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Monday, July 26, 2010

SEBI chief calls MF industry's bluff as members pour out grievances

You neglect investors, put your short-term interest first, he tells the industry.
A forum by an industry body on mutual funds on Wednesday, where fund
houses intended to pour out their woes to the Securities and Exchange
Board of India or Sebi, hardly had any effect on the market regulator. On
the contrary, Sebi chairman C B Bhave launched a scathing attack on the
practices of the mutual fund industry.

Mr Bhave was critical of the way fund houses do business and reiterated the need for
them to focus on investors to grow.

“If you (mutual funds) are producing better returns than what an average investor
investing himself in the stock market gets, then why is it that you are unable to
convince investors that you are giving them better returns,” said Mr Bhave, at a mutual
fund summit organised by the Confederation of Indian Industry (CII). “I mean, are
investors so dumb as not to understand that they are getting better returns here
(mutual funds) and yet would invest somewhere they would get lesser returns,” he
Sales of equity schemes of mutual funds have been hit, after Sebi banned mutual
funds from charging investors to pay fees to distributors.
Mr.Bhave said that mutual funds needed to look at how investors benefit from
investing in their products, rather than create an incentive structure that suits them.
“Somehow the focus goes to short-term incentives and that ultimately results in a
great loss for investors. And finally, when investors lose money, the whole industry
also comes tumbling down. I think, this lesson needs to be internalised by all of us,” he
The Sebi chief said that mutual funds have to streamline their 3,000-odd product
offerings to make it more investor-friendly.
“Even if you put before me 3,000 investment products, I won’t know how to choose
from those products. I’ll have no idea of which scheme is good for me,” Mr Bhave said.
“If you really want to reach to the so-called small investors in whose name you do
everything, does he need 3,000 options? Is there really so much of innovation that is
going on? Are these schemes really so different from each other or were there
incentives operating in the market that made us generate these 3,000 options?” he
In an earlier speech during the conference, UTI AMC chief UK Sinha remarked that
about 60% of the schemes are sub-optimal and the investments in them will not be
able to help mutual funds justify their claims that they are giving investors the benefits
of aggregation of savings.
Mr Bhave slammed the mutual fund industry for relying more on short-term money to
boost their assets under management. “You are becoming a shock absorber because
you are taking short-term money ... now who asked you to take short-term money ...
because you see that the neighbour (rival fund house) is taking short-term money and
his AUM has gone up, so I need to compete,” he said.

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