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The Securities and Exchange Board of India (SEBI) has given clear instructions to the country’s Mutual Fund Industry and Asset Management Companies (AMCs) to bring major changes in their working methods. The regulator has stressed that the measure of success of fund houses should not be only in increasing their Assets Under Management (AUM) or launching new fund offers (NFOs), but it should be seen how much real profit (Alpha & Real Returns) the common retail investor is getting on his invested capital.

Fund houses should leave the race for AUM and focus on investor returns.

In recent years, participation of retail investors in the mutual fund industry through Systematic Investment Plans (SIP) has reached record levels. However, SEBI believes that in many cases, fund houses focus solely on increasing their business size and commission, while the actual performance of the portfolio lags behind the benchmark index.

The regulator clarified that the accountability and primary objective of fund managers should be to create substantial value creation in investors’ wealth and not merely collect management fees.

SEBI’s strict stance on expense ratio and NFO

SEBI has also reiterated its concern over the Total Expense Ratio (TER) charged to investors by mutual funds and the flood of new fund offers:

• Restraint on NFOs with similar themes: The emphasis has been on improving the performance of existing schemes rather than confusing investors by repeatedly launching new funds in the same theme or sector.

• Transparent charge structure: Fund houses have been asked to ensure that various indirect charges and brokerage costs do not harm the ultimate returns of common investors.

• Risk Management: Liquidity stress test norms should be strictly followed at times of excessive fund flows in midcap and smallcap categories so that small investors can be protected from huge losses in times of market downturn.

Financial literacy and instructions to prevent mis-selling

The regulator has issued a strict warning to distributors and fund houses against misselling of products. Risky funds are often sold to conservative investors with claims of guaranteed or exorbitant returns. SEBI has directed that the standards of Risk-o-meter and Product Suitability Matrix should be completely followed, so that investors choose the right scheme according to their risk appetite.

What does this mean for investors?

This strict stance of SEBI will increase transparency in the mutual fund industry in the future, reduce the cost of fund management and put pressure on fund managers to consistently deliver better performance. This is expected to directly provide better returns and safe investment environment to long-term SIP investors.