SEBI's Mutual Fund Disclosure Rule Sparks Controversy

Posted On Wednesday, Sep 28, 2016

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With SEBI's mutual fund commission disclosure deadline approaching this week, we have encountered an uptick in commentary from elsewhere that brings to mind the subject line above, courtesy of David Ogilvy (known as the "Father of Advertising"). In our opinion, the commentary has ranged from patronizing at best to downright appalling at worst. If you as a mutual fund investor aren't outraged, you should be.

Regular readers are well aware of our stance on commissions. We have paid zero commissions since inception because our steadfast belief is, always has been, and always will be that investors should know how much they're paying for the services they are getting.

Is that such an unfair stance? Apparently some folks think so! SEBI's requirement has generated a flood of commentary from investment houses suggesting that the disclosure may drive investors away from using distributors. According to them, this is a bad thing because, as they have stated on the record, they believe that a majority - if not all - of you are either not bright enough or not mature enough to pick mutual funds on your own.

We wholeheartedly disagree.
First, let's distinguish between a mutual fund and individual stocks. Warren Buffett has often expressed his belief that individual investors who cannot devote a considerable amount of time and effort to investing should not invest in individual stocks. Instead, he says, investing in funds is a great way to get exposure to the equity markets while at the same time diversifying your risk.* We couldn't agree more with this sentiment.

Where we draw the line, however, is in recent commentary we've seen from fund houses that extends that idea to the selection of the mutual funds themselves. Essentially, we don't believe that it is beyond your capabilities to "diversify your diversifiers" - in other words, we don't think you are incapable of selecting the funds which are already tasked with diversifying your risk. As long as you spend some time understanding the fund house and the particular fund scheme, as well as some time understanding some basic asset allocation concepts, you are perfectly capable of investing in direct plans yourself and saving yourself a considerable amount of fees. Here are some basic questions to ask about any fund:

People
What is the background, what is the experience?
Philosophy
Is there a clearly defined investment philosophy across all market situations or is this a ride-the-wave, "bull-market" manager?
Process
What is the research and investment process and how reliable is it?
Performance
Given the process, is the performance as predictable as it should be?


Secondly, don't get us wrong - good financial advisors can be well worth the fees they charge as they will help you with a range of investment or taxation issues that are beyond even the most educated non-investment professional's understanding (or at least beyond their desire to understand). As such, those advisors who have your best interests in mind should welcome this new requirement. Now that you know the magnitude of commissions being earned, you can determine for yourself whether the amount of return you're sacrificing is worth the value those advisors are adding to your financial well-being. You'll be able to decide whether that price makes it worth your time to get the basic understanding of asset allocation and individual fund houses that's required for you to invest in direct plans on your own. If you decide you don't wish to devote that time, then by all means find yourself a good advisor. Absolutely nothing is preventing you from doing that.

Good financial advisors, then, should thrive. It's the others who have cause for concern. Going forward, this dramatic change simply means that you'll now know the price you are paying for a service, just like you do for presumably every other purchase you make on a daily basis! We fail to understand how this is - in literally any way, whatsoever - a bad thing for you. It will certainly prove to be a bad thing for those distributors who have exploited the hidden commission era so they can maximize their own piece of your pie.

For you, however, it is an unquestionably welcome development. So join with us in ushering in this new era of transparency in the Indian Mutual Fund industry, and credit SEBI for a job well done!

Regards,

Team Quantum


*Note that Buffett has generally advocated index funds to his largely U.S. audience because active management in developed markets like the U.S. has been of questionable value in recent years. See for instance, this article from May of this year. We think the data show that a strong case remains for active management at least in India and likely other emerging markets, however.

Disclaimer, Statutory Details & Risk Factors:


The views expressed here in this article / video are for general information and reading purpose only and do not constitute any guidelines and recommendations on any course of action to be followed by the reader. Quantum AMC / Quantum Mutual Fund is not guaranteeing / offering / communicating any indicative yield on investments made in the scheme(s). The views are not meant to serve as a professional guide / investment advice / intended to be an offer or solicitation for the purchase or sale of any financial product or instrument or mutual fund units for the reader. The article has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Whilst no action has been solicited based upon the information provided herein, due care has been taken to ensure that the facts are accurate and views given are fair and reasonable as on date. Readers of this article should rely on information/data arising out of their own investigations and advised to seek independent professional advice and arrive at an informed decision before making any investments. Please visit – www.quantumamc.com/disclaimer to read scheme specific risk factors.

Above article is authored by Quantum.

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