much needed transparency to the whole process of buying mutual funds and also lowers the transaction costs for the investor. Though it can be argued that in the near-term this poses some challenge in penetration of mutual funds especially in smaller towns.
Post regulation, the industry has seen some amount of slowdown in equity inflows. However, we are seeing a lot more balanced selling as opposed to selling just equity schemes. For example, we have seen a pick-up in sales of hybrid and fixed income funds in the past few months. This is a change from the earlier days when the concentration was a lot more on selling equity schemes.
The other trend one has seen is that, there is some anxiety in the mind of distributors, because of significant reduction in their earnings potential on equity funds. But we do believe that over a period of time, business volumes will increase as compared to what they are today. The cost of transaction coming down should motivate new investors to invest in equity mutual funds and also encourage existing investors to increase their allocation to mutual funds.
We believe that with increased transparency and lower transaction costs, more investors will choose to invest through mutual funds rather than going directly to the equity markets. In the long-run, what is good for the investor is good for the industry.

In the past few weeks, we are witnessing the numbers of fixed maturity plans (FMPs) again coming in the market. What's your take on this development?

The fixed income funds, open-ended or close-ended, have important place in investors' portfolio because the investors perceive these funds more as a low risk investment.
During the last year's liquidity crises, there was some loss of investor confidence in FMPs. Following that, there had been a tightening of regulatory norms governing FMPs. There was a period of adjustment from say, fourth quarter of last year till about mid this year, to the new regulations. Post this period, FMP's in their new form have started picking up. There is enough space for both open-ended or close-ended fixed income schemes and fixed income funds as a category would only grow.

Source: http://www.financialexpress.com/news/transparency-lower-costs-will-help-draw-more-investors-to-mf/537832/0