When AMCs play 'housie' with your money

We have a confession to make. At Personalfn, we are admirers of con jobs. We are truly amused by the con jobs that are pulled off by a certain Mr Daniel Ocean (of Ocean's Eleven) and his crew. However, we are rather disturbed when we see similar con jobs in the real world, being perpetuated in the mutual fund industry.

It hurts to see retail investors become unwitting preys to games being played by AMCs (asset management companies) and mutual fund distributors. Not too long ago, we pulled the covers off exit loads being charged to investors. This time around, it's contests for mutual fund distributors.

A recent trend (actually it's an old trend which is making a comeback; remakes, one might say) is for AMCs to announce contests for distributors to boost their NFO (new fund offer) sales. Distributors are encouraged to deliver a given number of application forms carrying a stipulated minimum investment amount by a specified date.

For example, the target could be to achieve 25 applications with a minimum application size of Rs 10,000. And distributors who achieve their 'targets' are entitled to gifts.

Doesn't this remind you of the popular game 'housie' (tambola), wherein the first participant to get 5 'called' numbers on his playing card becomes the winner of 'jaldi 5.' Well, 'housie' is a game and such frills are perfectly acceptable. But in the context of mutual fund investing, they acquire rather serious connotations.

Don't get us wrong. We have nothing against mutual fund distributors being compensated for their honest efforts. But the outcome of such contests is worrisome. When a tempting offer like the aforementioned one is put forth, it is unlikely that the distributor will put much thought to whether the given NFO is right for the investor.

Instead, there's a fair chance that he will work with single-minded dedication towards achieving the target and perhaps compromise the investor's interests in the process. Also let's not forget the 'jaldi' factor, which doesn't offer the distributor too much breathing space and forces him to choose between, either what's right for his investor or him i.e. the gift. No prizes for guessing what most distributors are likely to pick.

We aren't suggesting that distributors should solely take the flak for this phenomenon. On the contrary, the onus lies with the AMC. Sure, we recognise that garnering a sizeable asset size is important from an AMC's perspective; the AMC's revenues are directly linked to the same. But is compromising the investor's interests an acceptable proposition? We think not.

So what's the alternative? Simple, put an end to all contests and leave the investor alone. At the risk of sounding audacious, we believe this is the right way forward and a win-win situation for all.

So long as the investor's interests are taken care of and his investment objectives are met, he will continue to make investments. This in turn means that the distributor continues to make his income by way of commissions. And eventually, the AMC continues to garner its much-needed assets.

All that needs to be done is -- put the investor where he deserves to be, at the centre stage. And the rest will follow. Contests only seem to add unnecessary pressure and disturb what can be a perfectly harmonious relationship between investors, distributors and AMCs.

We urge the Securities and Exchange Board of India to scrutinise the phenomenon of mutual fund contests and their impact on the mutual fund industry. Necessary regulations must be introduced to ensure that investors' interests are protected at all cost.

As regards con jobs, we believe they are best left to Mr Ocean and his crew.

By Personalfn.com, a financial planning initiative
Your search for an honest financial planner ends here. Read on