Transparency and accountability are two words that exist merely in the lexicon in most professions in India. The mutual fund industry is no exception. Sebi has had to occasionally crack the whip to ensure that retail investors do not get short-changed while investing in mutual funds.

Notably, assets under management (AUM) of mutual funds  which was growing 50% y-o-y, has declined sharply by 17% since August, notwithstanding positive market conditions. 

Is it purely co-incidental then that this came at a time when Sebi, in an unpopular (among mutual funds and distributors) move decided to do away with entry loads that were levied on investors? Entry loads came into being when Sebi earlier abolished initial issue expenses.

This Sebi initiative was cleverly side-stepped by simply changing the nomenclature to entry load. An exit load within a specified time frame is understandable given the dynamics of the mutual fund industry in India, but the levy of an entry load was always debatable.

Understandably, the mutual fund schemes with the maximum entry load (read as distributor commissions) were invariably peddled the most aggressively to clueless investors.  

Now, Sebi has opened up new options for retail investors whereby they can make direct application sans an entry load or simply trade it on the stock exchanges through a broker/online account like a stock.

Given that not too many mutual funds do much more than lip service in terms of investor education, which incidentally is in their best long-term interests, retail investors still prefer to be guided by an ‘advisor’ who also doubles up as a distributor.

Now, Sebi has no argument with the retail investor and the advisor negotiating an advisory fee as it is only fair that professional inputs should cost. If the advise turns out to be useless, the retail investor retains the option of switching advisors unlike an entry load levy which is akin to tax deducted at source (TDS).

In yet another good initiative, Sebi's mutual fund advisory committee is looking at reducing the fund management fee, which is currently 1.25% as asset management charges for the first Rs 100 crore garnered by a scheme and 1% thereafter....

Given that many of our funds were caught with their pants down when the markets crashed in 2008, it is about time that the retail investor does not get docked with a ‘Mis’-Management Fee.

Finally, in what I see as a very progressive move, Sebi has also asked mutual funds to get their reports audited once in two years. Besides this, they need to submit the systems audit report to the regulator and also to place the systems audit report and compliance status before the trustees of the mutual fund. The deadline for this audit has been set for September 2010 for the period 2008-2010.

Will all these initiatives help the mutual fund industry or retail investors is a question I have often been asked on television shows. My response has always been - the two parties are inter-dependent in the market place, and, hence, in the long run, these initiatives by Sebi will benefit both.  

Take a bow, Sebi chief and team. Its a job well begun....

(Ashok Kumar is promoter, theIPOguru.com and director, Lotus Knowlwealth. The report is powered by www.theipoguru.com)

Also Read: Mutual Funds & Myths – Part I