Mumbai based IFA Association FIFA has submitted its views on the Sumit Bose committee report to SEBI recently. FIFA has joined hands with a number of other local/regional associations of IFAs to form an United Forum to represent IFAs across the country and submitted their consolidated feedback to SEBI.
Here are FIFA’s views on the committee’s recommendations related to product structure.
Committee: The benchmarks should be made more relevant than they are today. Schemes should be periodically tested to see if the asset allocation is conforming to the benchmarks chosen.
FIFA: We believe that relevant benchmarks are being used. We agree the schemes should be periodically tested for asset allocation to be in conformity with the offer document. The asset allocation as per the offer document needs to be tested rather versus benchmark. The appropriateness of the benchmark needs to be checked at the time of product approval and thereafter at periodic intervals.
Committee: Similar schemes from the same fund house should be removed. Some of these were launched in the NFO boom to harvest the 6% marketing cost. Such duplicate funds should be merged with others in the same fund house since they confuse investors
FIFA: Identical schemes from the same fund house having the same objectives and investment mandate should be merged. However, introduction of new innovative products should not be stifled.
Similar is an ambiguous term. A mutual fund may have two diversified equity funds with different investment strategy and philosophy. Considering that investment strategies and philosophies affect the performance of a fund over different time periods, mere name or investment objective cannot differentiate between different schemes. It should be left to the respective fund houses to take a call on this.
Committee: The regulator should ensure that the mutual funds are true to label. This means that the investment mandate in the information memorandum should be reflected in the active portfolio of the fund.
FIFA: We agree
Committee: The regulator should consider measures to encourage retail participation in ETFs.
FIFA: We don’t believe regulator should be promoting any asset class/category. Further, it must be noted that In the Indian context empirical evidence suggests that actively managed funds have significantly outperformed ETF's.
Committee: The regulator should put in place a free-look policy and define the period for which it will hold.
FIFA: A free look policy is not a good idea for an investment product. Investors, knowing that they can get out of the scheme, will take the investment process lightly. They need to be encouraged to do their homework well before investing in a product. The purpose of a free-look or trial period for mutual fund investments appears unclear. Most mutual funds are open-ended products that allow investors to exit any time unlike many insurance products where investors are locked in for longer periods.
Allowing investors to wait for a couple of weeks before confirming their investment may cause them to base their decision on short-term market fluctuations and prompt them to ‘time’ the markets. Besides, it may be misused by investors if there is a fall in the market immediately after making an investment.
On the process side too, the free-look period can throw up a number of problems. Units are allotted based on daily NAVs. So the question that will arise is on what day’s NAV should be taken to allot units; NAV of Investment day or NAV after free look-up period ends. Investors may demand the NAV that prevailed when they first invested, before the free-look period, especially if the NAV rises. Another question pertains to how the investor’s money will be invested during the free-look period.
