That's the latest statutory warning for mutual fund distributors. Going by the Securities and Exchange Board of India (SEBI) guidelines released on June 26, 2002, mutual fund distributors can no longer pass on incentives to investors to do business with them. What impact will this have on mutual fund investors?
First a little background. Passing on incentives/rebates has been the norm rather than the exception in the domestic financial sector. Right from life insurance, the most critical element in financial planning to a Rs 1,000 investment in an RBI Relief Bond, incentives had to be passed on by the distributor. If not, then the investor would simply go to his nearest (and highest paying) competitor. While this practice has been abolished in the life insurance industry (though LIC agents still persist with it), it has been thriving in other product segments like fixed deposits, RBI Bonds, NSC and even mutual funds until now.
SEBI's latest guidelines on incentives have come as something of a setback to large fund distributors, particularly those who thrived on incentives to push sales. There is a view that these guidelines are harsh and not entirely justified.
Incentives are unethical because they deprive the end-user (the investor) of an objective analysis of all options available at his disposal. In a lot of industries (like defence) incentives/rebates/kickbacks are considered illegal and unscrupulous. With incentives the investor does not have (or is willfully denied) the opportunity of objectively evaluating all available options. The investor is expected to invest in an investment (mutual fund, fixed deposit) because of a carrot that is dangled in front of him. The carrot (read incentive) could take the shape of cash (as a % of investment or a fixed amount) or a promotional item (like a pen). This was the case for a long time and a whole lot of investors put in money in an investment not necessarily because of what that investment was meant to do, but because of what their distributor gave them!
Mercifully, the powers that be recognised the mess that investors were getting into and initiated reforms to tidy up the financial products sector. Any violation of these guidelines will lead to immediate termination of agency. This has done wonders for the industry. (Thank you, Mr. Bajpai)
For the investors, there cannot be a move more beneficial than this one. You now get to choose a mutual fund scheme that is doing well, ranks higher vis-à-vis its peers and will hopefully work for you. You could have done all this earlier as well but you were never allowed to do it. You probably never even realised what you were missing because your mutual fund distributor never told you that! Its like you visiting a string of shops to buy a colour television and finding all dealers pushing the same brand because of the incentives that company was paying them and in the process never learning about the innovative features of other brands. This just goes to show that you don't need to be objective only while buying a mutual fund, but just about any product you can think of.
Which brings us to our philosophy. We never believed that passing on incentives was the right way to do sell an investment product. We held that the best way to recommend a mutual fund was to arm the investor with enough tools so that he could make an independent and objective choice.
On Personalfn, you will find some of the most interactive tools and queries to help you select the best fund and post-investment track it closely:
By making available these tools, some of which are free to access only for clients who use our services, we believe that you, the investor, can make profitable decisions that are based on credible information and researched on interactive tools.
The incentive era has been phased out. The dawn of a new era will see the mutual fund investor getting more aware and objective in his investment approach. This was the way he was meant to be investing. Hopefully, this is the way he will be investing.
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