SEBI’s New Rules on Managing Schemes and Disclosing Returns for Mutual Funds

We all know what a Mutual Fund is and how it works. Many of us even invest in Mutual Funds regularly. So, by now we must know who “A Fund Manager” is and also what the role of the “Asset Management Company (AMC)” is. This article is about the new rule that SEBI (Securities and Exchanges Board of India) has imposed on all AMC’s to ensure that the Customer Interest is well protected.

What are the New Rules?

Rule No. 1: - SEBI has instructed all AMCs to appoint separate fund managers for each of their schemes, unless the investment objectives of two schemes are the same and there is a 70% or more overlap in terms of asset allocation & portfolio.
Rule No. 2: - SEBI has instructed all AMS’s to disclose on their websites every month, the returns provided by a fund manager for all the schemes managed by him.
Rule No. 3: - SEBI has instructed that, if the difference in annual returns offered by two different funds managed by the same fund manager exceeds 10%, then the AMC has to disclose the explanation for the same on their website

Is this Rule Significant?

Of Course Yes. Lets see why:

It is practically very common to see two or more MF Schemes that are managed by the same fund manager. As investors, we trust the fund manager to make the wisest or best possible investment decision on our behalf. If the fund manager is managing multiple funds, the performance of some of those funds may suffer if the fund manager is overly involved in any of the other funds. So, it is in the best interest of the customer that, the fund manager gives his 100% interest and effort in managing his funds.

Why did SEBI do this?

SEBI as you might be aware, is the supervisory body of all stock market related activities in India. They may have given this ruling to:

1. Ensure that Customer Interest is protected
2. Ensure that a Fund Manager does not take contradictory positions in two different funds. For ex: The same guy may be managing a large cap and a contra fund. As per the investment objective of the large cap fund, he may be buying large cap stocks. But, due to market sentiment he may feel that large cap stocks may take a hit. As for the Contra Fund, he is free to take any position he wants, so he sells all his large cap holdings in that fund and buys mid & small caps. Isn’t this a conflict of interest? How can he be true to the investors of the large cap fund when he knows that large cap stocks are going to take a hit?
3. Ensure that Customers can easily track and compare the performance of funds managed by the same individual. If I see that one of the funds managed by a fund manager is giving stellar returns while another of his fund is performing in an average fashion, I will obviously decide to sell my holdings in the average performing fund and move over to the top performing one
4. Ensure that AMCs do not flout new schemes on the back of a fund managers credentials and then ignore the fund

At the end of the day, it is our hard earned money and it is the responsibility of such supervisory bodies like SEBI to ensure that the customer interest is protected at all times.

This will definitely come as welcome news to all investors of Mutual Funds.

Happy Investing!!!