In the past, many have been afflicted if the mutual fund scheme they invested in, hasn’t been able to clock the returns at least in tandem to the benchmark, if not the category peers. While investors entrusted the job of selecting the right mutual schemes for their portfolio on mutual distributor / relationship manager / agent, all they were left was disdain and distress. The occurrences of wealth erosion also led to them lose faith in the investment avenue, which in turn led get rid of their investment in mutual funds by logging in redemption request.
But now, addressing to this issue and being concerned about the continuous underperformance of some mutual fund schemes, the capital market regulator - Securities and Exchange Board of India (SEBI) at a mutual fund summit organised by the Confederation of Indian Industry (CII) displayed its determination to pull-up fund managers and CEOs of fund houses, and have a dialogue with them about what measures they are undertaking to turnaround the mutual fund scheme and reduce its underperformance.
"It is right that investors are free to move out and get into other schemes, but if it is happening on a continuous basis over a long term for a significant percentage of the schemes, then it becomes a SEBI issue as well. We are going to engage those fund managers and also the CEOs about what measures they are proposing to take", the Chairman of SEBI, Mr U.K. Sinha said.
The capital market regulator has found that there are around nine fund houses where half or more of their schemes have underperformed the scheme benchmarks consistently over the last three years. Also, in the case of nine others, up to half the schemes have given lower returns than their benchmarks, according to SEBI. The regulator also highlighted a number of mutual fund violations which the inspections have thrown up. For instance, in one case money invested in the scheme had been invested in the fixed deposit of a bank which was a unit-holder in the scheme. In another example, there were violations of SEBI directives on concentration risk - where one particular investor is putting in more than 25% of the corpus. There was also a case wherein inter-scheme transfers had been made mainly to transfer the losses from one scheme to another. However, the SEBI declined to elaborate on the steps it will take to protect the interests of the investors.
We believe that the consistency in performance of a mutual fund scheme is very important for it to create wealth for investors. SEBI is right in planning this line of action against the top officials of mutual fund houses in case of consistent underperformance of the mutual fund schemes. This initiative taken by the capital market regulator would make top official of mutual fund houses more accountable and responsible, while discharging their duties.
We also are of the view that SEBI should also look at scheme mergers to avoid overlapping of schemes and thereby ensure better returns for investors (by merging the non-performing one, with the one which is performing), which in turn would also be in the betterment of the mutual fund industry.
Investors too should keep in mind that buying a mutual fund scheme is not like buying grocery or vegetables. It is imperative that one undertakes enough research (by considering quantitative and qualitative parameters), in order to select winning mutual fund schemes. Also, although while may like to entrust this job to a mutual fund distributor / relationship manager / agent, it is vital to assess whether are you selecting your mutual fund distributor / relationship manager / agent wisely. Also, once you have built a portfolio of promising mutual funds, it is important to that you review the same and rebalance it, if necessary. Also remember, while you invest in mutual funds you need have an investment time horizon of at least 3 to 5 years (in case of equity funds) and prefer the diversified equity mutual funds and adopt a SIP (Systematic Investment Plan) approach to propel your portfolio with the power of compounding and also benefit from rupee cost averaging.