Apart from distribution charges coming back—mutual fund investors will now pay distributors every time they invest—the capital market regulator, Securities and Exchange Board of India (Sebi), announced a slew of changes in its board meeting held on 28 July. If you invest in MFs already, or plan to invest anytime soon, these changes will impact you.
No more CAGR in ads
Does it mean anything to you if an MF were to tell you that one of its schemes has returned 15% in the past three years? Or would you feel better if you are told that Rs10,000 invested in a fund three years back would have now grown to Rs15,208? Sebi thinks investors would be comfortable with the latter—that actual figures sound better than percentages.
In a move to revamp the way MFs advertise their schemes and their performances, Sebi has now mandated fund houses to avoid giving compounded annualized growth rates (CAGR). Expressed in terms of percentage growth, this was how fund houses so far advertised their scheme performances.
“Many investors do not understand what CAGR means and what to make of it. Communication has to be done in a simple manner,” said U.K. Sinha, chairman, Sebi, at a press conference, soon after its board meeting.
Additionally, Sebi has mandated that the performances of schemes must be measured against the Sensex or the Nifty, the two most popularly followed equity indices in India or against a government of India security in case of a debt fund.
Some fund houses feel it’s a good move.
Says Milind Barve, managing director, HDFC Asset Management Co. (AMC) Ltd: “The term ‘CAGR’ does not connect with the common man. People like us in the financial world can take it for granted. Although mathematically it is an accurate way to depict returns, the common man truly doesn’t understand.”
Not all are convinced. “The new way of giving returns will unnecessarily paint a rosy picture. It’s easy to get swayed by a figure, say, Rs70,000 if it is advertised to have grown from Rs10,000. Besides, banks give out their interest rates that investors can earn from fixed deposits; they never say your money will double in five years’ or some such thing. Even the public provident fund gives out a rate in terms of percentage,” says Jaydeep Kashikar, director, Brainpoint Investment Centre Ltd, a Mumbai-based financial planning firm.
But Barve believes that is exactly the kind of message the fund houses should not give. He says: “When you give returns in terms of percentage, it could be misconstrued that the past performance figure is what investors will get. That’s not what an MF wants to say, is it?”
That’s not all. Henceforth, any scheme’s advertisement will also need to be accompanied by the performance of all the schemes managed by the same fund manager. “Normally, fund houses highlight the performance of one scheme that has been doing well while ignoring the performance of, say, 10 other schemes within the same fund house. Many of such underperformers don’t even beat the Sensex or Nifty, and you never come to know of them,” says Kashikar, who believes that this will help investors’ decision.
Apart from having to disclose some uncomfortable truths, fund houses—especially the larger ones—are also going to find it tricky to accommodate a lot of data in their advertisements. Says Waqar Naqvi, chief executive officer, Taurus AMC Ltd: “Some larger fund houses have a single fund manager managing about four to five schemes. The size of the advertisements may become larger; the cost could go up.”
Common account statement
Already the two largest registrars of the MF industry— Computer Age Management Services Ltd (Cams) and Karvy Computershare Pvt. Ltd—provide consolidated account statements across fund houses whenever you demand. Sebi has now mandated fund houses—and by that virtue its registrars—to issue consolidated account statements across fund houses, every time you invest in a fund. Earlier, fund houses used to send you an account statement at the time of investment. But this would be limited to only the fund house in which you would invest.
Going forward, you will get an account statement across fund houses managed by a single registrar.
Sebi wants to regulate MF distributors and in its board meeting, it took baby steps towards that. In the absence of any regulations so far, it has put the onus on fund houses though.
Sebi has asked fund houses to disclose the commission they pay to distributors. Additionally, the Association of Mutual Funds of India (Amfi), MF industry’s trade body, will need to disclose the aggregate amount of commissions that the fund houses pay to such distributors.
To begin with, only those distributors who are present in at least 20 locations or with assets under management (AUM) higher than Rs100 crore across all MFs (only retail money) or commissions of over Rs1 crore per annum across all MFs or commissions earned over Rs50 crore from a single fund house will get covered. Sinha said that this criteria would cover around half of the industry’s AUM contributed by distributors.
Some fund officials like Naqvi don’t see much of a point in this exercise. “How will the investors benefit if they come to know that one distributor is getting, say Rs2 crore from one fund and then, say, Rs5 crore from all fund houses?” Naqvi believes that there could be a bigger agenda behind this exercise.
However, a senior fund official, who did not want to be named, said that there has been discussions at Amfi recently on whether fund houses should appoint “tied agents” the way the insurance sector does—all fund houses appoint exclusive agents who work only for them and no other fund house. This official believes that if Amfi or Sebi, after collecting this distributor data, observes that many large distributors’ business comes from one or very few fund houses, it could give a boost to tied agents’ argument. Or if the biggest distributors are getting a certain level of commission that perhaps justify a “slight higher” expense ratio that schemes charge investors, Sebi may look at that.
Distributor transaction charge
Perhaps the biggest norm is the comeback of the charges you pay to your distributor, almost two years after Sebi had abolished entry loads in August 2009. Though we wrote about it extensively in our edition dated 29 July, here’s a recap for those who have just joined the Sebi-MF show. Every time you invest RS10,000 or more in an MF scheme, you will need to pay your distributor a transaction charge of RS100. The same goes for your systematic investment plans if the total amount committed is Rs10,000 or more. “In competing industries (such as unit-linked insurance plans), distributors get higher commission hence they are more incentivised to sell those products. The tribe of MF distributors had become smaller. Now at least, to some extent, this problem will be rectified,” says Debasish Mallick, managing director, IDBI AMC.
So gear up for changes in the way you invest in funds.