Given that there will be an influx of novice and first-time investors into mutual funds as asset management companies (AMC) go all out to tap potential customers beyond top 15 cities, the Securities and Exchange Board of India (Sebi) has put in a lot of checks and balances to enhance investor protection.
Among the measures unleashed for the mutual fund sector, Sebi has put a lot of emphasis on increasing investor education, simplification of products and schemes and also has promised strict action for ‘mis-selling’.
Sebi has stated that all AMCs and industry body, AMFI, will have to put in continuous efforts to increase education and awareness and also have to set aside a portion of their fees for investor education campaigns.
“For the first time investors can expect a concerted effort by the industry to spread financial literacy that will empower them to take educated investment decisions in keeping with age and risk profiles,” says Sanjay Sachdev, president & CEO , Tata Mutual Fund.
Added Jimmy Patel, CEO, Quantum Mutual Fund, “Steps are meant not only to educate investors but also make investment process simpler and transparent.”
Industry participants believe if sincere efforts are put in by all the players in educating people, it could help the industry post exponential growth.
Along with investor education, Sebi has decided to introduce a new framework to curb mis-selling and frequent churning. To reduce churn, it has said the entire exit load will go back to the respective scheme, which will benefit existing investors. The additional expense ratio charged by AMCs for penetration beyond top 15 cities will also have to be returned if such investments are redeemed in less than a year.
To tackle the issue of mis-selling, it has been included as a ‘fraudulent and unfair trade practice’ in Sebi regulations. Currently, unfair practices like misrepresentation of truth and promises made without any intention of performing it fall under Sebi (Prohibition of Fraudulent and Unfair Trade Practices) Regulations, and attract penalty.
However, the industry feels more clarity is needed. “While Sebi’s intentions are good, in the absence of ‘what constitutes mis-selling’ it might be difficult for a retail investor to identify, define and prove a case of mis-selling. However, if implemented well, this will instil confidence amongst retail investors,” says Patel.
To further simplify schemes, Sebi has decided to have a new ‘product labelling’ system, wherein all funds will be categorised based on their characteristics and riskiness. Experts said this new system will help investors make sense of the variety of funds that are available in the market and the risk involved.
“Product labelling will bring uniformity in fund categorisation, which will eventually confront the issue of mis-selling,” says Patel.
“Right selling along with right education should play a crucial role in helping investors take appropriate financial decisions,” adds Sachdev.
To simplify it further for investors following Sebi directives, fund houses have already consolidated their various schemes into one. Earlier, classifications like regular, institutional and super institutional used to create a lot of confusion for investors. Also, big-ticket investors used to enjoy lower expenses. Sebi’s move will now bring all investors at par. A new framework –Investment Advisors Regulations – for registration and regulation of investment advisors has also been put in place. Now, all individuals, corporate body and partnership firms engaged in the business of providing investment advice for consideration like financial planners will have to be registered and regulated. “The fringe players whose objective was to make a quick buck would make way for serious advisers who see business in providing advice in the best interest of investors,” says Sachdev.
While all these measures look promising, the real task for fund houses will be its implementation.
