On April 28, 2021, SEBI introduced a new rule. They mandated key employees of asset management companies i.e. mutual fund companies to invest about 20% of their salary in the schemes they run or oversee. They’ll have to tie it up for 3 years or for the duration of the scheme, whichever is shorter.
Basically, it’s a diktat forcing fund managers and other key personnel to have their skin in the game.
Rumour has it that SEBI only acted after Franklin (an asset management company) wound down 6 different mutual funds overnight sending ripples across the entire sector. Reports allege that the fund managers, in this case, took on inordinate amounts of risks, acted recklessly, and pulled out their money when things took a turn for the worse. A few days later they wound down the funds leaving hundreds and thousands of investors in the lurch. There were no consequences for their actions. No penalties, no harm, and no damage done.
Because remember, fund houses are paid despite how their schemes perform. Most companies seek a fee (1–2% of the sum you invest), without promising much. According to one report from 2019, 82% of active large-cap funds have underperformed the S&P BSE 100 index, which includes the 100 largest Indian companies. Imagine that — You could pick a passive basket of the 100 largest Indian companies and still outperform those who are paid ludicrous amounts of money to actively manage a mutual fund scheme.
Bottom line —Most fund managers aren’t really that good at managing money and it’s probably why you’re seeing some backlash from the incumbents.
SEBI wants mutual fund companies to have skin in the game. But other key stakeholders in the industry want the rule gone. The only question remaining —What do you think?....
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