Chronically laggard funds get Sebi rap

The market regulator is miffed at the continuous underperformance of some mutual fund schemes and plans to pull up their top officials.

“It is right that investors are free to move out and get into other schemes, but if it is happening on a continuous basis over a long term for a significant percentage of the schemes, then it becomes a Sebi issue as well. We are going to engage those fund managers and also the CEOs about what measures they are proposing to take,” Sinha said at a mutual fund summit organised by the Confederation of Indian Industry on Thursday.

Sebi has found that there are around nine fund houses where half or more of their schemes have underperformed the scheme benchmarks consistently over the last three years.

In the case of nine others, up to half the schemes have given lower returns than their benchmarks.

The Sebi chief did not name the fund houses.

However, according to data compiled by fundsupermart.com, more than 50% schemes of LIC Nomura, DWS and JM Financial mutual funds have underperformed their benchmarks consistently for the last three financial years.

The regulator also highlighted a number of mutual fund violations inspections have thrown up.

In one case, money invested in the scheme had been invested in the fixed deposit of a bank which was a unit-holder in the scheme.
In others, there were violations of Sebi directives on concentration risk — say, where one particular investor is putting in more than 25% of the corpus.

In some cases, inter-scheme transfers had been made mainly to transfer the losses from one scheme to another.

“These things cannot be allowed by the regulator to go on and on,” said Sinha.

The Sebi chief mentioned plans to introduce some means of investor protection by way of a safety margin but declined to elaborate.

With regard to easing the entry of mutual fund schemes into managing pension money, he said Sebi is already in touch with the tax authorities, requesting tax breaks for mutual fund pension schemes in line with existing breaks for pension funds.

Sebi has received several suggestions from stakeholders on possible changes to mutual fund regulations, including fungibility in the total expense ratio and changes to the exit load.

Stakeholders have also suggested multiple share classes, using the broker and exchange mechanism for mutual fund distribution and also on re-introduction of entry load or variable entry load.
Other suggestions include a single cheque payment for both investments as well as advisory services.

Sinha also said that the Financial Stability and Development Council sub-committee, which met recently, had decided that a Sebi paper on distributor and advisory regulation was acceptable and given it a go-ahead.

“We are likely to implement these suggestions in the near future,” he said.

Mutual fund industry reactions were mixed.

Akshay Gupta, MD & CEO of Peerless Mutual Fund said it was a good move. “This will make the mutual fund companies more accountable and answerable. And this is what the industry needs in trying times like this. And a 3-5 year timeframe is sufficient to judge a fund’s performance.”

However, Dhirendra Kumar, CEO of Value Research, said a fund’s performance was best gauged over a longer period. “A fund has to be evaluated over a period of time. One needs to make sure that the evaluation takes into account an entire market cycle and not just a specific time-period. We should let the free market guide investors in such decisions.”