If somebody asks you whether you prefer quantity or quality; many of you would vote for quality over quantity, won't you. But that rationality doesn't seem to prevail with many mutual fund houses. In the race to garner more Assets under Management (AUM), the focus seems to be on quantity than quality. In fact this is so deeply soaked that their own sales forces and agents / distributors are chasing investors with host of products at the cost of quality.

On numerous occasions agents / distributors have sold mutual fund products which are not suitable to investors. A need-based approach which recognises the investment objective, financial goals, time horizon and risk appetite of investors; has not been practiced by many agents / distributors and even the mutual fund industry has fallen short in this direction. As a result, investors have been left in a heave, feeling disgusted and disappointed; but agents / agents on the other hand have made merry when the sun shone.

It is often seen that mutual fund houses have come up with New Fund Offers (NFOs) when the market is in phase of exuberance. Not many have lunched funds when markets are under pressure and valuation seemed attractive. They have capitalised on the upbeat sentiments in the market and launched funds which are an old wined in a new bottle (not offering anything much unique), or introduced sector / thematic funds to investors which are highly risky. The myopic vision prompted mis-selling.

The Securities and Exchange Board of India (SEBI) has time and again reprimanded agent / distributors and cautioned mutual fund houses to curb mis-selling.

But now to correct course, mutual fund houses are now thinking long term and are taking measures to curb mis-selling. Here's what fund houses are doing...
 

 

• Mutual Fund houses have started sending their representatives to their agents / distributors as laymen investors just to check how the products are promoted.
  
  If taken their feedback seriously, this practice would help fund houses know what's happening in the market. For investors, agents / distributors represent the company and if they promote products in a wrong way, reputation of fund houses is at stake.
   
• A few fund houses have also started calling up their clients to identify and curb the instances of mis-selling. It has been found that, investors often fall prey to false promises made by agents / distributors. They either invest in a product not suitable to their risk profile, needs or not as per the kind of time horizon they have. In both cases, investors suffer and agents / distributors wash their hands off their responsibility.
   
• Some fund houses are going one-step ahead and increasing the minimum ticket size to Rs 1,00,000 (up from current Rs 5,000) for schemes carrying high risk. They are expecting that people putting higher amount may take due care to understand the product which would reduce the chances of distributors being able to mis-sell the products.
   

Will these measures work?
 

PersonalFN is of the view that inherent limitations about these measures are likely to make them ineffective.

What are the limitations?
 

• One can invest over Rs 1 lakh and yet be a victim of mis-selling;
• What if a distributor has gone wrong in risk profiling or need-based selling (and the client himself is unsure for lack of education);
• How is reaching out to clients over a call going to cater to an incidence when he / she is already being mis-sold and has no clue about it;
• Some fund houses are arguing that, if someone has opted for SIPs there is no question of mis-selling. But that may not be the case if the funds advised itself are inappropriate.
   

Mutual fund houses would have to find out answers to these questions. They can't keep these issues unaddressed and still claim that they are taking measures to curb mis-selling. PersonalFN is of the view that, there is no substitute to investor education programmes. And after all, the performance of funds recommended has to stand out subsequent to tall claims. PersonalFN believes investors should also try to understand the product completely before investing.

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