The proposed amendments come at a time when fixed-term products have become popular among Thai investors, according to the consultation. As of the end of the first quarter, the total AUM for fixed-term funds was at THB 770bn ($24.9bn), with 96% of the products being offered to retail investors, according to the SEC.
In terms of fund flows, foreign investment fixed-term bond funds had the highest net sales in Thailand this year among all fund categories, with year-to-date net inflows of around THB 260.4bn, according to data from Morningstar Direct.
Also with net inflows were domestic fixed-term bond funds (THB 3.9bn) and domestic high yield fixed-term bond funds (THB 1.6bn).
“There will be additional compliance costs and operations expenses to comply with the risk spectrum revision"
However, the regulator believes that since most of these products have short-term fixed maturities of three, six and 12 months, Thai investors often perceive them as deposit products with an expected fixed return and may not be aware of their underlying risks.
“Despite their popularity, there are drawbacks in investing in term funds,” the regulator said.
Investors should be aware that fixed-term products have distinct characteristics from other mutual funds, such as the inability to redeem investment units before its maturity date and the high concentration risk which results from a concentrated portfolio in a few issuers, securities, sectors and countries, it said.
Fixed-term funds are also popular elsewhere in Asia, with a number of fund managers launching them in the region this year.
The proposed regulations include more disclosure requirements, explained Evonne Gan, Singapore-based analyst at Cerulli Associates.
For example, selling agents of distributors will have additional checklist questions when offering fixed term funds to investors, she said.
Additional risk warning statements should also be included on the term funds’ offering documents to make it clear that they are not cash deposits and are not risk free.
For example, documents should indicate that “investment in investment units is not bank deposits and is subjected to certain risks. Therefore, investors may receive the amount of less than the money in which the investors initially invested”, the circular said.
Gan added that the amendments also include a reclassification of the risk spectrum depending on how much a fund is concentrated in a single country or sector. She noted that at least 80% of the term funds launched last year have some exposure to foreign investments or foreign currency-denominated investments.
Proposed risk spectrums
Products that are available to retail investors should also be more diversified, according to Gan. Under the new regulations, the maximum investment in a single issuer will be decreased to 10% from 20% of a product’s AUM.
Gan expects compliance costs to increase for both asset managers and distributors.
“There will be additional compliance costs and operations expenses to comply with the risk spectrum revision, disclosure requirement, revising fund documents and training for selling agents,” she said.
Nonetheless, she is positive about the development.
“For the industry as a whole, it is definitely beneficial to help individual investors understand further the underlying risks of any investments.”