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SEBI wants MF trustees to crack the whip on poor performance

Speaking to Moneylife in an exclusive interview, KN Vaidyanathan, executive director, SEBI, said the regulator is working out the modalities for making trustees of mutual funds more accountable for fund performance. This is the second part of a series 

The indifferent performance and herd mentality of the Indian mutual fund (MF) industry is primarily due to the lack of accountability of asset management companies (AMCs), whose earnings are directly related to the corpus they manage and totally unrelated to fund performance. But how does one make the AMCs accountable? In an exclusive interview with Moneylife, SEBI executive director KN Vaidyanathan said the regulator is working out the modalities for making trustees of mutual funds more accountable for fund performance.

“The entire centerpiece of the mutual fund model in India is the mutual fund trust. The money is given to the trustees in trust to manage. But trustees have to get more active about performance record,” Mr Vaidyanathan said.

Under the current SEBI norms governing mutual funds, the board of trustees of a fund is entrusted with the task of monitoring fund performance and helping redress investor grievances in close collaboration with the regulator. Two-thirds of the directors of an MF’s board of trustees must be ‘independent’, that is, they should not be associated with the sponsors of the fund; also, 50% of the directors of the AMC must be independent. The names of the AMC’s directors and trustees must be mentioned in the fund’s offer document. Significantly, the existing norms even empower the board of trustees to sack the AMC’s board of directors for not safeguarding investor interests or for non-adherence to SEBI norms. But all of this power has remained only on paper and there is no precedent of the trustees of a fund sacking the AMC’s board for non-performance.

Mr Vaidyanathan said the new guidelines would require AMCs to disclose all information related to portfolio churn and risk-adjusted measures so that trustees can act on the basis of this information.

Under the existing mechanism, the auditors of a fund send their inspection reports of the fund’s performance to SEBI which, in turn, forwards them to the AMC. The AMC’s views and comments are sent back to SEBI and they are then passed on to the fund’s trustees so that they can evaluate the fund’s performance and suggest corrective measures. “This made no sense. We have changed the process,” Mr Vaidyanathan said. “We said that the comments would all go to the trustees and they will have to respond directly to us. We have met the trustees of least 15-20 funds and have asked them: what do you do on performance? When an AMC says that we have these five top-performing funds, do you ask them what about the 10 others that are not performing? In fact, we are also telling everybody to raise the bar on analytics of fund performance.”

Admitting that sponsors who have no performance track record in the financial services business have gotten into the mutual funds business, Mr Vaidyanathan said the regulator has tightened the entry norms for fund sponsors. “Sponsors used to have a clever way around. They used to hold a 39% stake, probably with side agreements with other investors. We have tightened it. We have said that anybody with 10% shareholding, and/or a director and/or a brand name will be treated as sponsors. At least three fund companies have had to change their plans because of this. We are insisting on customer track record of financial services,” he said. He clarified that the new norms would apply only to new entrants.

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COMMENTS

Satish Amin

7 years ago

I am glad you have taken up this matter on a serious note. You are absolutely right by saying there is no accountability in the whole system. Few years back I had written to an AMC asking them how there particular fund is not doing well. I even gave them the comparision of another fund house which opened thier NFO at the same time and that was doing much better then this. I had sent few reminders too, but no body replied.
Frankly, SEBI should put a ceiling on the remenuration/perks these fund manager get. I am sure you are fully aware about all this. Such huge annual package coupled with such big incentives. I have recently come to know that there are Fund Managers who makes minimum 2/3 trips in a year and that too with his fly/spouses outside India. I was also told that they are given the best of cars. I just fail to understand how these business houses, in short a service industry which works of commission can afford to do this. Even large production companies do no enjoy like these AMC people. In short these guys play with our money and in their case both heads and even tails are winners because as you rightly said there is 'NO ACCOUNTABILITY'. I wish you also take up this case about their salary package/incentitives.
Thank you once again for doing such a wonderful job to save guard customers and also keeping us abreast about all the developments in the Industry.

Knowledgeble Investor

7 years ago

If SEBI educate the investing community to pay the proper advisory fee to the Advisor will he the guts to sell the non sense to you?

Will SEBI wake up and educate the Investors first?

Vijay Trimbak Gokhale

7 years ago

Trustees and AMCs of MFs are established as per SEBI MF regulations and trustees appoint AMCs as investment manager also as per the sam regulations. Trustees oversee/supervise the functioning of AMCs on the basis of reports submitted by AMCs only. The question is not only of making Trustees work but make suitable regulations so that trustees have independent staff and office. This will enable them to discharge their function independently. Trustees attend only board meetings which is attended and navigated by AMC CEO almost as a matter of rule. This coupled withe fact that reports to trustees are prepared by compliance managers of AMC reporting to CEO of AMC compromises greatly with the quality of supervision and surely raises serious questions conflict of interest between AMC and Trustee companies. My detailed presentation on this issuse made a couple of years ago has not received due attention from SEBI. Hope SEBI will someday realise the importance of import of my presentation. That will agur well for the investors. A common citizen cannot do anything beyond bringing it to the attention of the regulator. You can take the horse to the water but you can not make it drink.

Hemant Beniwal

7 years ago

Why after ban on Entry Load in Mutual Fund, many agents started selling Structured Products, PMS from Mutual Fund Companies or Highest NAV Gurantee Plans from Insurance Companies? No prize for answer.

How Mutual Funds Work
http://www.tflindia.in/2010/05/how-mutual-funds-work.html

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