MFs Must Not Risk Communication Gap With Investors 

When a veteran fund manager’s warning about overvalued markets sparks industry backlash, it exposes a systemic flaw. Sankaran Naren, Chief Investment Officer of ICICI Prudential AMC, was recently caught in the eye of the storm for raising caution over froth in mid- and small-cap stocks. This event has revealed an uncomfortable truth about the Indian mutual fund industry — the stranglehold of distributors. The furore over Naren’s speech, ironically at an event organised by Independent Financial Advisors, is no tempest in a teapot. It is a call for all stakeholders to introspect.

Naren’s call for caution was neither alarmist nor unfounded. Valuations in the small- and mid-cap segments have been running hot, a sentiment echoed by Securities and Exchange Board of India chief Madhabi Puri Buch as early as March 2024. 

Naren is no Johnny-come-lately. He has steered a steady ship as the CIO of ICICI Prudential AMC for 14 years. Yet, distributors, who control 54% of the industry’s assets, reacted to Naren’s remarks as if he had committed heresy.  Their indignation stemmed not from flawed analysis, but from fears that his cautionary messaging around systematic investment plans, or SIPs, might curb inflows. This laid bare a structural flaw — when sales incentives collide with risk assessment, investor interests often take a backseat.

Distributors handle 75% of retail investments and 73% of investments by high-net-worth individuals, according to the Association of Mutual Funds in India’s data. This could explain their dominance and the reluctance of AMCs to tinker with a system that has served them well. For context, mutual funds paid ₹148.53 billion in commissions to distributors in 2023-24. The distributor-led growth model that has propelled India’s mutual fund industry—while instrumental in deepening market penetration—has also led to an overdependence on intermediaries.

Institutional Weakness

Unconfirmed social media reports suggest that some portions of the video were edited by the organisers—an association of mutual fund distributors—where they removed Naren’s comments that investors are bearing the risk of high valuations, not the AMCs. He also suggested that it was time to exit mid- and small-cap funds.

This manipulation of the context, if true, is deeply troubling. The distributors have done a singular disservice to their investors by distorting the message. They have let down their clients – the investors who drive their business.

A mutual fund distributor has a fiduciary responsibility, as AMFI’s own guidelines state—investor interest is paramount. What should have been a debate on valuations and protection of capital turned instead into a campaign to muzzle the messenger.

Independent financial advisors, banks, and large national distributors have become gatekeepers of mutual fund flows, which could tilt the balance in favour of commercial considerations over long-term objectives. If the mere act of a CIO voicing market caution can be construed by distributors as raining on their parade, they (not the MFs) face the risk of being called out for chasing fees over investor interest.

AMCs must urgently rethink their approach to attract investors. They must accelerate their transition towards direct investor engagement. Digital platforms, direct plans, and investor education must evolve beyond lip-service projects and become the backbone of fund house strategies. They must invest in building a robust and responsive in-house sales organisation that is as steeped in fiduciary responsibilities as it is in creating and understanding new financial products.

SEBI’s push for fee-based advisory models is a step forward but requires aggressive investor education.

India’s mutual fund industry must take cues from global practices and foster an environment where transparency, investor education, and long-term performance are the cornerstones of distribution.

Fund managers must also engage with investors directly. Why are most fund manager meetings organised by AMCs’ sales channels? Why can’t fund managers hold more virtual meetings with unitholders besides an annual general meeting, where they can share perspectives and understand concerns? SEBI’s nod to companies for holding virtual AGMs (granted during COVID-19) has proved that such meetings can be effective. AMCs need only muster the will, given the massive number of unitholders. That’s where technology could be leveraged to facilitate transparent communication and cultivate a long-overdue direct relationship with investors. 

India’s mutual fund industry has done pioneering work in generating awareness and increasing participation. It must now empower investors to seek knowledge.

Distributors will remain vital for penetration into semi-urban markets, but AMCs need to recalibrate their strategies to prioritise long-term investor welfare. This means inculcating fiduciary ethics into every layer of operations. 

The Naren episode must serve as a lighthouse for mutual funds to course correct and adopt best practices to reinforce fiduciary responsibility, the bedrock of their business. 

 

Also read: A Speech That Opened Pandora’s Box: Small S(l)ip?