Why Are Mutual Fund Investors Pissed?

Why Are Mutual Fund Investors Pissed?

Mutual Fund investors are vexed at the NPCI as its newly adopted system resulted in the piling up of orders. As a result, investors missed out on potential gains in the post-budget market rally. Investors are even demanding compensation for the potential gains! Let’s find out what happened.

Crux of the Matter

The Hitch

  • National Payments Corporation of India (NPCI) upgraded its system on January 31.
  • Since then, issues with the implementation of Mutual Fund orders started popping up.
  • Money is deducted through the digital gateway but units ordered by MF investors are either received late or not received at all.

What’s The Issue?
Step A
With increasing volume requirements and industry demands, NPCI updated its National Automated Clearing House (NACH) infrastructure on Jan 31. The NACH mandate deducts money from the investor’s account & then transfers it to the MF Scheme.

Step B
The planned migration was not implemented successfully. The amount was deducted without the units getting transferred to the account.

Step C
The upgradation coincided with SEBI’s new Net Asset Value (NAV) rules from February 1. SEBI’s new rules for orders above ₹2 lakh allow for the allocation of assets only when the fund leaves the bank settlement account and hits the Asset Management Company’s (MF issuer) account.

Step D
Hence with the persisting glitch, approximately 5 – 7 lakh transactions have piled up at payment gateways. Moreover, Sensex and Nifty have gained about 9 – 10% since Union Budget, making Mutual Fund investors more restless.

Who Is Accountable?
Side I:
The Mutual Fund investors are seeking compensation from fund homes on lost income for not receiving unit allotments on time.
Side II:
The fund home CEOs claim that unit allocation was not possible since the Mutual Fund never received the money.

Parties Involved

  • Investor’s Financial Institution.
  • Mutual Fund & its Payment Gateway
  • NPCI

Status Quo
NPCI released a statement that it is working with fintech companies and banks to resolve the glitch in its upgraded clearing system.

Curiopedia
  • The first modern investment funds were established in the Dutch Republic. In response to the financial crisis of 1772–1773, Amsterdam-based businessman Abraham van Ketwich formed a trust named Eendragt Maakt Magt (“unity creates strength”).
  • At the end of 2019, mutual fund assets worldwide were $54.9 trillion, according to the Investment Company Institute.
  • The Vanguard Group, Inc. is an American registered investment advisor based in Malvern, Pennsylvania with about $6.2 trillion in global assets under management, as of January 31, 2020. It is the largest provider of mutual funds in the world.

What Are Mutual Funds?

What Are Mutual Funds?

Recently, SEBI announced a major change in mutual funds investment. Now multi-cap mutual funds have a compulsion to invest 25% each in mid, large, and small capitalization funds. But before we delve into that, let us understand what mutual funds are, their various aspects, and how to calculate their value.

Crux of the Matter

What Are Mutual Funds?
A mutual fund (MF) is an investment company, which brings together money from many people and invests in stocks, bonds, or other assets. Fund’s portfolio includes combined holdings of stocks, bonds, or other assets it owns. Generally, a professional Fund Manager manages the fund.

The entire amount of investment is distributed in units. Investors buy these units instead of buying stocks directly. Therefore, mutual fund investors are sometimes called unitholders. Mutual Funds based on flexibility of investing are categorized as:

  • Open-ended – Can invest and redeem anytime.
  • Closed-ended – Can invest only at the start and redeem when its tenure ends.
  • Interval – Can invest or redeem only at some predefined dates.

Active & Passive Management
Portfolio management is the process of managing underlying assets (equity, debt, gold, etc) through buying, selling, and holding. Mutual Funds can be Passively or Actively managed.

Passive fund management generally involves replicating a benchmark index, in which a
fund manager tries to match the returns of the set benchmark. For instance, a benchmark for a Mutual Fund can be NIFTY 50, in which the fund would try to match the returns of that index.

In active fund management, a fund manager actively looks after which assets to buy, sell, or hold based on quantitative, technical, and/or fundamental analysis.

The cost of the passive fund is less whereas the cost of active funds is more. Generally, Open-ended MFs are passively managed, whereas Closed-ended MFs are actively managed.

Types Based On Investment

  • Equity MF – Invest in equities, and are considered risky but with a potential of a higher return.
  • Debt MF – Invest in bonds of Governments, banks, and corporates and are considered safe but with a low potential for returns as bonds fetch a fixed amount of interest.
  • Hybrid MF – Invest in both equity and bonds, and are considered to have a moderate risk with moderate returns.
  • Other MFs – Invest in gold, real estate, commodities, etc. individually or have mixed assets. These funds are also considered to have a moderate risk with moderate returns prospects.

NAV states the per share/unit price of the mutual fund on a specific date or time.

Now that you have a basic understanding of Mutual Funds, you can read about SEBI’s major announcement for mutual funds: SEBI Announced New Norms For Mutual Funds

Curiopedia
  • An index fund is a mutual fund designed to follow certain preset rules so that the fund can track a specified basket of underlying investments. The first theoretical model for an index fund was suggested in 1960.
  • Dollex 30 is the USD version of the SENSEX. It is designed to measure the performance of the 30 largest, most liquid and financially sound companies across key sectors of the Indian economy that are listed at BSE Ltd.
  • The first modern investment funds were established in the Dutch Republic. In response to the financial crisis of 1772–1773, Amsterdam-based businessman Abraham van Ketwich formed a trust named Eendragt Maakt Magt (“unity creates strength”).

SEBI Announced New Norms For Mutual Funds

SEBI Announced New Norms For Mutual Funds

Recently, SEBI announced a major change in mutual funds investment. Now multi-cap mutual funds have a compulsion to invest 25% each in mid, large, and small capitalization funds. Let us demystify what multi cap, large cap, mid cap, etc are and understand how mutual funds and investors will be impacted by this move.

Crux of the Matter

Before you deep dive into this piece, you can understand the basics of Mutual Funds in a simple jargon-free language here.

Recent Announcement
SEBI made it mandatory for multi-cap Mutual Funds to invest at least 25% of their funds in each small, mid, and large-cap equities. Mutual funds have been told to abide by the new rules by end of January 2021. A multi-cap mutual fund is the one that invests across equities with varied market capitalization, i.e. large-cap, mid-cap, and small-cap. Market Capitalisation = Share price x Number of outstanding shares.

Currently, minimum equity allocation in multi-cap is 65% but as per the new rule minimum equity allocation will also increase to 75%.

Impact
Experts say that investors who have already invested in mid and small-cap funds will be benefited. As demand for mid and low cap stocks increases, so will their price. Investors’ holdings in mid and small-cap, thus, can go up due to accelerated buying in mid and small-cap space by the multi-cap funds before January 2021.

Response Strategy
Investors can switch their funds from multi-cap to other equity funds. Mutual Funds can merge/dissolve multi-cap funds with large-cap funds or large-mid cap funds. One can also convert multi-cap to ESG (Environmental, Social, and Governance) funds. By doing so one can maintain the same investment process as well as portfolio quality. ESG funds measure the sustainability and ethical impact of an investment in a business or company in Environmental, Social, and Governance areas. ESG criteria are often preferred by socially responsible investors for investments.

Curiopedia
  • An index fund is a mutual fund designed to follow certain preset rules so that the fund can track a specified basket of underlying investments. The first theoretical model for an index fund was suggested in 1960.
  • Dollex 30 is the USD version of the SENSEX. It is designed to measure the performance of the 30 largest, most liquid and financially sound companies across key sectors of the Indian economy that are listed at BSE Ltd.
  • The first modern investment funds were established in the Dutch Republic. In response to the financial crisis of 1772–1773, Amsterdam-based businessman Abraham van Ketwich formed a trust named Eendragt Maakt Magt (“unity creates strength”).