Fidelity Mutual Fund is reportedly looking for a suitor for its mutual fund business. The blame for forcing out a solid long-term investor lies with two successive SEBI chairmen

Fidelity Mutual Fund, the Indian arm of Fidelity Worldwide Investment and one of the most storied funds in the United States, is supposedly looking for a buyer for its Indian asset management business. Why would Fidelity think of exiting India? Is India breaking up, with prospects of deep recession and debt default staring at us all indefinitely? It is only in such dire economic conditions that a solid long-term investor would think of completely packing up. On the contrary, foreign direct investment (FDI) into India is booming and many multinationals see India just as not a strategic location but one that delivers huge cash flows that boost their global balance sheets. So what is the reason for Fidelity’s exit? It is simply harebrained experiments and draconian regulations by the Securities and Exchange Board of India (SEBI) which has been cheered by everyone in the media since 2009 except Moneylife.

The foolish regulations that killed all incentives to sell mutual funds started under former SEBI chairman CB Bhave’s tenure and has been taken to new depths, ironically by someone who was running a large mutual fund - the current SEBI chairman UK Sinha. Two years before the media reporting Fidelity’s exit, we had reported that SEBI might have shot the industry in the back by banning entry load without thinking through the implications. (http://www.moneylife.in/article/mutal-fund-turmoil-can-sebi-be-held-accountable/3204.html ). With the banning of entry load, the distributors’ margins have been completely squeezed and they have been exiting the business of selling mutual fund in droves. Investors who need hand-holding and cannot decide without the help of market intermediaries, ended up buying harmful products that was pushed at them or preferred to keep the money in the bank. Mr Bhave singe-handedly killed the only route of average savers to grow their wealth in the long-term to beat inflation. For this capricious and patently anti-investor move, some managing directors of asset management companies supported Mr Bhave and he was uniformly hailed as the messiah of the small investor by the mainstream media.

When the decline in fund flows was obvious, SEBI started tinkering such as allowing stock brokers to sell funds, which was another foolish move as we had predicted. Sure enough, mutual fund sales through stockbrokers have amounted to nothing. Clearly nothing made any difference to the fund management industry.

In February last year UK Sinha took over as SEBI chief. There was a lot of hope among distributors that a man who has actually run mutual funds would now bring out some sensible policies. Instead, his policies turned out to be even more useless. (http://www.moneylife.in/article/will-inives-to-mutual-fund-distributors-have-much-of-an-effect-on-fund-inflows/17541.html)

In fact, SEBI went on to push Mr Bhave’s agenda further by brining in all sorts of funny advisor regulations. (http://www.moneylife.in/article/investment-advisor-regulation-i-sebis-ideas-are-as-usual-far-from-reality-may-increase-mis-selling/20109.html). At a time when most of them are slowly moving to a fees-only model, SEBI is hell-bent on cutting them off. This will further impact distribution. When this happens, distribution business will fall on players who can afford them—the banks. But is it in the interest of the average saver?

Sebi's actions have pushed smaller distributors out of the business leaving investors at the mercy of bank relationship managers. But relationship managers are well-known for their unscrupulous and pushy ways, and tend to operate purely on commissions and rarely on customer interests. By having bank relationship managers double as distributors, they will be able to peddle their own mutual fund products, albeit unethically, to consumers. In lieu of an entry load, they are paid a professional fee (http://www.moneylife.in/article/what-is-a-professional-fee-you-pay-a-bank-for-buying-mutual-funds/3802.html). Also the information they give will be biased and not in consumers’ best interest. We had also written about this earlier. (http://www.moneylife.in/article/best-mutual-fund-schemes-please-dont-ask-your-banker-about-it/21551.html). The last thing the consumers need is relationship managers banging on their doors every week.

Apparently, SEBI hasn’t learned any lessons and refuses to do so. If the regulator does indeed go ahead with the implementation of the concept paper, it will not only be a death knell for the mutual fund industry but also for consumers as well as they will be starved of quality products.

The mutual fund business model solely rests on the quantum of assets managed. According to industry sources, Rs10,000 crore is the ball-park quantum of assets required to break even. Therefore, sale of fund products is paramount to the survival of a fund house. Fidelity, after years of systematic planning and execution, has Rs8,800 crore of assets, and incurred losses of Rs62.39 crore in FY10-11 against a loss of Rs27.56 crore in the previous financial year. Clearly, thanks to SEBI’s successive moves, Fidelity sees no hope.

This marks the first time a big-name mutual fund is a victim and has succumbed to the sudden change in environment. If this is any indicator of the current state of the mutual fund industry, it will only get worse unless massive consolidation takes place.

Distributors and advisors are responsible for pushing and increasing penetration of financial products. Their income depends on this and without this there is not much point in selling an unprofitable product the same way as it is not worthwhile to continue with unprofitable businesses. For years SEBI failed to pay heed to the investors. Under the last two chairmen it did not pay heed to market players either. It has been on its own trip at the cost of hapless retail investors and the fund industry. But with the mainstream media unable to see or hear any evil, Sebi bosses will get away by making guinea pigs out of us. Please offer your feedback here, even if Sebi prefers to remain indifferent to hard facts on the ground.