Is the Sebi doing enough?

Part I: Bull Run? Beware of being scammed!

The tenth anniversary is an important milestone. It's a good time to absorb the lessons of the past and look at a road map of the future. Sebi's Mutual Fund Regulations completes 10 years in 2006; we don't know if the regulator is indulging in introspection since it did not respond to our emails and queries.

But we can chart its progress and frame a wishlist for the future. Sebi has indeed made progress in setting norms for the mutual fund industry. Large investors can no longer own the lion's share of a scheme; the certification course is mandatory for fund distributors; the quality of disclosures has improved; advertisements have been regularised, etc.

But in some important areas, Sebi has failed to meet the needs of a rapidly expanding market. Mutual funds have rushed to launch new schemes during the current bull market. In 2005, they collected a record Rs 25,000 crore (Rs 250 billion) and in the first three months of 2006, they have already added over Rs 15,000 crore (Rs 150 billion).

We list four areas where Sebi could improve:

1. Portfolio disclosures: Move up from semi-annually

Sebi mandates that mutual funds must disclose their portfolios in September and in March. Some funds do disclose portfolios on a monthly basis. Other houses like Fidelity stick to Sebi's minimum requirements and disclose portfolios only twice a year.

Says Ashu Suyash, head, Fidelity Mutual Fund: "Very frequent disclosures do not help the investor. If an investor can track what stocks we're buying and then invest in the fund, perhaps he is so evolved that he is better off managing his own portfolio."

There's a danger here though. While Fidelity's investors might not have much cause for worry, it sets a bad precedent. And although we concede Ashu's point that it may not help the novice investor, it does help Outlook Money to track mutual funds and help you make informed decisions!

Frequent portfolio disclosures can help you take corrective action if a fund follows a risky strategy. For instance, Taurus' equity funds have consistently invested around 20-25 per cent in each of the top three scrips in their portfolios. This method of concentration on specific scrips can backfire if the concerned sectors and scrips drop sharply.

U.K Sinha, chairman and managing director, UTI Mutual fund says: "Disclosure brings discipline to the fund manager. Since it is in the public arena, fund managers will not violate fund objectives, even temporarily."

It would be helpful if Sebi made it mandatory for portfolio disclosures for all open-ended as well as closed-end schemes to be made available every quarter, on the fund's Web site.

2. Account statements: not just event-based

Babu Narude, 55, has been investing in mutual funds for several years. While his investments have gained, his problem is that he doesn't know by how much! Narude says, "I am planning my daughter's marriage and I will need to redeem some investments to finance it. Unfortunately, I do not know how much my portfolio is worth. How can I decide how much I should withdraw and how much I should keep invested?"

Sebi doesn't specify how frequently funds must send account statements to investors. While most funds sent account statements once a transaction takes place, others send it at least once a year. But none are bound to do so. Although investors can call up fund houses to dispatch account statements on request, this is a tedious process.

Sebi should ideally make it mandatory for mutual funds to make account statements available on a periodical basis to all investors.

"Perhaps quarterly disclosure is a good idea", says C. Jayaram, executive director, Kotak Mahindra Bank. Alternatively, fund houses could emulate banks and create systems for investors to access their accounts online.

3. Naming the scheme

Ideally the name of the fund should describe its intent. But there are instances of schemes with misleading names. A year ago, HDFC Mutual Fund intended to launch a fund called 'HDFC Relief Bond Fund.' Although it was a bond fund, the name might have misled investors to believe it had something to do with the RBI Relief Bond. After the media highlighted the issue, the fund launch was aborted.

Funds named "HDFC High Interest Fund", "JM High Liquidity Fund" won Sebi approval at the time of their respective launches. The former is a bond fund that doesn't pay higher interest than others; the latter is not particularly highly liquid in its objectives.

Market sources say that Sebi is now more alert about misleading names. For instance, ING Vysya Select Debt fund was called "ING Vysya High Interest Fund" when it filed its draft offer document. The fund intended to invest in AA and lower-rated securities, which have higher yields. Sebi objected to the name and cleared the scheme only after a change of name.

The US Regulator, Securities Exchange Commission (SEC) has detailed guidelines about the naming of fund schemes. Sebi has no such guidelines. We feel that Sebi should make an attempt to lay down some guidelines as to how funds name their schemes.

4. True to objective

You invest in a fund going by its objective. But what if the fund steers away from its stated objective? Although Sebi has mandated funds to state in their offer documents the proposed allocation to securities commensurate to its name, funds do have leeway to invest elsewhere. For instance, if an Information Technology (IT) fund invests around 80 per cent in technology, it can invest the balance 20 per cent in non-IT companies. In 2000, scrips like Zee Telefilms and HDFC Bank were prominent in some IT fund portfolios.

Although it is the trustees' responsibility to ensure that funds stay true to their objective, it would help if Sebi raises the minimum investment limit, to say 90 per cent, to ensure that funds stay committed to the chosen sector or theme.

With Tejas P. Bhope in Mumbai

Part III: Will the stock market party end?

Do you want to discuss stock tips? Do you know a hot one? Join the Stock Market Discussion Group