Consistency is an important virtue while managing finances. This holds true not only for investors, but also fund houses that manage investors' monies.
...it leaves investors in the lurch; which calls for regulator's intervention
Consistency is an important virtue while managing finances. This holds true not only for investors, but also fund houses that manage investors' monies. Any slip-up could spell disaster for both.
Sadly, lack of consistency is a prevalent phenomenon in the mutual fund industry. And quite shockingly, it is the fund's very positioning, which is often found to be inconsistent.
Every fund has a defined investment mandate/proposition, which is conveyed in its positioning. It informs investors what the fund has set out to achieve and how it intends to do the same, i.e., where it will invest its money. Expectedly, investors make their investment decision based on the fund's positioning. It helps them decide whether or not a particular fund fits into their portfolio.
The trouble begins when a fund house unilaterally decides to alter the positioning of a fund, thus leaving investors in a lurch.
For example, a long-term floating rate debt fund has recently been repositioned as a fund that can maintain flexible maturities. The fund maintains a maturity profile, which is comparable to that of a liquid fund or a liquid plus fund. While a long-term debt fund would typically be suited for investors with an investment horizon of a year or thereabouts, liquid and liquid plus funds are apt investment avenues for parking short-term surplus funds, i.e. for less than 3 months.
Now, why would fund houses incorporate such a radical change in the fund's positioning? Perhaps because the investment (read interest rate) scenario is unsuitable for a long-term debt investment. But that isn't a good enough reason to change the fund's positioning. It would have been justified if the fund had explicitly stated in the first place that it can change its character in line with market conditions.
We believe that the reason for the transformation is a lot more sinister than meets the eye. Union Budget 2006-07 introduced a penal tax structure on dividends declared by liquid funds vis-à-vis other debt funds. This made investments in liquid funds unattractive for corporates and other investors. The importance of corporates' contribution to a fund house's assets under management is well-known.
Fund houses decided to bail out their corporate investors by repositioning long-term debt funds as liquid plus funds. Effectively, while prima facie the fund would seem like a long-term debt fund, it would be managed like a liquid plus fund. Hence, corporates have the option of investing in a liquid plus fund and yet enjoy the benefits of a liberal tax structure, i.e. a long-term debt fund.
Fund houses may try to justify their actions under the pretext of protecting investors' interests. But, what about the interests of investors who got invested in these funds, assuming (and rightly so) they were getting invested in a long-term debt fund?
Fund houses which are rather trigger-happy while launching new fund offers (NFOs) of the equity kind, adopt a different stance for debt offerings. They could easily launch an NFO. But then, mobilising money in a debt NFO is easier said than done; hence, the easy route - alter an existing fund.
Every investor has the right to expect that his investment will continue to be managed in a predetermined manner, irrespective of how the markets are placed or changes in the investment scenario. The regulator should ensure that investors' interests are protected.
www.personalfn.com
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