Skin in the game: MFs have bet over Rs 80,000 cr on their own schemes

Most of the money goes to debt schemes, but equity allocations are rising

When billionaire Warren Buffet started his first fund in 1956 with eleven investors, he invested a token amount of $100 of his own money as "skin in the game". Buffet denies it but he is credited with coming up with the term describing those running a fund risk some of their own money in it.

The mutual fund industry has more than Rs 81,200 crore riding on its schemes, shows a Business Standard analysis of data on sponsor and associate contributions from the Association of Mutual Funds in India (Amfi). The amounts haven’t changed with the increase in mutual fund assets seen in recent years. This has meant that the share of total assets has fallen to 1.8 per cent in March 2023 from 3.4 per cent in March 2019 as seen in chart 1 (click image for interactive chart).

The contribution appears to be higher than what is mandated by the Securities and Exchange Board of India (Sebi). The market watchdog has over the years introduced regulations to ensure that mutual fund houses invest some of their own money along with their investor’s capital in the schemes they run. In 2014, it asked mutual funds to invest Rs 50 lakh in new funds. It sought to pay a portion of mutual fund employee compensation in the form of scheme units, and also brought in additional norms on fund houses allocating their money alongside investors in 2021. The minimum investment was in the range of 0.03-0.13 per cent of assets, depending on the scheme’s risk profile.

Fund house sponsors and associates had invested Rs 70,000 crore – most of their allocations– in debt schemes as of July 2023. The share of equity funds is rising: It was 6.5 per cent in March 2019 and is 9.3 per cent now. The share of debt schemes has fallen from 92.6 per cent to 82.2 per cent in the same period. Balanced and exchange traded funds have seen their share rise from under 1 per cent to between 1-5 per cent (chart 2).

Most large fund houses had a higher share of invested money in March 2019 than March 2023. Three out of the top five houses now have less than 1 per cent share. The two fund houses with the highest share of assets belonging to sponsors or associates in their own scheme are SBI Mutual Fund and HDFC Mutual Fund. Both have over 2 per cent share in the schemes they manage (chart 3).

Research suggests that asset managers where mutual fund directors had invested their own money tended to outperform. Buffet, for one, grew his $105,000 fund by a thousand times in 13 years to $105 million.