Ponzi schemes and other unregulated parallel market investment schemes are affecting the growth of the mutual fund industry, a senior fund manager said here today. In the first candid admission of the elephant in the room by an industry member and easily the most spirited attack on the malice, Akshay Gupta, CEO, Peerless Peerless Funds Management said these schemes are among the major challenges facing the mutual fund industry.
“People are cheated by ponzi schemes that are running a number of fixed return schemes in tier-II and III centres. Agents are paid 20-40% and people are promised 40% return. I can’t understand how this works,” Gupta said speaking at a seminar on “The road ahead for the mutual fund industry” organised by industry body Assocham. Till now, the mutual fund industry had stopped short of acknowledging this issue in public.
“At the end of the day, the amount raised have to be invested in financial instruments. I don’t know which instrument gives 80% returns. If you tell me, I am ready to invest all my Rs 10,000 crore in this instrument,” Gupta said. Gupta’s Peerless is one of the few funds which has been able to buck the trend and grow the assets under management from scratch in an unfriendly environment, where funds are caught between micro-regulation and a wild west of ponzi schemes.
While expenses chargeable by mutual funds and the promises they can make are heavily regulated by the Securities and Exchange Board of India, illegal schemes that stay out of the regulatory ambit do not follow any of these rules. Mutual fund agents, who earn much lesser than the agents of illegal schemes are left with the burden of pitching a regulated product that comes with huge disclaimers on market risks against a schemes that offer fantastic returns (40%, doubling of money etc).
While Sebi has been lining up regulations for regulated mutual funds, it has not been able to rein in illegal schemes effectively. Even cases, which have been caught red-handed, are dragging in courts. For example, Sebi action against Pearls group which raised money through realty plans is pending in Courts for nearly a decade. In a recent case, where Sahara India Parivar raised money through debentures without following public issue procedures, Sebi has been trying to get refunds for investors.
Gupta also pointed out that the huge parallel economy in the country is another reason why the penetration of the industry is not as much as in some developed countries. In a presentation preceding Gupta, Mirae Asset CEO Jisan Yoo had showed how Korea which is smaller than Uttar Pradesh has a mutual fund market that is two times India’s. He also pointed out how India, which has the 3rd largest economy in PPP terms, stood at a lowly 20th position in a list of 22 countries with developed mutual fund markets.
Gupta said, “In a country of 130 crore people only 14 lakh people paid advance tax. That shows the extent of the parallel economy.”
According to him, the biggest threat though came from the housing bubble in the country. “The price of a 1,500 square feet house even in outskirts of Delhi would cost Rs 75 lakh today.” The sole aim of a person who enters his career with an annual package of Rs 5-6 lakh is to build his own house. He buys it with a loan and his entire life is spent servicing this loan, Gupta said, leaving nothing for any financial investments. “There is a housing bubble in this country. It has to burst,” Gupta said. Complexity of products and lack of accountability of distributors are other big challenges before the industry according to him. He pointed out how distributors have their licences cancelled in the US for not rebalancing the portfolio of clients as promised. In India, most of the retail assets are concentrated in equity, reflecting poor asset allocation.