DSP MF has made it mandatory for its staff to make new investments in own schemes only
The firm believes that its staffs must walk the talk on the advice given to the investors to avoid investing directly in the asset classes, and instead use the scheme of DSP MF as an investment vehicle
In a move that the fund house has described as ‘eating the same food that we serve to our customers and build complete skin in the game’, DSP Investment Managers Pvt. Ltd (DSPIM) has prohibited employees from making any direct investments in shares, bonds, debentures and derivatives of a company and made it mandatory for its employees to make any incremental investments only in the schemes of DSP Mutual Fund.
“It demonstrates conviction in our own funds and takes away the distractions that come with owning a direct portfolio that has a different volatility profile," said Kalpen Parekh, president, DSP Investment Managers Pvt. Ltd. “We are in a fiduciary business and we espouse mutual funds as the most efficient way to invest. When we dissuade investors from investing directly in an asset class, then as people who are in the responsible position of dealing with people’s hard earned money, we need to walk the talk—not just in letter but also in spirit," he added.
Existing investments of the employees, whether in mutual funds or other securities, may continue. Any systematic investment plans already registered may also continue. However, switch-out of such investments or any change in such systematic registrations are not permitted. Employees can make investments in third-party mutual funds schemes in categories where DSP Mutual Fund currently does not offer a product. While employees are not allowed to make any additional investment in securities, they can invest in initial public offerings and follow-on public offerings. Investments in fixed deposits, insurance policies, public provident fund and postal saving schemes are exempt from this directive.
Parekh says that it is important to demonstrate reasonable skin in the game. “If our design and execution of product and the fund management is right, then as investors, we will also benefit," he said.
DSPIM is not the first to come out with such restrictions. In 2015, Kotak Mahindra Asset Management Co. Ltd initiated this policy for its own investors. When we asked Nilesh Shah, managing director of the company, on how that policy had fared, he said, “We structured it as a voluntary pledge. When we started this initiative, we were a small company looking to grow big. That brought people together. Now, we have grown significantly over the last four years and growth has been faster than the industry. Despite this, people who have come in later have also been willing to take the pledge. So they must be seeing some value in it."
But how will employees feel about staying tied to a scheme that is doing poorly? “Our funds’ performance has been in line with others in the industry. If performance was bad, it may have been difficult to retain the employees on the pledge," said Shah.
“There may be points in time when the funds don’t do well and our money faces the same pain that the investors face. We made it mandatory for employees to make incremental investments only in our own schemes so that there is no easy route out, and to force ourselves to constantly strengthen our platform and create value for all the investors," said Parekh.
PPFAS Asset Management Co. Ltd, another early convert to this philosophy, has a different take on this. “We encourage our employees to invest in the fund so that they are better equipped to handle the queries and give advice. At no stage is anyone forced to do it," said Neil Parag Parikh, chairman and CEO, PPFAS AMC Ltd. They have taken it a step further and made the information on employee holdings available on their website and it is updated every month. “This transparency builds the confidence of the unitholders where they can track the investment activities of key employees," said Parikh. Currently, 7.5% of the flagship scheme, Parag Parikh Long Term Equity fund, is held by its employees. But he does not believe that making this exercise mandatory is the right way to go. “We have only two offerings—a liquid fund and an equity fund—and it may not fit into the employee’s needs. The decision to invest has to be made keeping in mind the asset allocation and risk-taking ability of the individual," said Parikh.
Others have also raised concerns on the legality of such a move that restricts the employee’s choice. “Such policies could be questioned as being coercive and more importantly could be seen as reflective of trust deficit that the organization has on its own products. However, the situation would differ if the employees are incentivised (by way of beneficial conditions) while investing in the products offered by their employer," said Nitin Sharma, legal head in a large multinational company.
“Policies containing restrictive covenants like these could run afoul of the law of the land, including the rights granted under the Constitution. Further, restricting employees to investing only in investment products of their employing entity may also have to be assessed from the standpoint of insider trading regulations and any sector-specific legal requirements (by the Securities and Exchange Board of India), if any," he added.
But Kalpen Parekh believes that it will lead to self-selection for the company. “The right talent that believes in this ideology will find us as a great place to work at and see that the intent is to make sure that the best ideas come into the funds’ portfolios for the advantage of all investors instead of personal portfolios. If we are advocating the DSP funds to our investors, then it must hold good for us too," he said. He believes that this will help maintain the best fiduciary standards in the industry that will reflect well on all who are part of this.
The move by fund houses to demonstrate conviction by putting their money where their mouth is will no doubt bolster investors’ confidence in the schemes. But investors should stay with an evaluation process that would identify the scheme that is best aligned to their needs and risk preference, and use any information on employees’ holdings in the scheme as one more data point to consider while making an investment or exit decision in a scheme.