The
regulator must look beyond just lowering the expense ratios of mutual funds to
safeguard the interest of investors, says Pankaaj Maalde.
Abolish dividend reinvestment option
The dividend distributed by equity funds will now be taxed at 10%,
reducing investors’ returns. This will make the dividend reinvestment option of
equity funds unviable because it will saddle the investor with a tax he can’t
avoid. Even earlier, the dividend reinvestment options of equity funds had no
advantage over the growth option. It is time these plans are scrapped to
protect the interest of lakhs of investors.
Stop monthly dividend plans of equity funds
Demonetisation led to huge inflows into mutual funds. To attract
investors, fund houses launched monthly dividend options in balanced funds.
Being equity funds, they carry high risk and should not be missold. However,
they have been used to lure senior citizens in the name of regular
income—‘higher returns compared to fixed deposits’. But the schemes cannot
deliver dividends if the market tumbles. Also, it is unethical to declare
dividend from the investment amount and not from the gain. So, there is no
‘guaranteed’ income. In fact, most investors are not aware that even their
principal can erode, if the market falls. Sebi needs to immediately stop such
schemes.
Merge multiple liquid, ultra-short-term plans
from same fund house
Most fund houses offer two liquid and two ultra-short-term debt funds.
But there is hardly any difference in the portfolio of the two plans offered
under these categories, except their expense ratios. Multiple products simply
help fund houses garner more businessdistributors push expensive plans to earn
higher commission. In fact, you can judge how sound your financial adviser is
by checking which liquid fund plan he recommends. If it’s the one with the
higher expense ratio, then he is only looking at earning a higher commission.
Sebi needs to ask fund houses to merge multiple plans of liquid and
ultra-short-term schemes.
Stop closed-ended equity funds
Fund houses try to encash the market tops by launching new fund offers
(NFOs). The NFOs’ names and themes are decided according to the market
conditions to attract maximum investors. On the one hand, Sebi wants
standardisation of mutual fund products and, on the other, it gives permission
to launch NFOs that may be very similar to the existing schemes of fund houses.
The market regulator should look back to 2008-09 to find out what happened to
the NFOs launched then—what returns did they generate? Fund houses too should
clearly state why they are launching an NFO, if the new scheme is in no way
superior to existing schemes.
Lower the expense ratios of arbitrage funds
Arbitrage funds will be among the worst hit categories on account of the
just-imposed long-term capital gains tax on equities, given their already
limited returns. The management charges for these funds are very high—1% in
case of regular plans—and fund houses pay large commissions to distributors to
push these funds. In today’s market, the maximum return these funds can
generate will be around 6%. This does not justify their high charges—made worse
by the LTCG tax. This category will lose its importance if the charges are not revised
immediately.
