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The SEBI restriction on AMCs charting 'indicative returns' to lure more investors is all set to limit their marketing prowess

Life has never been so tough for Asset Management Companies (AMCs) in India. While a downturn in the equities market has already thwarted their aggressive customers, the path now has been paved for even ‘play safe customers’ to turn their backs. Market regulator Securities and Exchange Board of India(SEBI)’s unpleasant New Year’s gift to the AMCs (its latest circular) has announced, “It is...decided that the mutual funds shall not offer any indicative portfolio and indicative yield. No communication regarding the same in any manner, whatsoever, shall be issued by any mutual fund or distributors of its products.” Simply stating, this bans all AMCs from luring investors by showing them a portfolio that they are mulling of building and the anticipated return thereof. Industry experts may consider this as a step taken in the right direction; but mutual fund houses are set to face the heat in marketing tactics.

The market mayhem of 2008 witnessed a free fall in the net asset value (NAVs) of all equity-based mutual funds. The agonistic display of the returns can be well understood from the fact that of the 271 open ended equity funds, whose one-year returns are listed in MutualFundsIndia.com, unbelievably only 12 have delivered a positive yield with the highest offering of just 9.75% by UTI Spread Fund (Growth). Negative returns have gone up to as high as -80.88% as delivered by JM Small & Midcap Fund (Growth). Debt funds, on the other hand, have quite clearly outperformed equity MFs. Of the 270 odd open ended debt and liquid schemes listed in MutualFunds India.com only 34 have landed their investors in the negative zone that too with a maximum of -16.16%. No doubt such performance has made investors divert their corpus to debt funds.

In this sudden rush of investors, debt funds have got themselves into a higher degree of competition to grab a larger share of the pie and have finally landed in a situation where they are using indicative returns on their indicative portfolios as a main tool to attract customers. The problem with this in the first place is that such portfolios are just indicative, not real (without an obligation on the fund manager to pay at that rate). Further, as they are not real, at the time of high competition fund managers may present inflated figures to grab more investors. Thus SEBI has mentioned in its circular, “This practice should be prohibited as the indicative portfolio and indicative yield may be misleading to the investors.”

On the contrary, Sanjeev Sharma, Fund Manager (Debt), Escorts MF avers to 4Ps B&M, “It is a direct indication that the government is trying to reduce competition between MFs and banks. The short-term yield of bonds is around 10% and that of the MFs is above that and this is giving tough competition to banks which are already facing a blow from RBI’s pressure to cut interest rates.” No doubt, his words have some thought provoking elements, but then misleading investors (with indicative yields) should not be tolerated. Thus, while its time for AMCs to find new marketing tricks, for the customers its time to be rational instead of getting carried away by just indicative figures.

Deepak Ranjan Patra

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Source : IIPM Editorial, 2009

An Initiative of IIPM, Malay Chaudhuri and Arindam chaudhuri (Renowned Management Guru and Economist).

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