The Securities and Exchange Board of India (Sebi) chairman M Damodaran was recently quoted by leading business dailies for his remarks on introduction of regulations for mutual fund distributors.
Damodaran reportedly spoke about the need to ensure that mutual fund products sold by distributors are suited to investors' needs, rather than those of the distributors. Also he commented on the practice of churning portfolios that is encouraged by distributors for their selfish interests.
While Sebi's proposal to introduce regulations might take some by surprise, we at Personalfn have seen this coming for a while. In fact, we are happy at this turn of events, given the kind of practices we have witnessed in the mutual fund industry over the years.
Also our view on this issue is not distorted by the fact that we are in the distribution business and offer financial planning services to our clients.
Practices like offering rebates on investments made (despite being explicitly prohibited) or advocating investments in new fund offers (NFOs) with scant regard for the investor's risk profile or needs are rampant in the mutual fund industry. With equity markets scaling record highs, the mutual fund industry has undeniably been a major beneficiary in recent times.
Fund houses' assets under management have swelled sharply and distributors have done their bit in contributing to this phenomenon. However the manner in which this was done is questionable.
This brings us to the role played by fund houses. Powered by their greed to amass huge asset sizes (since their incomes or profits are linked to the same), nearly all fund houses turned a blind eye to the practices adopted by distributors. We find it rather difficult to believe that fund houses were unaware of the manner in which their distributors went about procuring investments in mutual fund schemes.
Sadly, investor education or empowerment rarely featured as priority areas for fund houses. In some ways, they fuelled the sorry situation by launching a plethora of (in most cases unnecessary) NFOs to capitalise on the conducive market conditions and encouraged distributors by offering hefty compensation structures to sell these NFOs; effectively, the fund houses acted in collusion with distributors.
Of course, the fund houses had their own reasons for launching NFOs, a fact that was not lost on SEBI. So after fixing the problem with them and their NFOs (at least the open-ended ones), it is not surprising that we now have the distributors coming in Sebi's line of fire.
In an ideal situation, fund houses and distributors alike should have taken upon themselves the onus to act in a responsible manner and work in the best interests of the investor. Sadly, the regulator has yet again been forced to step in and clean the mess.
According to reports, the Sebi chairman has indicated that the preferred route would be for the distribution industry to come up with a solution to this problem; else the regulator would come up with its own set of recommendations.
We believe that the concerned parties i.e. distributors and fund houses alike must get their act in place. Fund houses have the authority to ensure that their distributors don't act in an unethical manner and they must exercise the same. Distributors on their part must realise that acting in the investors' interests is something that will hold them in good stead over the long run.
The distributor community should treat this as the final opportunity to either shape up or ship out! And making a choice between the two shouldn't be difficult.
Mr Damodaran, a big thank you from Personalfn!
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