MUMBAI: Given the rising mismatch between demand and supply of debt market instruments across investor classes, a senior Sebi official has urged the mutual fund industry and its lobby Amfi to conduct voluntary and credible industry-wide stress tests.
Reeling out numbers to buttress his points, Sebi whole-time member Ananth Narayan G told mutual fund industry leaders in New Delhi that in FY24 alone, net demand for paper -- across primary and secondary markets -- from all MFs, DIIs, FPIs and individuals stood at around Rs 3.6 trillion. As against this, Narayan said the supply of fresh paper in FY24 -- across IPOs, FPOs, rights issues, QIPs and preferential allotments -- was less than Rs 2 trillion and the mismatch has been growing much faster in recent times.
“Of course, for every buyer there must be a seller. But ideally, one would like to see fresh paper issued by companies, rather than substantially the same paper being churned, to meet the demand for paper from core investors such as individuals, MFs, DIIs and FPIs,” he said.
“Fresh paper issuance is clearly a better reflection of fresh capital formation and raises less doubts about asset price inflation. Over the past five years, over 40 percent of all midcap, smallcap and microcap stocks have grown by over 5x in price. While earnings growth, macros and any other number of factors can be used to explain and justify price movements, I would urge industry experts, who are the fiduciary managers of public money, to collectively deliberate on this issue,” Narayan said in a speech shared by Sebi on its website on Friday evening.
He further said, “As a result of the large inflows from individual investors into equity capital markets in recent times, the holdings of MFs, DIIs and individuals have risen from 54.3 percent of the free float of all midcap and smallcap companies as of March 2020 to 60.6 percent as of March 2024. This does raise questions about what would happen in the hypothetical stress event of large redemptions from mutual funds, particularly from arguably less-liquid midcap and smallcap schemes.”
H said that from under 2 crore unique investors as of March 2019, the MF industry has increased to nearly 4.7 crore unique investors as of June 2024, an annual growth of 18 percent each year. Since March 2019, MFs have net garnered, on average, nearly Rs 2.4 trillion each year. Of this, over Rs 2.2 trillion was directed towards risk-oriented schemes such as equity-oriented schemes, hybrid schemes, equity-oriented exchange traded funds and index funds.
In comparison, the average FPI inflow into equities during this period since March 2019 was just about Rs 61,000 crore per year, which is not even a third of the inflows into MFs, which has gathered further pace in the past three years.
The average annual MF flows into risk-oriented schemes over the past three years have risen to Rs 3.3 trillion annually. Again, over the past three years, the benchmark indices have given a creditable return of 14 percent per year, with an annualized realised volatility of just 14.3 percent. During this period, the Nasdaq retuned only 3.7 percent per annum, with a higher volatility of 23.5 percent.
On the back of these robust inflows and market price growth, mutual fund assets under management (AUM) have grown from Rs 23.8 trillion in March 2019 to Rs 61.2 trillion in June 2024, an annualised growth of 20 percent. The AUM touched Rs 64.69 trillion in July.
"While growth in investor participation aids capital formation, as there are over 55 crore people who have linked their PAN numbers to Aadhaar and who have the potential to be part of the securities market ecosystem, we’re also duty bound to ensure that their investments are managed responsibly, and that investors are both completely aware of, and accepting of, the inevitable risks that accompany securities markets," said Narayan.
“The fiduciary responsibilities of the MF industry should well outweigh any commercial goals and considerations because the best time to reflect on possible issues is during good times rather than bad,” he added.
