Sebi pulls up MF industry

Whole-time member says excessive churning, too many products confuse investors.

The Securities and Exchange Board of India’s (Sebi’s) whole-time member M S Sahoo has pulled up the mutual fund industry for aggressively churning their portfolios and confusing small investors by launching multiple schemes.

At a mutual fund awards function last evening, Sahoo said, “Mutual funds, which should ideally be long-term investors, are behaving more like traders. For certain schemes, the churning has been as high as 20 times.” This churning, Sahoo said, was increasing investors’ cost burden.

However, ICICI Prudential Mutual Fund Deputy Managing Director Nilesh Shah, who also attended the function, defended the industry and said that the churning ratio could be much less if one excluded some of the money market instruments from the schemes of fund houses.

In the last six months, many fund managers have been aggressively churning their schemes in a falling market so as to maintain a good net asset value (NAV). Also, redemptions that happened in some of the debt schemes forced funds to aggressively reallocate money to reduce asset liability mismatch. Some fund houses even had to sell securities to meet their redemption pressure.

Sahoo also slammed the practice of fund houses launching large number of schemes at regular intervals. “Investors have to choose between the devil and the deep sea. As if 2,000 different stocks weren’t enough, fund houses have launched nearly 1,000 schemes and have another 5,000 options like quarterly, half-yearly, long-term, short-term and so on. This confuses the investor completely,” said Sahoo.

The Sebi member-director also pointed out to the fact that complex financial instruments were one of the reasons for the recession that the world economy has gone into. He asked fund managers to think about investors, whose wealth they were managing, and wondered if it was the wealth of the distributors that was the priority.

Sahoo, who had recently criss-crossed the country for investor awareness purposes, further said that fund houses should work towards increasing market participation and penetration rather than just marketing their products.

While congratulating award winners, he urged fund houses to maintain some simple schemes. He also said that awards should be there for fund houses that were most transparent, had highest number of retail investors and indulged less in trading and provided a cost advantage to investors.