The recent developments pertaining to SBI [Get Quote] Mutual Fund and its investment, on a preferential basis, in a technology company in early 2000 (just ahead of the tech meltdown) have been grabbing headlines.

In this note, we do not offer our view on whether the investment decision was justified or not. We instead look into what one can possibly take away from such a situation.

The Regulator

Indeed, the Securities and Exchange Board of India has, justifiably in our view, come down heavily on the mutual fund industry in recent months. The incessant launch of open-ended schemes by asset management companies, which were nothing but the result of a compulsion of distribution, was one of the most unethical practices in the industry.

Sebi has put an end to it by changing regulations pertaining to charging of expenditure during the launch of such schemes to the scheme itself (from amortisation over five years, to within the first year of launch). The result is for all to see - no more new fund offers for open-ended schemes. Thank you, Sebi.

But there is a lot more to be done, before financial planners and research houses like us, develop a comfort with the way the mutual fund industry is shaping up. Even simple, basic data pertaining to schemes is not available in a standardised format. Take the following data points for example:

1. Portfolio turnover (tells you the churn in the portfolio)
2. The expense ratio

Both the above data points are very important for any mutual fund research analyst; but this is simply not available in a standardised format. Each AMC declares this information at different frequencies for different schemes; sometimes, locating this information in the fact sheet is as challenging as money management itself!

Our suggestion is that Sebi get all the AMCs to file their fact sheets, in a standardised format (which can also be downloaded), in one central location which can then be accessed by all - the research analyst, the distributor and the investor.

Making information available to all those interested in mutual funds will solve only part of the problem. The biggest problem today is, broadly speaking, a complete lack of understanding of mutual funds.

At Personalfn, we regularly present to groups of individuals across India on how they should plan their finances. The one learning we have from these presentations is that the knowledge level of the average investor is below par. And that is why the distributor and the AMC, leaving aside few of them, have taken advantage of the investor.

There is an urgent need for Sebi to 'educate' investors, as only few in the industry actually are involved in such activities; but of course all of them claim to do so. We are certain of one thing - conventional methods will not work. There is an urgent need to discuss ways of educating the millions of investors in the country.

Who will pay for this you say? Undoubtedly, the mutual funds and stock exchanges. Every trade executed on the stock exchange (where ultimately the equity mutual funds transact) effectively contributes to the investor protection fund. These funds need to be utilised for the purpose of educating investors.

An educated investor armed with credible information will be less susceptible to fall prey to every other 'transaction generating' gimmick the industry adopts.

The Distributor

The mutual fund distributor has undoubtedly been the biggest beneficiary of the recent stock market bull run. Commissions on 'pushing' open ended mutual fund NFOs (new fund offers) have been as high as 6 per cent, i.e. if an NFO mobilised Rs 5,700 crore (Rs 57 billion)) about Rs 340 crore (Rs 3.4 billion) got paid out as commission!

If this makes you wonder why Personalfn, which is a financial planner, does not have more than 8 branches as on date, the reason is not far to seek -- we give about 90% of NFOs a miss, even though they pay very attractive commissions. The reason is simple -- they are not in your interest.

By the way, we have never recommended a SBI Mutual Fund scheme to our clients (some have invested, as we reckon, the pull was too great to be subdued by our apparently rational view).

The distributor will have to migrate from 'selling schemes' to offering solutions that are in the interest of the investor. If that seems a difficult transition, the unscrupulous selling in any case must stop. Advice should be backed by research.

The Investor

As far as the investor is concerned, in our view, there are two options. One, read up and become a smart investor Two, alternatively you can spend that time on finding yourself an honest financial planner (even in this case, always question your financial planner on the advice; always be in control)

It is important that the investigation into the SBI Mutual Fund issue is completed in a time bound manner. The final verdict, if any, will have yet more learnings for the industry.

Having said that, we continue to believe that for most investors mutual funds continue to be preferred investment options.

(At the time of writing this note, we received yet another 'sales promotion offer.' For every SIP we close, we will get anywhere between Rs 100 to Rs 2,000; depending on value of SIP. Such spending encourages mis-selling and should be totally banned. In fact such spends should be diverted to genuine investor education initiatives. We will support any such move by the regulator/industry.)

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