“Mutual funds sahi hai” has been a phenomenal campaign that has not only spread investor education but also brought many new investors to the capital markets.
However, not everything is “sahi” (or right) with the Mutual Fund industry. Whether it’s the unfairly charging investors, mis-selling of products by distributors, misleading of performance by mutual funds – the mutual fund industry has come under tremendous scrutiny in recent years from a very proactive SEBI.
The letter was addressed to Association of Mutual Funds in India (AMFI), which is a private organisation (consisting of all the 44 mutual fund houses) that is charged with the advancement of the mutual fund industry in India. Of the 23 offences, most fall under 3 major categories:
1. Expenses: This is the most damaging kind, in my opinion, which have caused outright loss to many investors. These include failing to ensure that Direct Plans have lower expenses (TERs) compared to Regular Plans, as well as practices that enhance the transaction costs for new investors putting money in any mutual fund. A total of 5 such offences, which resulted in higher charges in some way or the other for investors, have been flagged out of the 23.
“Failure to ensure that direct plans have a lower expense ratio than regular plan, and the difference is to the extent of all distribution expenses & commission paid”Source: Point #9 in the SEBI letter dated 30th July 2019
2. Misleading Investors & Reporting Failures: The most common offence type, at least 7 of the 23 flags fall under this category. This includes reporting incorrect or selective performance data, non-disclosure of certain transactions even though it’s required, inaccurate & inadequate submissions to SEBI, etc.
3. Being careless: Another 5 offences can be categorised as SEBI highlighting instances where MFs have been careless with implementing various angles of the regulatory framework. Not having proper internal controls in place, accepting investments from distributors who have been banned by SEBI, not having proper compliance in place, delays in redemption of investor funds, etc.
I’ve been a fan of the different investor-friendly initiatives SEBI has taken in recent years, especially when it comes to protecting their interests – like introduction of direct plans, probing the role of Credit Rating Agencies (like CRISIL) categorisation of mutual funds, etc. However, this one was pleasantly surprising because it directly reprimanded the mutual fund industry & highlighted specific practices that have been hurting innocent investors, many of whom just didn’t have a clue.
It’s a sad reality that marketing campaigns focus only on the benefits without educating on associated risks and costs.
This is especially true for the “Mutual Fund Sahi Hai” campaign – while it certainly helped boost investor participation in equity markets, we also now have many investors who are being mislead, mis-sold, and unknowingly overcharged. In fact, many still don’t realise that mutual funds are not free – since investors never have to make an explicit payment, many wrongly believe that investing in mutual funds are free.
This most recent crackdown from SEBI is very heartening to see as a small retail investor. While many corporates of any kind might only care about their bottomline, it’s very reassuring to know that the regulator is not only watching all market players but also has the interests of the common investor at its heart.
Are you a mutual fund investor? Check out this collection of articles written specifically to educate mutual fund investors.