The Hindu Business Line : Is there a case for regulating MF distributors?

HERE is a query that has lately brought forth furtive glances, shrugs, defensive body language - perhaps all of these in one or two cases. This may be an innocuous poser, but one that a lot of people are trying to sidestep for one reason or other.

Yet, there is no doubt that serious attention needs to be paid to it. The question, visited many times before but worth raising again in view of recent developments, is simple: Is there a case for regulating mutual fund distributors by SEBI?

Business Line brought up the topic in the past 10 days or so before some very senior people, broadly referring to the market regulator's latest statements on the matter. To recall, Mr M. Damodaran, Chairman of SEBI, clearly indicated that many distributors are only too keen on selling NFOs (new fund offers) and not existing schemes as the former provide them with higher revenues.

The SEBI Chief referred to a scenario marked by distributor regulations, a possibility if certain practices are allowed to carry on unfettered. He, however, also held the view that the asset management industry (as represented by AMFI, the industry body that stands for the 30-odd players) has sufficient experience within its ranks to deal with the situation.

But this does seem a bit too iffy, doesn't it? After all, one does not really expect AMFI to attempt a change when the present system seems to be good enough for so many people, never mind what practices are being followed.

To be fair to the regulatory agency, it is not that the good folks at SEBI are not aware of the realities. But, as Mr Damodaran himself indicated, the market watchdog already has a lot on its hands. A closer look at the issues involved, therefore, will be possible only at a later stage.

Have you, as an investor in mutual funds, experienced such practices? Has your friendly distributor encouraged you to churn your money every now and then? If you have and have actually benefited from such a move, no one will expect you to be bothered. But if you have not, well, it may then be an altogether different story.

The point is intermediaries (some of them, that is) often do business in ways that you and I may not readily appreciate. A distributor who prompts an investor to pull out of Fund A for no apparent reason, only to put the proceeds into Fund B (typically an NFO) should be closely questioned, especially if he keeps repeating the exercise.

In real life too it is not uncommon to find an investor who nags about his financial advisor after the latter has strongly recommended redemption from a well-performing fund, simultaneously suggesting the merits of a completely new offer.

At the other end of the spectrum are investors who seem to actually enjoy getting out of old funds and entering new ones. Aiding the trend is the high-decibel advertising that some fund houses indulge in whenever their NFOs arrive on the horizon.

Chances are, a careful investor will pierce the veil and see through it all. He/she will realise that the distributor concerned is probably doing whatever he is doing because of certain selfish reasons. And that, ladies and gentlemen, brings us to a topic that should eventually be close to your hearts: Fee-only financial advisors. More on that, later.

Feedback may be sent to nilanjan@thehindu.co.in

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