There are no two ways about it. Sebi (Securities and Exchange Board of India) does not trust AMCs (Asset Management Companies) to settle anything on their own. Every time Damodaran (Sebi Chairman) identifies a problem with the mutual fund industry, he simply makes rules/regulations for the AMCs so that they have no choice but to comply with them.
If the AMCs have a problem with that, they must understand that this is largely their own doing. Had AMCs been proactive enough to identify problems on their own and nip them in the bud, they would not need a 'hawkish' market regulator.
The latest bogey raised by Sebi is about NFOs (New Fund Offers). If you are wondering what is it this time with NFOs, there is plenty. To begin with, the domestic mutual fund industry has witnessed so many NFOs over the last 18-24 months, that investors have almost forgotten that there are a great deal of well-managed mutual funds with track records going back more than 10 years.
And AMCs weren't doing anything to make it simpler for investors to choose the right fund; in fact, AMCs were more keen that investors choose the 'latest' fund. That is why you have a Sundaram Growth Fund (a conservative, diversified equity fund with one of the better track records in the industry) with a net asset base of Rs 1,441 m as on May 31, 2006.
On the other hand, Sundaram Rural Fund, an NFO that invests predominantly in companies that stand to benefit from rural growth (i.e. a thematic fund), has mobilised net assets in excess of Rs 12,000 m during the NFO in April 2006.
We are not able to comprehend how or why investors find a rural-centric theme more compelling than investing in a well-managed diversified equity fund with a proven track record. So Sundaram Mutual Fund's new flagship fund is a 'rural fund'. While this is just an example, practically every AMC in the country (including those in existence for nearly a decade) has a new flagship fund that is less than two years old.
When Sebi saw how NFOs were being mis-sold, they made rules to curtail the malpractices. The obscenely high commissions (at times as high as 6%) paid by AMCs to mutual fund distributors/agents were identified as the problem area. So Sebi clamped down on the commissions AMCs could pay to distributors in open-ended mutual funds.
That left the door open for higher commissions in close-ended funds. For AMCs that are forever in quest of opportunities (usually in the stock markets), this was an opportunity to appease the distributors (not investors) by launching close-ended funds and offering them higher commissions.
So we are now plagued by endless, close-ended funds that offer nothing new to the investor but plenty of the old stuff (read high commissions) to the distributor. AMCs are launching all kinds of close-ended funds. A recent one launched a close-ended equity with an 18-month lock-in.
The fund will attempt to maximise returns and minimise losses through, among other measures, speculative calls on futures and options. We are still trying to find out since when equity investing needed a mere 18-month investment horizon and going short on futures/options was an ideal way to maximise returns and minimise losses.
By now, investors would have figured that Sebi's edict to curb malpractices in mutual fund distribution only shifted the focus from open-ended to close-ended funds.
Sebi figured this out themselves; so in his latest salvo to AMCs, Damodaran has once again made public his displeasure on how NFOs being doled out were simply existing funds in a new avatar. From widely circulated reports he had two questions for AMCs:
Do you need so many new fund offerings (NFOs)?
Are you telling investors that I am giving a new label to a product I already have?
The answer to both questions is obvious. AMCs are better off focusing on their existing offerings and making them the investment of choice for investors rather than adding NFOs that have little value-add and confuse investors.
It's a different story that most distributors sell only NFOs, but then AMCs should hardly be launching NFOs at the behest of distributors.
The Sebi chairman seems to have had enough of cajoling AMCs into launching meaningful mutual fund schemes. He has now sought greater participation from the Board of Trustees in this regard.
He has proposed that the Trustees of AMCs certify an NFO as 'New' rather than just a minor modification of existing schemes. He envisages a bigger role for the Trustees in the way AMCs manage their business.
Hopefully, when Trustees play the role that was always envisaged for them, but never really materialised, we may well see the investment equation tilt in favour of investors as opposed to distributors. With better quality funds (both existing and NFOs) and lower expenses (as distributors are forced to settle for lower commissions) we could see a new scenario emerging where finally it's the investor who is king.
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