At PersonalFN, we won’t stop criticising those who try to take undue advantage of gullible uninformed investors. Here’s one more article exposing the industry’s malpractices.

The Securities and Exchange Board of India (SEBI) has been nudging mutual funds to merge similar schemes. The regulator also wants them to cut down the number of NFOs they introduce in the market. It has been observed that investors get confused because of a vast number of similar offerings. What’s more is that the commission-driven approach of distributors and lack of awareness among investors results in rampant mis-selling. Distributors often ‘pitch’ NFOs which are usually offered for Rs 10, as ‘cheaper’ alternatives to existing schemes whose Net Asset Value (NAV) is above Rs 10. Investors get trapped in the plot and ignore the risks of investing in NFOs.

The irony is that mutual fund houses have been conveniently ignoring the message of SEBI, despite it being loud and clear. Do you know something? In 2016, mutual fund houses have launched 30 NFOs so far. Although the new offerings have been from across categories, mutual fund houses targeted three classes in particular—Equity, Fixed Maturity Plans (FMPs), and retirement.

Mutual funds have been giving lame excuses about launching.

Given below are some of the reasons:

• Positive sentiment about the markets
• Increasing retail participation in mutual funds
• Good response to NFOs launched in the recent past

This is the real reason behind the proliferation of NFOs
There is a tendency for investors to be swayed by the performance of markets in the immediate past. They make investment decisions based on the market trends. If the markets have fallen in the immediate past, they get bearish. On the other hand, they tend to ignore valuations and still invest if the market trend is strong. Mutual fund houses and greedy distributors take undue advantage of such biases investors have. They sell stories and increase their Assets Under Management (AUM).

You may have a look at schemes that mutual funds have released after NDA Government came to power in May 2014. ‘India recovery,' ‘manufacturing growth’ were some of the themes mutual fund houses tried to tap through NFOs. It remains for mutual fund houses to explain why their existing equity schemes don’t tap those opportunities. Similarly, why one needs a special retirement fund? Do they mean a balanced fund or an equity fund is unsuitable for fulfilling long-term goals such as the retirement?

Mutual fund houses and their distributors do not want to answer difficult questions and take a tougher route that goes through a jungle. They want flat highways. They want to grow their AUMs without taking pains of educating investors adequately—something that PersonalFN always believes in. PersonalFN has taken some initiatives to educate investors.

Mutual funds and commission-driven distributors might think Indian voters and investors are in the business of buying dreams. Like ‘acche din’, profitable investments in equity markets remains a distant dream for many investors. It is high time mutual fund houses realise this.

Let’s say this one more time—“NO to NFOs offering old wine in a new bottle.”
 

Add Comments