Sir, though I am investing in MFs but still I am concerned about safety of money invested in MFs (I understand the risks involved: blue, yellow and brown); my queries are as follows;
- Lot many finance companies in more recent times have duped the money of investors through their chit fund/ponzi investment schemes and some of these are also into MF business. Is it possible that any MF/AMC dupes the money of investors?
- What is the possibility of fund manager being managed by politicians` pressure/giving bribe to purchase stocks of poor companies?
- It is more reliable to invest with government backed AMC (SBI, LIC etc ) compared to private players to safeguard money?
- Is the investment in big AMCs with high AUM more safe as compared to smaller AMCs?
Hi Abhijit, must say all your questions are very well thought out! Will answer them as I can:
Yes, it is possible for any Mutual Fund/AMC to dupe the investor by collecting money and intentionally investing in the wrong instrument or in the case of equities, intentionally investing in a company that has no long term future.
While theoretically, the above is possible, the reality is that it is extremely difficult for Mutual Funds to do this. Market forces, press write ups and strong regulations and regulators will prevent such an eventuality.
Duping in the above manner is very different from being duped by wrong promises. Therefore, you should be alert to the messages given by your financial advisor and you should also be aware of the investing practices that the Mutual fund intends to follow and what they actually do. I would strongly advise you to go through the factsheets of the funds you have invested in so that you know exactly where your money is being invested by the fund. If you feel that a fund you have invested in has started taking strange calls and is not true to its label
, then you can always withdraw your investments or complain to SEBI about the same.
On the possibility, of politicians forcing fund managers to buy certain stocks; it could be happening, we don’t know for sure since, thankfully, we have never faced such pressure. And should such an eventuality occur, Quantum will surely and respectfully ask the politicians to mind their own business and let us mind our own ☺
To answer the question on government backed entities being safer, you should invest in a fund which follows a good process for investing, has a long history of managing money, has experienced different market cycles, is focused on cost of investing and finally keeps a good communication channel open with its customers. You may read this article
where we have given some inputs on mutual fund selection.
Whether the fund house is from the public sector or private sector does not really matter. For instance, UTI was a public sector fund- but went through a time which was very tough on its investors. There have been instances in the past where public sector mutual funds had launched schemes with guaranteed returns and could not really fulfill those promises. There have also been instances where the private sector failed to meet its commitments to investors.
So yes, while it pays to see the pedigree of the parent – fund processes, etc. whether it is sticking to its promises and long term consistent performance should be the primary criteria for fund selection.
There is a myth and a very popular one unfortunately, that the larger the fund house, the safer it is. Just because the doctor is rich, doesn’t mean he’s necessarily good, he could have inherited the money! ☺ What you need to see is the performance or track record of the fund, and whether the fund is true to its investment philosophy, even when market conditions are unfavourable. We have detailed articles on this in the past. Here is a link to the latest one
As explained earlier, it is also another myth that a government backed fund house is safer, the role of an AMC in the mutual fund industry is to manage investors’ money; the performance of the scheme depends on how well the money is managed. Now you could find great fund managers and investment processes in organizations not backed by the government or a large bank too!
Subbu's Solution is authored by I. V. Subramaniam. I. V. Subramaniam is a director of Quantum Asset Management Company Private Limited.
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