Surgery Vs Chemotherapy of Mutual Fund Industry

We all know about the state of Mutual Fund industry – a patient, who was once healthy and now is a basket case and is fighting for survival.  As it happens, a good and perfectly normal patient has been administered lethal doses of  medication, without verifying the toxicity or the adverse reactions. Conditions worsened but the doctors from SEBI Medical Institute proceeded to surgery, in the process hoping to prove their mettle… medication and chemotherapy might have done the work, just fine.

The industry before August 2009…..

After the dip of 2008, markets showed some signs of revival. The investor was also happy that the bear phase was not as big as it was in 2000-01 during the IT bubble. Mutual Fund agents started teaching him concepts like SIP and averaging. Although cautious, he was with the industry. The agent or the channel knew that this is one of their last chances, as, already SEBI had announced their intentions of a no load regime. Small agents, who had come from insurance field, young management graduates who wished to make a career in personal finance and freelancers who had realized that mutual funds was the best product for any kind of goal planning, were wondering whether to continue their business or not. I met a small agent ‘Gopal’, in one of my training sessions, where he raised a few questions …. What have I done Wrong? I never sold any NFO to my investor…. I never bargained a foreign tour for business….. or I never switched my client’s money to earn brokerage….. or I never asked my investor to do a dividend stripping …… or any other misdemeanor.

Gopal said, I never even known that these things exist….. yes I am a ignorant & innocent scapegoat who does not know how to switch clients money repeatedly or that X NFO which was promoted by Y AMC as Financial Niravana paid 6 percent as I only got 3.5 percent and for me that was mouth watering. I also did not know what is stripping and that if you have Rs.5 crore of client money even for 5 days I could have got a family vacation at Bangkok.

Gopal’s points look logical, when one looks around and in general there are a handful of agents indulging in malpractices. Each market has culprits.  Does SEBI have any system to track their presence? If they could have just checked the brokerage records of AMCs or the tax return of few agents they could have easily known as to  who the people are, behind this hall of fame are. Red listing these biggies or punishing them with penalty or imprisonment would have created a larger impact and the much needed investor safety.

And this is what I meant chemotherapy. When you can cure through a less painful procedure why do you need a surgery? But now it has happened…..

Post August 2010….

The agent who wanted to tell the investors in his village to come out of post-office recurring deposit days, and invest in systematic investment plans in forced to open a mobile recharge shop. This is because SEBI has never said that with the no load, they would like a no upfront regime also, instead like a stabber they have passed multiple guidelines for the MF companies to cut all possible ways to pass the upfront. MF companies have still created ways to keep a bit of upfront still going on. And what about those greedy middlemen? They are having a ball of their life. Small agents have come under them as they have no voice so these people have made their own associations, trust and forums and to protect (read milk) the industry. They have decorated themselves with designations like president, chairman & secretaries. Their business has increased as small agents have shut shops and new people are not entering. Now they can bargain more and hard as they have exclusive tie-ups with AMCs and poor AMC has to dance to their tunes. In present year the top 10 distributors cornered around 30 per cent of the commissions and they earned profits which were 25 times what the industry as a whole generated in 2008. And who mentioned cost cuttings…. The foreign tours are in full flow with only difference that the destinations have become more exotic & experimental like Tashkent and Rome. And till the time of writing this piece the new chairman and Vice Chairman of AMFI have been announced and I am in fact honored to announce that the Mutual Fund companies, for which these two gentlemen have worked, discovered the above mentioned locations.

About the industry… from 1^st August 2009 to 30^th September 2010 there was a redemption of Rs. 21461 Crores from Equity Mutual Fund & From November 2009 till date the mutual fund folios are down by more than 11 Lakh. New players are not entering AMC business and a few MF companies are up for sale.

And the problem is with the industry in bad shape, chemotherapy may not be an option now… Expect more surgical procedures in anticipation of better health.