Each individual thinks and behaves differently while dealing with day to day activities. Some follow a laid back attitude, take things for granted and often misuse the resources they have at their disposal. On the other hand there are individuals who are always on their toes, give cent per cent to whatever they do and try to achieve flawlessness in their daily activities. These latter one’s (individuals) behave in a more responsible manner as compared to the former one’s (individuals).
Similar is the case with mutual fund houses. Some of them despite underperforming schemes in their backyard, follow a laid back attitude in reviving the performance of those mutual fund schemes which ultimately result in loss of wealth for the investors. These fund houses lack consistency, do not follow prudent investment processes and systems and aim to garner more and more Assets Under Management (AUM) rather than improving performance. On the other hand there are fund houses which follow a well laid down investment processes and systems and consistently provide respectable returns to their investors.
Citing this disparity in the functioning of fund houses, the capital market regulator - Securities and Exchange Board of India (SEBI) is planning to deny approval to new offerings from fund houses whose schemes have been consistently underperforming over the last few years. SEBI hopes that this will put pressure on such mutual funds to deliver returns closer to or better than the benchmark indices.
| Scheme Name | 3-Yr CAGR | Std Dev. | Sharpe Ratio |
|---|---|---|---|
| JM Multi Strategy (G) | -3.5 | 6.25 | -0.12 |
| Reliance Equity (G) | -0.9 | 5.37 | -0.12 |
| JM Equity (G) | -0.4 | 5.87 | -0.09 |
| LIC Nomura MF Top 100 (G) | 1.5 | 5.35 | -0.08 |
| LIC Nomura MF India Vision (G) | 2.3 | 5.47 | -0.06 |
| LIC Nomura MF Opp (G) | 2.9 | 5.43 | -0.06 |
| Taurus Bonanza (G) | 3.1 | 5.01 | -0.07 |
| Birla SL Special Situations (G) | 3.3 | 5.60 | -0.05 |
| Baroda Pioneer Growth (G) | 3.4 | 5.65 | -0.04 |
| Birla SL Adv (D) | 3.8 | 5.66 | -0.04 |
| BSE SENSEX | 6.0 | 5.54 | -0.01 |
| BSE-100 | 5.9 | 6.30 | -0.01 |
| BSE-200 | 6.2 | 5.63 | -0.01 |
| BSE-500 | 6.4 | 5.65 | 0.00 |
| CNX 100 | 7.0 | 5.68 | 0.00 |
| S&P CNX Nifty | 6.7 | 5.69 | -0.01 |
On the consistent underperformance of various mutual fund schemes, SEBI Chairman - Mr U.K. Sinha said, "There are nine fund houses where over a period of three years, 50-100% of their schemes have performed less than the scheme benchmarks. So, imagine if more than half of their schemes, over a period of time on a continuous basis, have been performing less than their benchmarks. This should be a cause of concern for those AMCs. And I do hope that the trustees of those AMCs have taken note of it."
The regulator is also working on measures to revitalise the mutual fund industry based on suggestions received from various stakeholders on allowing fungibility in expense ratio, crediting back the exit load to a fund's net asset value instead of giving it to the Asset Management Company, single cheque payment for both investments as well as advisory services, utilisation of stock exchange mechanism and the brokers' network for sales and distribution of mutual fund products and multiple share classes.
Impact on investors in mutual funds...
If the above proposal by SEBI is implemented, it would bring in more accountability and responsibility in the way the assets are managed by the mutual fund houses. Moreover, the focus would shift on performance rather than being in the race of garnering AUM (Assets Under Management). As a consequence to the same, investors would witness less of NFOs flooding the market and their could see a revival in the performance of their underperforming mutual fund scheme(s) due to this strong stance proposed by the SEBI.
Our view:
We believe the proposal put forth by SEBI is very prudent, and will go a long way in protecting the interest of investors. However, it is necessary that the proposal is implemented immediately thus aiding underperforming mutual fund schemes perform better. Also, those who are not in favour of the SEBI’s proposal should understand that by taking such a step (of denying NFOs), the capital market regulator is advising the underperforming student (mutual fund house) to study well (improve mutual fund schemes performance) and not denying him or her from education.
Moreover, the investors in mutual fund schemes should regularly monitor the performance of the mutual fund schemes they are invested in and take the right step at the right time to avoid losses in their portfolio. More often than not, investors stay invested in an underperforming mutual fund scheme(s) in the hope of a revival in its fortunes and also out of fear of losses on exiting such laggards. Investors should therefore seek unbiased expert advice from professionals in order to make smart investment decisions.
