Do you hold more close-ended funds that the open-ended diversified equity funds?

Do the majority of schemes in your portfolio underperform their benchmark indices?

If 'yes' is the answer to most of the above questions, you are perhaps the victim of mutual fund mis-selling.

This calls for your immediate attention and perhaps you urgently need to change your mutual fund distributor, who is serving indecorously as an adviser.

What exactly qualifies as mis-selling?

Mis-selling means any sale of units of a mutual fund scheme by any person, directly or indirectly, by:

• Making a false or misleading statement, or

• Not taking reasonable care to ensure suitability of the scheme to the buyer

• Concealing or omitting material facts of the scheme, or

• Concealing the associated risk factors of the scheme, or

What’s the primary cause of mis-selling?

Mis-selling often happens because mutual fund distributors act in a dual capacity —they represent mutual fund houses while pretending to keep the best interest of investors. But this masquerade drops when investors realise they are losing their hard earned money.

As reported by Mint on January 9, 2018, 6 out of India’s top 10 mutual fund distributors, when ranked on the commissions earned, are banks. And banks, as you may know, have been mis-selling mutual funds. 

A dedicated team of sales professionals who serve as relationship managers have been trained to promote third-party products that earn them more fee-income. These teams, known by whatever name, try to cross-sell you investment products without truly recognizing your needs and risk profile. Their only aim is to maximise revenue and achieve their monthly targets.

More you interact with them; higher are the chances that you will fall prey to their sugary sales pitch.

They fulfil your expectations and serve you promptly so that one day they can make you sign a cheque for the mutual fund scheme/s you don't require.

Even mutual fund houses offer banks great support. Sometimes, they also assign a dedicated marketing manager per city/cluster which assists bank relationship manager to close the sales call.

[Read: Why Investing In Mutual Funds Through Banks Is A Bad Choice]

And banks are not alone.

Corporate mutual fund distributors, their sub-brokers, individual distributors, mutual fund agents and some of the newly founded robo-advisory platforms, all work for commissions.

What is SEBI doing?

In the recent times, the Securities and Exchange Board of India (SEBI) has tried shielding investors from the malpractices by imposing stricter regulations.

As per the revised consultation paper issued on Amendments/Clarifications to the SEBI (Investment Advisers) Regulations, 2013, June 2017, there should be a clear demarcation in the advisory and distribution of mutual funds.

The highlights include:

• The consultation paper recommends that the investment advisers must always act in the interest of investors.

• There should not have any 'reward' arrangement with the mutual fund houses.

• Advisers must consider ‘product suitability’ as the most critical factor when advising their clients on mutual fund investments.

• They are required to take into account the client’s needs and exercise due diligence.

• They are expected to demonstrate professional skills and financial-advisory acumen.

SEBI is resolute in pushing for norms in this regard, which may be effective from April 1, 2019.

Although SEBI has proposed to disallow mutual fund distributors from offering investment advice; they can explain the product features to potential investors.

Moreover, mutual fund distributors can’t offer any advice on financial planning. That being said, the suitability of the product to the investors should be their primary focus. 

While SEBI is working incessantly to protect investors’ interest, investors need to be vigilant too. Otherwise, protecting one’s interest would be difficult for the capital market regulator alone.

How can you save yourself from mis-selling?

Here are a few quick points among many others…

1. Deal with only a SEBI registered investment adviser

2. Ensure that investment adviser understands your risk profile

3. Ensure that the investment adviser conducts a thorough need-based analysis

4. Check how the investment adviser backs the fund recommendations

5. Recognise his business model and post-advisory support

6. And whether he guides you to invest in direct plans

[Read: Everything You Need To Know About Mutual Fund Direct Plans]

It is important that own an optimum portfolio consisting of time-tested mutual funds that are managed by an experienced fund management teams following robust investment processes and systems. And it’s pivotal to invest as per your risk profile --- while you may invest via  SIPs (Systematic Investment Plans) or lump sum.

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As a result, it’s quite possible that you might be holding mutual fund schemes that are not in line with your risk appetite or unsuitable to fulfil your financial goals.

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