The shareholders of a fund house, the managers of a fund house, the fund manager, the distributor and the end customer have the common interest of getting a good return for the unit holder, right? NO. Wrong.

Completely wrong.

The shareholders of a fund house have invested Rs. 10 crores and they want to exit the business for say Rs. 5000 crores. Yes of course this over a 20 year basis, but where else can you get such an amazing IRR? So the mandate to the employees is simple – run the business on a ZERO cash drain basis, that is all. So they can run a negative PnL for a long time as long as they do not ask for further funds from the ones already invested – it could vary from Rs. 10 crores for the early starters and about Rs. 400 crores for the new players. The exit may be by selling outright like Cholamandalam Mutual fund / Fidelity who got a very good price for exiting or like Reliance etc. who keep selling a small stake to the foreign partner. In about 20 years time all the important funds are likely to be foreign owned – like the banks of today. We have only foreign banks or PSU banks.

The managers of the fund house have to collect AUM because the valuation at the time of selling the amc (asset management company) is a % of the assets under management (AUM). So they are busy collecting AUM and for doing this having good fund managers will help. Managers have a nice budget to spend on themselves, get huge bonuses, keep the banks and other big distributors happy, and keep increasing the AUM. Performance be damned.

The fund manager is responsible for the performance of the fund – but he has an army of people and tons of excuses about why he could not. The investor is reasonably complacent and it requires 16 horses to pull him out of an existing fund. So the fund manager who is paid a handsome salary and a vulgar bonus. Most fund managers would have under performed the TOTAL RETURN INDEX since inception. It has to be some independent blogger who will have to calculate the TRI index since 1994 (when most of the private sector funds were born) and compare the performances.

The distributor is in the game of AUM gathering and selling off his company showing them a ‘trail income’ cash flow. This is a brilliant ploy to get investors to put money in the distribution company. Go to investors (super HNI to start with) and take their assets promising to rebate all the commissions (what the client, all does not mean all). So the super HNI shifts from top banks, IFAs, National distributors to ‘New Distributor’. New Distributor now has an AUM of say Rs. 5000 crores. Nice big round amount at the top line, but nothing at the bottom line because you are paying high salaries. Then the New Distributor starts distributing unregulated (ok less regulated products) where he has a 4% fee. ┬áSo the New Distributor now has an AUM of Rs. 5000 crores (acquired aum), Rs. 1000 crores of PMS (distributed aum) and Rs. 1000 crores of appreciated aum. So he now has a Rs. 7000 crore aum on which he makes a damn decent money. He now hawks his company and sells a stake. So the real big distributor too is not creating value for the customer, but for his own shareholder – and that is how life is!

The small distributor is trying to ape the big distributor, worrying about the amazingly short sighted regulator, worrying about filing service tax returns….and wondering whether the client will go away.

It is an amazing circus out there.

So if you are a mutual fund investor, accept it as TINA – there is no alternative – but do not have too much of a high expectation from any of them. Now at least you know why they are in the business that they are in. What they tell you does not matter, what they do is this. True for all the fund houses…..Enjoy!!

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  1. SO what are we supposed to do.
    Investing directly in equities is not recommended for folks who have other things to do.
    For someone like me who have 80% of saving in Mutual Funds what are other options?
    At least we had some hope that with old fund houses like HDFC and Templeton investors can worry less on Management part.
    I am in process of consolidating my whole portfolio consisting of 7 or 8 Mutual funds houses to maximum of 2 or 3 .
    Any advices which mutual funds houses to choose.?

  2. used to think Highly about Hdfc till they got embroiled in an insider trading case where the top management was named. A good fund house looks good till proven bad. All are of the same feather.

    no specific names – i personally invest in Hdfc, FT, I Pru, Motilal Oswal, …I may not have looked at newer funds with smaller aum…so i may not have a view on Mirae, Indiabulls, Escorts…

  3. Thanks Subra
    Yes now remember the case of synchronized trading in HDFC Fund house.
    Moreover many popular funds from HDFC have been doing badly though I was willing to stay invested. Not sure what to do with three funds that I hold from this fund house which have given poor 2 year returns.

    Fortunately Investing directly in most of funds house as become much easier and FT and ICICI have been on my radar too for long term investment point of view.

  4. Would like to correct my statement. It was not synchronized trading but front running that was uncovered in 2010

  5. With lack of transparency in this industry, it has indeed become a circus in here. The other extreme is Life Insurance industry where companies are having such hard time with non-glamorous product and strict regulator.

    Would love to hear from you regarding the reasons for shrinking Life insurance industry in India.

    Regards,
    Pradeep

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