Underperformance of mutual fund schemes is a serious cause of concern for investors. Fund companies opt for mergers while SEBI just looks on

In a recent case, the Bombay High Court has sought an explanation from SBI Mutual Fund about why one of its schemes— SBI One India Fund has yielded no returns— when its other funds are yielding reasonable returns to investors. According to a newspaper report, the court also issued a notice to the Securities and Exchange Board of India (SEBI), directing the market regulator to file an affidavit stating the exact nature of the regulatory framework in place to ensure proper management of mutual funds.

The fact that the Bombay High Court has admitted such a case speaks volumes for the regulatory approach and philosophy that India has adopted and the unintended consequences thereof. Equity funds disclose upfront that these are subject to market risks. Prima facie, it is common for equity funds to underperform over arbitrary start and end periods. But this is an interesting case. In the last thirty three-year rolling periods from 1 January 2007 to 30 June 2012, SBI One India Fund has underperformed the benchmark on as many as 27 occasions.

Very often fund companies merge their poorly performing schemes with others to escape scrutiny. In this case, SBI MF got the nod from the regulator to merge SBI One India Fund with SBI Magnum Equity Fund. There are many such schemes of other fund houses, would this lead to strict action taken by the regulator or would they just keeping merging schemes to hide their pathetic performance?

Moneylife is the only publication that has consistently highlighted underperforming fund houses. (Recent Articles: Equity Mutual Funds to avoid at all costs, Fund Performance: Worst Equity Funds.) What we have noticed is that most of the schemes which are consistently underperforming come from the same set of fund houses. Such gross underperformance over different periods can’t go unnoticed by the AMC and the trustees. But SEBI has not done anything about it. The only thing it could have done is question the trustees.

At a recent mutual fund summit SEBI chief UK Sinha had voiced his concern on the gross underperformance of mutual fund schemes and suggested that remedial actions should be taken. Recently we saw few funds being merged to hide fund underperformance and SBI One India Fund is one of them (Read: Fund mergers: What mutual fund houses do to hide underperformance ). The new scheme—SBI Magnum Equity Fund—has underperformed the benchmark just twice and this would hide the gross under performance of the other scheme, SBI One India.

Fund companies charge a fixed amount of 2.25%-2.5% from investors for managing their money and this is the performance. The least the investor would expect is returns on par with the benchmark. Unless SEBI takes active interest and introduces stricter norms, AMCs would continue their business as usual. Maybe the high court would be able to throw some light on what investors can expect.