Growth at the cost of investors' interest?

Wed, 23 Jan Pre-Open

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Indian economy in the last few months has taken some firm strides with regards to regulations and policies. A lot of bold decisions have been taken across the sectors in the economy. The Indian mutual fund (MF) industry is not untouched either. The industry is in a nascent stage in India as compared to other countries. However, with the new initiatives taken by Securities and Exchange Board of India (SEBI), one can see the statistics improving. The signs of expansion are evident in the number of distributors renewing their AMFI (Association of mutual funds in India) registration numbers (ARN) and fresh registrations. But unfortunately, there is no index to suggest what it implies for investors.

A major push, apparently to revive MF industry has come with SEBI bringing in some new regulations. However, the new measures taken by SEBI suggest a shift in the priorities. They seem to be focusing more on the growth in MF business as opposed to taking care of the investors' interests. Let us see how. Earlier in August 2009, SEBI had introduced the concept of no entry load. This was done keeping investors' interests in mind. The move discouraged unnecessary churning of the investors' portfolio and disincentivized the distributors to promote schemes just for the sake of higher brokerage. Little wonder that this move led to the exit of several distributors in the industry.

Now compare this with the recent announcements by SEBI for the industry. In August 2012, SEBI allowed mutual funds to charge an additional expense ratio of up to 30 basis points. This was conditional on bringing at least 30 % of the total inflow from locations beyond top 15 cities. The incentives were upped further in November 2012 as AMFI cut down its registration fees for individual from Rs 5,000 to Rs 3,000 for three years. Even the renewal fee was reduced at 50% of the registration fee. Close on the heels of these steps; the renewals in the month of December 2012 were around 40% higher than historical monthly average. In fact, the industry witnessed over 700 new registrations in the quarter ending December 2012.

So the policies seem to be working for MF industry. But what about the investors' interest? Surprisingly, there has not been any additional regulation to protect investors' interest here. Under these circumstances, one cannot rule out the possibility of industry getting obsessed with expansion and hefty commissions even if that comes at the cost of long term value for customers. Unless SEBI comes up with further regulations and supervision to protect investors' interest, it may turn out to be a regressive step detrimental to the interests of the public.