April

03, 2018

5 Things SEBI Needs To Do Right Away For

Mutual Fund Investors
Author: PersonalFN Content & Research Team
The Securities and Exchange Board of India (SEBI) has
safeguarded investors’ interest by making mutual fund houses
more accountable. Guidelines governing the industry are strict,
clear, and one of the best in the global context.

But there is still more to do.

Although instances of mis-selling have been curbed, they haven’t

stopped completely. Every time the capital market regulator
comes out with stricter regulations, mutual fund houses and their
channel partners find a way to achieve their objectives, perhaps,
compromising the investors’ interest.

What should SEBI’s next action plan be?

1. Tighten the noose around close-ended schemes

Soon after the capital market regulator issued strict guidelines for
 open-ended mutual fund schemes for equity and debt both, fund
houses floated more close-ended schemes.

New Fund Offers (NFOs) in the form of close-ended schemes not

only help mutual fund houses grow their Assets Under
Management (AUM), but also help escape the stringent rules
applicable to open-ended schemes.

This is a major lacuna in the regulatory framework, and in the

investors’ interest, the regulator must fix it with appropriate
guidelines.

PersonalFN has highlighted the drawbacks of close-ended

schemes on numerous occasions. Recently, it published a couple
of articles to create awareness among investors:

5 Reasons To Avoid Close-ended Mutual Funds

Close-ended NFO Factories: Should You Invest?
The capital market regulator should take strict action against the
irresponsible behaviour of mutual fund houses and their channel
partners.

When the equity indices hit new highs, it’s relatively easy to
convince, new investors. Mutual fund houses have mastered the
art of playing with investors’ psyche to grow their AUM. They
launch close-ended schemes, at a time, when valuations are
stretched and committing more money to equity is risky.
 As a result, most of the close-ended schemes underperform
compared to their open-ended counterparts. In the name of
offering stability to the scheme’s operations, “close-ended” nature
of the schemes makes them less accountable and lethargic.

2. Do away with the dividend reinvestment option

Dividend reinvestment option, in our view, is a fool’s choice!

Those who do not want regular income should select growth

option and those prefer to have occasional pay-outs, should
choose dividend pay-out option.

Let’s first understand how these options work. Under growth

options, the gains are accumulated and automatically retained
and reinvested. In dividend option, at the discretion of the fund
house, the gains are distributed among investors.

But under dividend reinvestment options, when the dividend is

announced and paid, the proceeds are utilised to buy the units of
the same fund at ex-dividend Net Asset Value (NAV).

What’s the loss?

Dividends are tax-free in the hands of investors. But the mutual

fund houses have to pay the dividend distribution tax before
paying any dividend. Therefore, dividends aren’t totally tax-free.

Even as far as equity-oriented mutual fund schemes are

concerned, the dividend option has become less attractive. As you
may know, the Union Budget 2018 introduced dividend distribution
tax @ 10% on equity-oriented mutual fund schemes.

Do you still think, dividend reinvestment option should stay?

Hopefully, the capital market regulator would also think on the

similar lines.

PersonalFN has always encouraged investors to select their

options carefully. Read some of the pertinent articles by clicking
on the links below:

Should You Opt For Dividend Option Offered By

Equity Funds Now

Choose between dividend and growth option wisely

4 Myths About Dividends Declared By Mutual Funds
Debunked
3. Discontinue monthly dividend options in balanced funds

As interest rates fell substantially over last three years, and

sharply post-demonetisation; mutual funds started to attract
conservative investors to balanced funds backed by a skewed
narrative.

Since conservative investors have a strong preference for

dividend-pay-outs, a few mutual fund houses launched monthly
divided options.
 (Image source: freeimages.com)

Recently, before the new financial year, many of mutual fund

schemes paid dividends before dividend distribution tax on equity-
oriented mutual funds being applicable. They were able to do so
with huge gains made over last three-four years.

But such options are always misleading.

Under challenging market conditions, how many of these fund

houses will be able to sustain the quantum of dividends they have
distributed every month till now?

And let’s not forget, even if you as investors earn dividends and
make losses on your capital, due to fall in the NAV post dividend
distribution, the net effect is not positive.

4. End ‘copy-and-paste’ of liquid and liquid plus schemes

Observe carefully, many fund houses have similar liquid funds and
liquid plus schemes (also known as ultra-short term schemes) in
their product bouquet. It is challending to figure out the difference
in their mandate and portfolio preferences.
But in this regard we are hopeful that the regulator will prudently
regulate, as it did for scheme mergers of similar equity-oriented
funds from the same mutual fund house.

5. Need to cap expense ratio of arbitrage funds

Arbitrage funds are classified as equity-oriented schemes for

taxation purpose, but their return profile is comparable to that of
liquid and liquid plus schemes (also known as ultra-short term
schemes).

But their expense ratio is often near 1% –––rather high. Large

commissions are paid to distributors to sell these funds.

Until now, they were marketed as the tax-efficient alternatives to

short-term debt schemes.

But soon after the government imposed dividend distribution tax

and the long-term capital gains tax on equity-oriented schemes,
they have lost their appeal.

PersonalFN has written some enlightening articles on arbitrage

funds—comparing them with other available alternatives and
explaining pros and cons of investing in them. Read:
Arbitrage Funds vs. Liquid Funds vs. Savings Bank
A/C: How to Park Your Short-Term Funds

Arbitrage Funds: Do they work too hard for too
little?
The capital market regulator is playing a critical role in creating a
fostering environment for all stakeholders: mutual fund houses,
distributors, and investors.

Nonetheless, it is essential things that are beneficial for investors’

are done. If investors are happy, educated about invested, money
will continue flow into mutual funds. Keeping this in mind, the
regulator’s action on all the above mentioned issues would be
crucial.
PersonalFN has always placed investors’ interest first!

We advise clients backed by thorough independent research,

recognising their: risk profile, investment objectives, financial
goals, and the investment time horizon before goals befall, among
many other facets.

PersonalFN believes, mutual fund investing is a serious business.

At PersonalFN, our research team tests every mutual fund
scheme through extensive scrutiny by a set exhaustive research
process, consisting of both quantitative and qualitative
parameters.

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