In your interest.
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No beating about the bush.
Ajit Dayal, founder, Quantum Asset Managers, has lashed out against the market practices of HDFC Mutual Fund and other large players
Recently, HDFC Mutual Fund took over the assets of Morgan Stanley Mutual Fund. While the reaction of various mutual fund heads was hardly worth noting, Ajit Dayal, founder of Quantum Asset Management, a small but top-performing mutual fund has hit out at HDFC MF and other large players. In a weekly opinion letter called The Honest Truth, he ranted: “As much as I like HDFC as a company, I continue to be amazed why it tolerates the business practices of its affiliate, HDFC Mutual Fund. While HDFC is reputed for setting higher standards in the home lending business, HDFC Mutual Fund - and most of the other fund houses in this "business" of mutual funds - cannot claim any such distinction.”
Dayal points out that “HDFC Mutual Fund and its representatives have been involved with various committees of AMFI - the association of the people who run mutual funds - and have had ample opportunity to build something of immense value for India's retail investors. Yet, HDFC Mutual Fund, which - in my opinion - sponges off the immense goodwill of the HDFC brand name, has been a party to practices that hurt retail investors and protect the franchise of the business houses that control the mutual fund industry.”
According to Dayal, HDFC Mutual Fund, with the brand of HDFC behind it, “should be aiming to lead the charge of higher standards, better business practices, and more competition. It is, after all, a "leader". But don't hold your breath for this. Reading the chairman of HDFC Group, Mr Deepak Parekh's recent comment about a need for "consolidation" in the industry and the view that India has too many mutual fund houses shows the complete lack of understanding of our profession…But it does show the naked desire to convert a profession into a business: a "business person" wants less competition, a "business person" wants less disclosure, and a "business person" wants growth at any cost. A professional is trained to honour the contract with a client and look after the clients' best interest.”
Dayal argues that “Fund managers are professionals: most have rapidly and willingly been converted into doormats for the CEOs who run the mutual fund business. Doctors are professionals: they are now being made part of the profitability chain of diagnostic centres and hospitals via undisclosed commissions for recommending unnecessary tests. The mutual fund industry had endorsed this methodology. The distributor is king and the Indian retail investor has been the sacrificial offering at the slaughter house. Hail the CEOs and their focus on growing Assets under Management! Hail the Fund Managers who pretend that their only job is to manage the investments and turn a blind eye to how the assets were collected or how many lives have been decimated from suspect practices. Their intellectual superiority would make the MBA schools they graduated from proud of their achievements. "Ethics in Business" was a course they probably skipped.”
This is not the first time the founder of Quantum Mutual Fund has lashed out on HDFC Mutual Fund. Earlier in the year he called HDFC MF as part of a racket in the mutual fund business which has focused on gathering assets and figuring out ways to ensure that the payment of commissions to distributors is never compromised. (Read: Ajit Dayal, founder of Quantum MF, lashes out at HDFC MF)
Dayal’s letter of 30th December says “Rather than fighting for a disclosure of the distribution costs - which comes from the pocket of the retail investor - the fund houses have supported the efforts of AMFI to work for the benefit of distributors and reinstate high, and opaque, commissions. There has been no public voice of persistent dissent by the leadership of HDFC Mutual Fund or any of the "leading" fund houses.”
The mutual fund industry lobby is Association of Mutual Funds of India. According to Dayal, AMFI is known to be biased to a few large players. In the past, the larger mutual funds that effectively controls AMFI have been instrumental in endlessly postponing the decision on trail commission, had made a last-ditch effort to preserve the status quo, presumably because large commercial interests were involved. (Read: Foot-dragging on trail commission raises stink of commercial interests). Even recently, the efforts of small distributors to promote trail commissions and scrap upfront commissions have gone in vain as last year AMFI scrapped the plan to ban upfront commission. High upfront commissions lead to the practice of excessive churning by unscrupulous mutual fund distributors in order to earn themselves a higher commission. This practice of fund houses offering a higher upfront commission and lower trail commission is detrimental to many honest distributors who promote investing in mutual funds for the long-term. Only large fund houses can afford paying high upfront commissions to promote their schemes.
Dayal further lashes out at large fund houses like HDFC MF saying, “Rather than using their position as a leader in the mutual fund industry to force the industry to adopt better disclosure standards on portfolio turnover, payment to brokers as commissions, payment to investment professionals and senior managements, the opaque practices of limited reporting carry on. Similarly, the recent attempt by SEBI to raise the minimum net worth to run a mutual fund "business" from the existing Rs10 crore to Rs25 crore smacks of a bad policy influenced by a desire to have a closed club of limited members.”
Towards the end of the post, Mr Dayal states that, “Sadly, the chapters of the persistent battering of the Indian retail investor will continue to be written. And it is a shame that "leading" mutual fund groups like HDFC Mutual Fund and their well-respected Chairman - who are in prominent positions of leadership or are respected because they carry the HDFC tag on their visiting cards - continue to perpetrate this sorry state of affairs: whether by design or by sheer ignorance.”
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