2 min read.Updated: 04 May 2021, 06:28 AM ISTNeil Borate
On 28 April, the markets regulator said a minimum of 20% of the compensation for key personnel of mutual fund houses should be in the form of units in schemes managed by them. The move links their incentives with the performance of the schemes. Mint takes a look.
1. What exactly is Sebi’s skin-in-the-game rule?
According to the Securities and Exchange Board of India (Sebi), key personnel of AMCs must get at least 20% of their CTC from investments in their own funds, excluding tax and mandatory PF contributions. Of the 20%, fund managers can invest up to 50% in their own schemes, and 50% in a scheme with a similar or higher risk profile. For the senior management, such as CEO or CIO, the investment has to be made across schemes managed by the AMC, and in proportion to the assets under management. The money will be locked-in for three years, and can be clawed back (seized) in case of a fraud.
Historically, fund managers have been paid fixed salaries, at least as a part of their remuneration, regardless of how their funds performed. This particularly drew flak when there were multiple defaults in debt funds, following the IL&FS debacle in 2018. In case of equity funds, star fund managers drew high salaries despite their schemes underperforming benchmarks. Some alignment of managerial and investor incentives may push returns higher. The focus on fund managers’ remuneration may also force AMCs to think harder about high salaries and overall cost structures.
3. What are the exceptions to the rule?
Sebi has excluded exchange-traded funds and index funds because they are passive in nature. It has also excluded overnight funds. Overnight funds are mandated to invest in debt securities maturing over a single day which reduces the variation in their returns and the scope for managerial skill. It has also excluded existing close ended-funds from the rule.
According to senior industry executives, the rule may force fund managers to invest their personal money in funds that are not suited to their own risk profile. For professionals, such as dealers, who do not earn high salaries, this can impose a financial strain. Executives are worried that this will ultimately provoke a flight of talent to products such as insurance or portfolio management services (PMS), which compete with mutual funds to a certain extent, but will not have to deal with such rules.
5. The indicators of a well-managed MF
The skin-in-the-game rule is just one factor to be considered while investing in a mutual fund. Other important factors include performance against the benchmark and category, for how long a fund manager is managing the scheme, volatility of the fund and consistency of returns. Also, consider asset allocation before you actually select a fund. Getting your mix of equity, debt, gold and international funds right can make a big difference to your returns, than scouting for the right scheme.
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