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AMFI sting study finds rebating system still in place — Mutual fund agents `guarantee' returns

Dinesh Narayanan

Mumbai , Jan. 11

AN investigation by the Association of Mutual Funds in India (AMFI) has found that about 75-80 per cent of mutual fund distributors lured investors into thinking that the plans they were buying "guaranteed a minimum return" on investment.

The probe also found that a large number of distributors were still using `rebating' system to woo investors. Rebating, now banned by AMFI, is essentially passing back to the investor his expenses such as demand draft charges.

An industry source closely associated with the pilot study - described as mystery shopping - told Business Line that the project attempted to determine whether AMFI members were following the organisation's 14-point code of conduct when soliciting investments. "It was an experiment and the result does not appear to be very precise. However, the fact remains that a fairly large number of investors are led to believe that a minimum return (on investment) is assured," the source said.

The AMFI Chairman, Mr A.P. Kurian, said, "This is a feedback from the market. We have to now educate distributors and investors about returns (from mutual funds plans)."

A couple of months ago AMFI set up a panel of compliance officers from four asset management companies to identify an agency to monitor investors' meets organised by mutual funds. The pilot study was restricted to major cities. The agency trained volunteers to pose as buyers of investment plans and ask probing questions at such gatherings. A majority of the investigators concluded that distributors were assuring returns.

Another industry insider told Business Line on condition of anonymity that mutual fund distribution was indeed getting murky, as competition was cut-throat. Aggressive distributors were heaped with incentives, some of them bordering on the limits of ethical practices, to make investors part with money, he said.

AMFI now plans to extend `mystery shopping' to smaller centres in the next phase. It is in the process of retraining volunteers to minimise error in judgement and increase accuracy of the results.

On the issue of rebating, Mr Kurian admitted that some instances did occur. He said the AMFI committee would form a view on all issues after discussing them threadbare. The panel would also take a view on extending the study to other places.

The booming stock market shook up a rather dozy mutual fund industry early last year. The Bombay Stock Exchange's benchmark index, the Sensex, has risen more than 80 per cent since January 2003 to touch its record high of 6250 on Friday.

Over the year, assets managed by mutual funds grew more than 60 per cent to nearly Rs 1.2 lakh crore, excluding about Rs 20,000 crore managed by UTI Mutual Fund. Total assets that these funds managed in January 2003 was about Rs 75,000 crore, excluding nearly Rs 45,000 crore of the undivided UTI.

During the period asset managers sponsored about 10 new `growth' plans and a dozen `income' funds, all of them intensely marketed to investors.

While so far thanks to the bull run in stocks, many plans have been able to pay reasonably good returns, what a downturn could do is yet to be tested. As all mutual fund promotional literature ends, "Past performance is no guarantee of future results." .

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