Correct diagnosis on MFs

THE Sebi chief has done well in asking mutual funds to stop chasing short-term gains and instead enhance returns for the retail investor. The regulator's concern, aired after Sebi was denied the right to oversee unit-linked insurance plans (Ulips), is valid. Mis-selling of marketlinked products, be it mutual funds or Ulips, is unacceptable. Sebi should tighten the rules for fund houses to improve disclosures and make distributors accountable for their advice to investors. Sure, it scrapped entry loads and allowed agents to negotiate fees directly with investors. It has also rightly changed the accounting norms to discourage fund houses from declaring artificial dividends. Distributors have, however, failed to act as advisors and this defeats the goal of a fee based model. Reforms are needed to make mutual funds a vehicle for mass investment. Today, there are around 3,000 mutual fund schemes in the market. Proper disclosures on the performance of the scheme are a must to enable investors to make the right choice. Sebi's mutual fund advisory committee has reportedly recommended that distributors maintain written records of their recommendations and fund houses present a clear picture of the performance of the scheme to investors. This should be implemented. The cost structure for market-linked products should be simple. The pension regulator has shown the way, making the new pension scheme load free. A clean-up in the cost and incentive structure of Ulips is underway to prevent mis-selling. Mutual funds too should put their house in order.
Fund houses rely on banks and companies to make short-term money. Companies and banks invest in mutual funds when they have cash that needs to be parked for short periods. Banks also prefer to lend to one another and to companies through MFs due to the tax arbitrage. However, mutual funds face redemption pressures when banks pull out their money. The RBI too wants moral suasion to stop banks from putting their money in mutual funds. Fund houses should stop banking on short-term money. Individual investors are more stable and their money yields higher margins. Widening retail investor participation, therefore, makes eminent sense.