BUT IS IT TOO LITTLE TOO LATE?
SEBI is now mulling the idea for separating the corporate investor from retail investors in every scheme of mutual funds, so that latter does not suffer at the expense for former. Even, if it suffers it will now come at a cost.
Retail investors until now always had to pay a higher entry load compared to Corporate Investors. The exit loads were also biased to favor the Corporate Investor more than retail investor. It was easier for a Corporate investor to enter and exit a Mutual Fund scheme at minimal transaction costs. However, that lack of barriers came at the expense of retail investors. Many companies park their Working Capital and short term funds in various mutual fund schemes to seek higher returns for otherwise idle money.
Corporate Investors
Corporate Investors until now had it easy while investing in Mutual Funds of major fund houses. They were offered parking of their idle funds at huge concessional rates compared to retail investor.
Corporates could invest and withdraw funds with ease providing them the ample liquidity, which they relished upon.
Corporate Investors were also provided extra benefits in terms of ease of withdrawal with negligible or zero penalty for early withdrawal of funds.
With the advent for ECS, RTGS and various quick settlement facilities the turnaround time required to process the withdrawals of Corporate funds also reduced considerably. It only made Corporate Investor pour in more money to their existing investments.
RTGS provided ample opportunity to them to receive redemption funds within shortest possible time.
So what was initially an investment vehicle for idle funds could have also evolved into an easy mechanism for producing higher returns with minimal transaction costs.
Retail Investors
It was easier for a Corporate investor to enter and exit a Mutual Fund scheme at minimal transaction costs. However, that lack of barriers came at the expense of retail investors.
They were charged huge sums for early withdrawals compared to corporate Investor. When a Corporate investor exits a scheme (redemption), then the securities held by the fund have to be sold to pay the Corporate Investor in Cash. This results in erosion of NAV. It also results in selling costs which are bourne by the remaining customers (existing unit holders).
Since the barriers (costs as well as time required to encash) to exit a scheme are so less that Corporate find it simple route to make quick buck and exit.
All through this downturn in assets of all major fund houses, retail investor has shown his faith in the abilities of money managers. They have not panicked and not followed a herd mentality unlike Corporates. A Major portion of 47,000 Crs of outflows in October's AUM has been in Fixed Maturity Plans which are favorites of the Corporate Investors.
Very few retail investors might have redeemed their portfolios in such harsh conditions.
In fact they might have stopped believing in the advices and tips of their favorite Grocery Shop guy who sells less Grocery than stock tips.
In fact during such times retail investors turn to proven records of top Money Managers and trust their instincts more than Grocery Shop advisor with stock TIPS.
Fund Houses (Asset Management Companies)
Even for fund houses it was easy money at cheap rates and in huge amounts. It was a win-win situation for both Corporates and Fund houses. The lone suffer in this party was the gullible and naive retail investor.
It is easy for Fund houses to collect Rs 100 from Single Corporate Investor than to collect Rs 5 from 20 retail investor located at different locations.
The Corporate Investor fulfilled the insatiable desire of marketing and money managers to pump up their AUM. So long the party lasted everybody was cheering. Now the same corporate investor has exited various schemes which were designed for making their life easier and returns higher. The money managers could not keep pace with double whammy of erosion of NAV along with outflows of same easy money.
Many fund houses struggled to keep pace with redemptions. Some had to knock on the doors for the regulators.
Last thing you would wish to do as a fund house.
SEBI
SEBI had all the key records, data with it all along.
This practice was on since many years. Just that the regulator has now chosen to act upon it now, is not surprising.
SEBI at times acts much like the cops in movies which arrive on the scene after the crime has been committed.
SEBI on its part needs to be more proactive and have a firm grip on the nerve of industry. It may also be the case that it does not have the necessary manpower and required expertise to cater to the huge surge the Mutual Fund Industry.
The regulator woke up after close to 47,000 Crs (See October AUM figures) of erosion and withdraws of funds from the Industry.
However, to be fair to the regulator many people do not like regulatory interference during uptrend in the markets. It’s only during downtrends that regulators are respected and existing regulations are adhered to.
If regulators intervene during uptrend in the markets they are viewed as unnecessary interference and supervision.
SEBI has decided to implement either
Option 1:
Same entry fee for both Corporate and Retail Investor OR
Option 2:
Create separate investor classes and manage both separately within main fund so that both the parties are firewalled.
Onlinemutualfund (OMF) recommends the Option 2 and hopes SEBI and adopts it.
Second option, is to be more reasonable and sound, as it keeps all the players happy.
Hope right decisions are made and retail investors are again a happy lot.
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