You neglect investors, put your short-term interest first, he tells the industry.
The mutual fund (MF) industry got a severe rap on Wednesday from the head of the equity markets regulator. C B Bhave, chairman of the Securities and Exchange Board of India (Sebi), said MFs tended to put their short-term interests above that of investors. He also questioned how much homework went into the products they fashioned and sold.
He also seemed to indicate a rethink on last year’s entry-load ban, which critics said had resulted in a lack of incentive to sell MF products. Bhave said there had been a misunderstanding of what Sebi had wished to do, but his suggested way-forward was not very clear.
Speaking at the 6th Mutual Fund Summit 2010, organised by the Confederation of Indian Industry, the Sebi chief said the structure of incentives in the MF industry “drove away investors, as what was good for the industry in the short term would not be beneficial to the investors”.
Nor, he said, was enough effort going into finding what investors want. “There needs to be a survey done to understand what the investor wants...that is the heart of the matter, because till the time the investor feels that the mutual fund industry is doing (a) great (job in finding this), he will not come. I think the communication is not going through,” he said.
“This is a good time for the industry to ask itself as to what has it done so far and what all improvements need to be done from here on to take it further,” he added.
Bhave also made a pointed reference to the lay investor’s confusion as to how to judge between the constant flow of schemes on offer.
“There are 30-odd fund houses and around 3,000 schemes in the market. An investor will have no idea of which scheme is good for him. Are new fund offers (NFOs) being launched even while the existing offers are at their sub-optimal levels? Or is that there are wrong incentives for launching NFOs?” asked Bhave. Was there any kind of real innovation or was it just about short-term gains, he asked.
As for the controversial ban on entry load implemented last August, this is what he said: “There is a misunderstanding that we told the distributors to work for free. All we said was that the investors should decide how much they want to pay for the advice. Let them negotiate,” was his rather puzzling advice, given that the ban had been imposed by his agency.
What spat?
“We all operate under the laws as they exist. The law has changed now and so now we will operate under a new law. There is no question of happiness or anything,” said Bhave, when asked for his reaction on the government decision that the insurance regulator, not Sebi, would police unit-linked insurance products. He was asked whether Sebi had emerged winner in the spat after all, since Ulip norms had been tightened considerably after Sebi first upset the boat in this regard.
