Regulations
Retired teachers selling ‘simple’ & ‘performing’ schemes: Another harebrained idea from SEBI

SEBI wants to create a new category of fund sellers: Postal agents, retired teachers, retired government and semi-government officials who will sell units of ‘simple’ and ‘performing’ mutual fund schemes. The concept and the definition of these two terms should rank pretty high in the list of harebrained ideas from regulators

The Securities and Exchange Board of India (SEBI) recently passed a circular that sharply increases charges for mutual fund investors. This by far is the worst we have seen from the market watchdog. Apart from penalising long-term investors (Read: Mutual funds to be expensive from 1st October ) SEBI’s circular also states “A new cadre of distributors, such as postal agents, retired government and semi-government officials (class III and above or equivalent) with a service of at least 10 years, retired teachers with a service of at least 10 years, retired bank officers with a service of at least 10 years, and other similar persons (such as bank correspondents) as may be notified by AMFI/AMC from time to time, shall be allowed to sell units of simple and performing mutual fund schemes.”
 

Now what is SEBI’s ‘simple’ and ‘performing’ mutual fund schemes? SEBI has helpfully defined it: “diversified equity schemes, fixed maturity plans (FMPs) and index schemes.” If SEBI considers diversified equity schemes as simple, we wonder why SEBI has not included debt income schemes and liquid schemes as well and which are not complex? And FMPs were the main cause of distress for investors and SEBI in the 2008 crash, which wiped out a fund house.
 

But what is even more intriguing is the second part of the idea. The schemes “should have returns equal to or better than their scheme benchmark returns during each of the last three years.” (our emphasis). This criterion for selecting schemes is not only wrong but investing in certain schemes based on this can be harmful to one’s investment. And what’s worse is that this would be the investments of hard earned money of savers from small towns and cities who would invest on the trusted advice of ‘government’ employees, postal agents, teachers and ‘senior’ bank officers.
 

Schemes that beat their benchmark in each of the last three years are not necessarily consistent performers. Take for example the scenario in August 2007, had one planned to invest at that time there would have been funds like SBI Magnum Global Fund 94, Reliance Vision and DSP BlackRock India Tiger Fund among the list of schemes that beat their benchmark on each of the last three years. What happened subsequently?

  • In the following year itself the schemes fell by 10% to 17% whereas their benchmarks had fallen by just 3% to 5%.
     
  • In fact none of these three schemes made it to the list in any of the subsequent years till now based on the same criteria.
     
  • Half of the schemes present in that year never met the criteria for the following year. This is one reason why we emphasise that while selecting a scheme one should focus on long-term consistence performance.
     

Let’s take the most recent period just for making our point clear.
 

  • At the end of August last year there were 51 equity diversified schemes that met the criteria of the SEBI circular.
     
  • The following year as many as 18 schemes failed to beat their benchmark and around eight schemes delivered negative returns compared to their benchmarks which were positive.
     

Here are some more issues that show how foolish SEBI’s idea of ‘performing’ schemes is.
 

  • Returns are always considered point-to-point. We have explained the fallacy of taking returns over a fixed period (read it here Three reasons why S&P-CRISIL’s rating of mutual funds based on fixed period is flawed ). Here even though the performance over each of the last three years is taken it is not enough.
     
  • Some good schemes may have failed to outperform their benchmark for just one particular period that too by a negligible amount. If we apply the above mandate it would mean the particular good scheme would fail to make it to the list of “simple and performing” schemes. Take for example HDFC Top 200, it marginally underperformed its benchmark in August 2007 by one percentage point (the scheme had returned 31% compared to the BSE 200 which returned 32%). This would mean it would not be present on the list of schemes for that year and the following two years even though it substantially outperformed its benchmark in the following two years.
     

And as long as SEBI allows fund companies to charge 1.5% on index funds, allowing retired teachers to sell index funds to the masses is patently doing severe harm.
 

Would the retired government officials be able to do their own research and select the top schemes or would they just push the schemes that would earn them higher incentives? Who would be responsible if investors lost their hard-earned money by investing in the wrong scheme? After all, SEBI has only found new ways to bribe mutual funds companies to reach them, not protect their interests with appropriate metrics and making fund houses and sellers accountable.
 

Bureaucrats who run the regulatory bodies come up ideas that are well-meaning but senseless because of their tendency to bring in value judgements that have little to do with reality. In 1992 when Dr Manmohan Singh declared that foreign funds would be allowed to invest in India, he said only ‘reputed’ institutions would be allowed to invest here. Dr Singh’s value judgement looked ridiculous and even more so with the reputation of Wall Street firms like Goldman Sachs, Merrill Lynch, Citi and Morgan Stanley in tatters after their role in sub-prime crisis of 2007-08 came to light.
 

We suspect that this breathtakingly silly idea will remain stillborn like many other ivory-tower ideas of regulators. This is simply because it is not possible to implement it and neither will there be any takers for it.

User

COMMENTS

Pankaj Kapadia

4 years ago

FMPs are simple. How? Because no returns are printed and given. I wonder what would those govt employees answer if asked how much return FMP would generate and what are tax implications?. Honestly we have no reliable answer.
Index funds AUM if you go to see is hardly anything. In fact they should be given monopoly to sell such funds. I also wonder why refresher courses are required for existing ifas... if there are SIMPLE MUTUAL FUND SCHEMES available.

mam chand aggarwal

4 years ago

This is unnecessary hue and cry ,Please ask the investors who put their hard earnings 4-5 years ago in mutual funds,what is their condition now ? they were promised
to get the profit earning at least @ 15 % but they have lost their most of the principle amount also.
Who is responsible ? The shops of mutual funds may please be closed to any further financial loss to the investors and save them from mental agony.The bank FDs are much more better and with ensured income

H Doshi

4 years ago

hanks for the article and the research. Wonder how the retired history, chemistry and biology teachers are going to first,self understand the past, investment combination in a fund and the life strength of a fund? Experience of their past in classes considered similar to the fund classes, by SEBI?

AJIT SRIVASTAVA

4 years ago

SEBI has miss the target what i feel , i dont thing this is the smart solution to protect the investor's interest. whereas my view is that on issue that the SEBI has now implement the regulation for advisory model.

Krishna Gopal Gupta

4 years ago

SEBI itself is allowing to MISSELL & MISREPRESENT MF Schemes to new investors, why? The motive is to be found out. Probably, they might have got a huge sum of money to push this class of people. Further, what is wrong then with the AMFI Certified IFAs, who are not only earning their bread but are also feeding AMFI, NISM, AMCs and Investors besides their own family members needs to be answered by SEBI?

Jayant

4 years ago

Apart from all this are these guys supposed to check everyday for the performance of every scheme for the last three years, to date? At the cost of repitition I will say it again that this is what happens when you try to fix things when they are not broken. If these hairbrained people are supposed to look after the interests of the investors, then God save the investor.

mam chand aggarwal

4 years ago

there is no need of appointing new distributors / retired teachers . the officials sitting in AMCs have got issued ARN in favour of their family members.

Samraj

4 years ago

Excellent and well researched. What about new found theory of "Direct" investments cheaper for all existing and new investments? In what way this will benefit AMC? SEBI is bringing one or the other at frequent intervals only to harm the industry than helping to survive. IFAs role in promoting the sales are of paramount importance and they should be encouraged. My request to you is to put concerted efforts to prevail upon SEBI to help grow MF in India.

Bharat Bhushan

4 years ago

For such bizarre idea, each of the advisory commitee member and current SEBI Chairman and Director and AMC CEO should take upon themselves a mandatory target to rope in minimum 25 such distributors from amongst there near and dear ones (relatives - there must be many aspiring) in this cadre who accomplish minimum mobilisation of Rs. 1 crores and 50 new investors each in next one year and then publicly publish the experience.

What happens if any of their investors wishes to invest/ switch into any scheme out of this selected set ? Do they say "No" ? Who shall be responsible for this ?

Will there be a separate fact sheet and CAF of such schemes ?

Go one step further - If the scheme fails to meet the criteria next year - Do automatic redemption !

mam chand aggarwal

4 years ago

The AMCs have grabbed the poor investors hard earnings in connivance with SEBI.Both are enjoying on public money .They are suggesting new frauds with old aged persons to overlook the old grabbing .

arun adalja

4 years ago

sebi is trying to correct his mistakes by creating foolish idea.and wasting time of the elderly retired persons by moving out in streets for small amount by selling junk mutual fund schemes.

mani thyagarajan

4 years ago

Re the HARE-BRAINED PROPOSAL of SEBI:

Ur article is very informative, but dont just stop there, take it further and FORCE SEBI to withdraw these FOOLISH SCHEMES. We public cannot do anything in this, Only media can protect the hapless investors,

regards
thyagarajan
MTRAJAN06@GMAIL.COM

mam chand aggarwal

4 years ago

MFs are nothing but junk food due to highly paid fund managers sitting in AC cabins without minds

A COMMON INDIAN MAN

4 years ago

yah baat ab sabit ho gayi hai ki SEBI ki office me gadho(donkey) ki jamat baithi hai kyoki gadhe hi itni betuki ghatiya salah de sakte hai.

Nilesh KAMERKAR

4 years ago

1) Performing Schemes: Somebody seems to have forgotten, past performance is no guarantee of future returns . . . used to be a risk factor disclosure till very recently. Like changing traffic, performing schemes keep on changing. Otherwise, we would have had a list of some common schemes performing this miracle continuously.

2) Rewarding Tracking error? How can a passively managed Index fund be expected to outperform the underlying benchmark? It can only happen if the fund manager, managing the Index Fund is incompetent. i.e. he is unable to replicate the index portfolio. Index funds have costs attached to them while an index has no cost, thus how can we expect an Index fund to do better than the underlying index?

3) New Cadre of distributors: It is one more attempt at trying to figure out what does not work. As things stand, it will be difficult to enroll new agents (After having witnessed the plight of MF sellers, who will now want to join the ranks? And for what?) . By creating this cadre of retirees, are we trying to convert a full time profession into a post retirement hobby? How many retirees will be willing to go ‘out of pocket’, spending their princely pension for promoting mutual funds? Their upfront compensation shall be less than a stipend.

REPLY

Nilesh KAMERKAR

In Reply to Sucheta Dalal 4 years ago

Thanks Ma’am,

About SEBI’s advisory committee: Do not wish to take names, though . . .
A few from that list of 14, which makes the committee are ‘single handedly’ capable of advising SEBI on reviving the MF industry. And make it robust.

It is depressing when such leading lights of the MF industry have collectively let the opportunity slip – some of them have spent most of their professional lives ‘nurturing the MF industry’ while creating wealth for their investors & a solid reputation for themselves.

Like it happens in committees, here too there are those who masquerade as crusaders of investor protection, but in reality are feasting off the same retail investor’s hard earned savings in mutual funds ( and in more ways than one). They may be here for their nuisance value & personal agenda. Mutual funds revival can continue to wait.

While one understands the difficulty of making things simple, but, it is kind of weird when complicated measures get announced as simple.

Sucheta Dalal

In Reply to Nilesh KAMERKAR 4 years ago

Excellent points Mr Kamerkar .... very thoughtful. It makes me want to be a fly on the wall and listen to the discussions at SEBI's advisory committees, that end up with such bizarre schemes being approved and publicised.
Funnily, the mutual fund industry, which is already so badly damaged by such mindless and knee-jerk actions remains silent.
The new rally in stock indices will ensure there is no discussion either!

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