Mutual fund schemes
Are there too many schemes in the mutual fund industry?
Well it can be argued till the cows come home. Value fund, growth fund, large cap, mid cap, mid and small cap, large cap value, mid cap value, large cap growth, opportunities fund, special situations, price-earning ratio fund, equity biased balanced fund, debt heavy balanced fund,…..and a million such words are possible.
I can argue why so many schemes should exist and in the same breath argue why the existing sales force will not be able to distinguish between the schemes. In case of fund house they had said ‘We will invest in Value based equity shares’ – when SEBI asked them to define the word ‘value’ they dropped the word value!
If fund managers find it difficult to define the purpose of a fund how does one expect the sales person, the distributor and the common man to know the difference between different schemes. I have argued with a fund manager – saying ‘I can see value in the growth that this company will get’. Navin Rego of Managalore will agree with this!
In this background one has to see what SEBI can do. Sebi was in a good position to grill fund houses FAR, FAR before things came to such a sorry state. However having brought to this stage ….they may be doing something, well hopefully!
http://www.livemint.com/2011/01/05234332/Declutter-existing-products-M.html
Maaran
The temptation to play GOD is only too much for anyone I would think.
Why doesn’t SEBI open a mutual fund house of their own and create what they think is the ideal list of funds with the ideal list of stocks.
Seriously, what makes them so much smarter than the market?
Smart Singh
I beg to differ Maaran. In my opinion, SEBI has really played a godly role in last couple of years to safeguard investors. Abolishing entry loads and locking horn with IRDA over insurance regulation has served greatly to investors’ interest. Bhave is a personal hero to me.
Ideally, markets should be left free with minimum regulation and competition would bring out the best. However, it does not work in a market where a) consumers have zero information b) companies have an amazingly short-term outlook c) there is rampant mis-selling.
I often struggle to explain the difference between different fund schemes, to my friends and investors. Most large cap funds in this country have an indecent exposure to mid and small cap companies. The alpha they claim is almost always derived from a higher beta when compared to the benchmark. Floating rate debt funds do not invest in floating rate securities at all.
In this kind of scenario, I believe we need an iron fist tightly controlling the short-sighted fund companies, which regularly blame ‘competition’ for their short-sighted policies.
Maaran
All govt regulations are done ostensibly in the name of protecting the “gullible” from the “greedy” corporates. Almost every regulation would be unnecessary in a free market if only free market were allowed to run its course.
What we see are only the short term tangible effects of a govt regulation. What trained economists do & should do is look at unintended consequences & intangible long term distortions due to these myopic regulations.
Forcing fund houses to not charge Entry load has only meant that the “middle men” (those greedy distribution agents) are out of business & closed shops. SEBI considers the middle men as adding no value to the whole investment process. For investors in 2nd tier & 3rd tier, access to equity markets has evaporated because distributors are out of the business now. MF houses have reported funds inflow has dried since this regulation. The banks in cities & towns that used to duistribute MFs have started selling ULIPs & FDs in the place of MFs. I am certain this is not what SEBI intended to happen. Every stakeholder is worse-off as a result.
The market potential for investor education in india is huge & is just starting to be exploited by entreprenuers the likes of personalfn.com & others. The distributors will have had no option but to mature & become “investment advisors” to stay in the business. But SEBI shut down distributors pre-mature & household savings are now being siphoned off to FDs & ULIPs. Brilliant.
Maaran
If SEBI thinks they can ensure optimal returns for each & every investors, I can only conclude they already know of a list of companies to invest in. Why not start a MF and see how many investors join in ? Govt did run a MF years back – UTI. (UTI-US64 remember). Yeah. That one worked great.
Sanjay
Because mutual fund companies were carteling to siphon off entry-load from investor thats why SEBI had to jump in and intervene.
Financial literacy is increasing, internet penetration is increasing. Young generation is well versed with financial products. So Mutual fund will survive and grow irrespective of entry-load ban.
As far as FD investment are concerned, I am sure that it gives pretty good return. equity have discovered their fare price (because of FII entry and survival of india in 2008 slump) and debt is looking a very good investment.
Smart Singh
I agree with Sanjay here on increasing financial literacy and how it will help better products like mutual funds.
Maaran, middle man in India is really adding no value to the overall investment process because there is a huge conflict of interests between the seller and the buyer. As the financial awareness grows, and as regulators like Bhave perform their duties, we’ll find the alignment of interests and the ‘fiduciary’ spirit will prevail.
Distributors with a long-term view would change their strategy as you suggested. Only the unhealthy fat would melt away.
Dr Mohammed Ali Khan
“The middle man ” is a favourite bogey man of all Marxists and Statists.. Those who want to increase state power at the expense of the common man..
Actually quantum MF was/is selling funds without the distributors.. That was their USP.. Now the Govt. regulation has made it obsolete.
@ Smart Singh
So, people selling ULIPS and bank FDs have no conflict of interest?
You actually think that 1 mind.. The mind of a bureaucrat like Bhave is actually better than the millions of minds making independent decisions( which is the market )?.
Maaran
Grocery stores are middle men. Let us make them fix prices at wholesale. Stock brokers are middle men too. Let us ban brokerage fee. If we keep doing this, we will end up eliminating all middle-men. We would all be back to hunting/gathering food without any trade/exchange. Reality is we are all middle man for someone.
MFs will survive this. No doubt. The folks indirectly impacted the most are those in 2nd,3rd tier cities & smaller towns.The MF distributor in their locale has shut shop. Those shopowners in that little town who perhaps would have invested a few ten thousand of their savings in a hdfc MF otherwise will end up investing in FD. That enterprising BBA student in a little town who wanted to make a career in investment advisory may never get to open his MF distribution business. His town may never hear of such a thing as MF for the next I don’t know how many years. The picture isn’t pretty at all.
Maaran
The fact that Quantum MF is not even a signficant player in terms of asset size tells me this measly 2% entry load never mattered to investors. There were distributors who even used to refund a certain% back to investors. If entry load was all that mattered, HDFC equity fund (& few other funds too) won’t be 100 times as big as Quantum. We look only for returns matching our risks (Lots of us overestimate our risk taking capacity, but that’s investor education/advisory issue. No one will ever be able to fix that completely).
Intentions of Mr Bhave may have indeed been noble..But almost all of these regulations result in outcomes far far inferior as opposed to letting the Market & Competition decide for itself. Regulators often end up creating the very mess they “imagined” to eliminate.
Maaran
Here is another instance of a govt/regulatory intervention: “Mobile number portability- This would never have happened without Department of Telecom/ TRAI stepping in. The regulators can only be doing a good job, right?”
No. Quite the opposite. MNP operators(telecordia, syniverse,etc) were not given “licenses” to operate till now. Who was blocking them? Telecom companies formed a cartel & were resisting TRAI/DoT from giving those licenses. But for DoT/Trai officials, we probably would have had number portability years back.
Smart Singh
Maaran & Dr. Khan,
Our country needs more people like you who understand the potential of capitalism. You are the future.
Both capitalism and socialism are beautiful romantic ideas and both need some checks and balances for correct implementation. Capitalism doesn’t acknowledge the myopic greed of humans and socialism doesn’t even acknowledge the basic selfish nature of humans. That’s why history has shown us that socialism is much more harder to implement. But let’s not forget that the 2008 crisis was brought upon by lack of regulation, ignorant investors and push-based marketing of home loans.
We need aware consumers and a tight and speedy judicial process to eliminate the need for regulation and ensure self-regulation. Until then, I’ll look up to good regulators like Mr. Bhave.
Cheers!
Maaran
The 1929 great depression & 2008 housing bubble are the two most widely cited cases by “interventionists” to argue against “free market” & what would happen if greedy humans were let to operate completely freely. Common man is only too eager to accept “the truth” in this story. There is plenty of material available online especially at http://mises.org on how “a series of government interventions & regulations” distorted the free market & culminated in each of these two crisis. I encourage you to invest your time in understanding the “real truth”.
Here is an article from 2003 (Yes, 2003) on the housing bubble in US. When they tell you “Nobody saw this coming”, they are lying. Free market Austrian Economists saw this coming alright.
http://mises.org/freemarket_detail.aspx?control=450
pravin
“Capitalism doesn’t acknowledge the myopic greed of humans”
no ,smart singh.capitalism acknowledges that people can be greedy and selfish and all that.that is it is against concentration of power in arbitrary hands.that is why we have the concept of natural laws.
the 2008 financial crisis was bought about not by lack of regulation -but precisely because of over regulation.fannie and freddie are govt entities and they gave their friends on wall st a free lunch.ditto for the fed reserve who created tons of money to bail failed firms. none of this is capitalism.the fed and fannie are govt entities.the bad lenders and buyers should have gone bankrupt.capitalism doesnt mean people who make bad decisions WONT fail.in fact failure is necessary for markets to work.the bailouts are not capitalism by any means.
good regulators are an anomaly and even if he possessed omniscience(and thereby provided the best incentives) he cannot beat markets which are “free” of govt interventions.
capitalism allows people to co-operate EVEN when they are selfish and greedy.take some random object:say an ipod.it is created in thousands of factories piece by piece and no single person knows to create it on his own.the design may be american.the manufacturer could be chinese and the metal may come from africa and the oil paint from arabia.none of these greedy people would have co-operated if they knew each other personally .but the market(catallaxy) allows everyone to work with even hated strangers peacefully.
Maaran
I posted a comment earlier with a link to an article published in Year 2003 (A full 4-5 yrs before the supposedly “black swan” event happened) from mises website explaining housing bubble in US & how it could turn out to be a disaster. That comment is “awaiting moderation” I dont know why. May be comments with links are auto flagged as SPAM & subra needs to approve? Subra, could you. thanks.
Dr Mohammed Ali Khan
A bureaucrat is just one human being.. He got the job by .. maybe a competitive exam, maybe his relative was a in a senior position, maybe he caught the fancy of the interviewer in the orals, ( and in Reservation India ) maybe he belonged to the right community.
He works maybe 5 days a week, morning 9 to 5 only, take tea breaks, lunch breaks, toilet breaks in between. He may fall sick, he takes vacations, he has a family which needs his attention. He simply is not there most of the time. In simple terms, unless he has Godly powers his information is inadequate and mostly outdated by the time it reaches him.
Whereas the Market is made of millions of human minds, works 24 hrs a day, 365 days in a near, never takes rest, constantly calculating.
You tell me Smart Singh, which is superior in the long term?
One of the main problems that regulators is this
http://en.wikipedia.org/wiki/Economic_calculation_problem
Dr Mohammed Ali Khan
@ Smart Singh
But I understand what you are meaning to say..
Bureaucrats/ Governments have critical functions.
They need to create clear, rational, non arbitrary, mostly unchanging rules and which needs to be implemented impartially.
(That is why there are no markets in Afghanistan or in wild regions of Pakistan. Maaran & I are not advocating anarchy. Markets CANNOT function in anarchy.)
The main stress is on “non arbitrary” and “mostly unchanging”. Why, if I am an entrepreneur, unless I know what are the rules, I cannot plan much ahead, but if I am afraid that the rules change constantly AND in an arbitrary fashion based on the whims of bureaucrats, how will ever plan. Will I invest?
For example, the game of Cricket has some unchanging rules. How will you feel, if an umpire, in the middle of an over, decides arbitrarily that if the ball is caught without touching the ground after hit by a batsman, it is NOT out? Can anyone play cricket with such ever changing rules? ( SEBI abolishing distributor fees is something like this )
But when it comes to economics this simple understanding escapes everyone.. Yes, we need Umpires, but they need to follow a strict codes of unchanging, non arbitrary rules.
——————————-
“The fundamental difference between private action and governmental action—a difference thoroughly ignored and evaded today—lies in the fact that a government holds a monopoly on the legal use of physical force.
It has to hold such a monopoly, since it is the agent of restraining and combating the use of force; and for that very same reason, its actions have to be rigidly defined, delimited and circumscribed; no touch of whim or caprice should be permitted in its performance; it should be an impersonal robot, with the laws as its only motive power.
If a society is to be free, its government has to be controlled.” – AYN RAND
Smart Singh
Maaran, Dr. Khan, Pravin,
Thanks a lot for your wonderful thoughts. As I said earlier, my heart fills up with hope when I see advocates of free markets and entrepreneurship. It’s people like you, not our policy-makers, who would lead India to a brighter future.
However, it’s my personal opinion that Indian companies don’t yet understand the value of self-regulation and we could use some help from well-meaning regulators (there are really few anyway). There is too much pressure to achieve short-term targets for survival. Indian companies give a whole new dimension to the principal-agent problem.
More financial literacy and better judicial system would ultimately lead to self-regulation.
Cheers!
subra
self regulation? nice joke, has not worked anywhere in the world. Ask Alan Greenspan! Medical Council of India, CA institute, Advertisers Guild of India, Amfi, – show one place it has worked!
Maaran
“self regulation? nice joke, has not worked anywhere in the world. Ask Alan Greenspan” – Come on Subra. Not again. His is a clear case of “over regulation”. You owe yourself to read up on Money, monetary policies & how Fed’s regulations caused the 2008 crisis. Greenspan set artificially low interest rates. If that is not regulatory intervention in the market process, what is?. There is no reason why Fed Reserve should exist at all. I wish you took the time to read.
Eg. for greedy businesses in a zero regulation environment – computer storage manufacturers. Floppies, CDs, DVDs, Blurays are all market evolved standards. If it were left to a regulator, I am sure we would all be still stuck in floppies. This is a direct result of “market” , “competition” process. People don’t notice this and assume that these improvements & standards happened “naturally”.