About a month back, I wrote about SEBI's proposed enhancement of the net worth that a mutual fund company needed to have. Currently, the limit is Rs 10 crore but SEBI is planning to increase this to Rs 50 crore. As I'd written at that time, this may appears to be something that would help make investments safer. However, this is an illusion, just a comfort factor that will play no role in an actual crisis. In reality, the net worth will just end up digging a moat around the business, making it difficult for more players and limiting competition.
Over the last few weeks, I've had many interactions with people in the mutual fund community on this issue that have convinced me that increasing the net worth requirement will do tangible damage to the future of mutual fund investing in India in ways that will directly impact investors. In its current form, the Indian mutual fund industry is now effectively almost two decades old. Over this period, the industry has grown to 39 currently operating mutual fund companies managing about Rs 8 lakh crores of investors' money. However, when you stand back and try and look at Indian mutual funds, one is stuck by the essential sameness of all major players.
There is a basic template for what kind of funds an asset management company runs, how it deals with investors, how it deals with advisors and what kind of a message it carries about itself to the world. Practically the entire fund industry is stamped out of this same template, with any new approach to the investor limited to attempts to tinker a little bit with the AMC's public image. Even with the upheaval that mutual funds are facing because of the abolition of entry loads and the avalanche of reforms that SEBI has unleashed, there isn't any revolutionary thinking about whether mutual funds can offer a new deal to its customers and to financial advisors.
What could this new deal be? Perhaps it could finally be a comprehensive investment solution rather than products that are sold piecemeal? Or a new approach to investor education and investment selection. Or a radically different type of customer service delivered in an innovative low-cost way. What does all this have to do with net worth? Only that small, new fund companies are much more likely to try and break the mould rather than just rely on size to be a me-too business.
Even in recent years, it's been the smaller or at least newer AMCs like Benchmark or Quantum or Peerless that have tried to do something differently. Ideally, a fund manager or another investment professional with a good track record should be able to get hold of some start-up capital and start a specialty AMC. That would be that much more difficult if a capital Rs 50 crore is needed just to buy an entry ticket.
The net worth idea basically arises from the notion that a fund house's own capital has some connection to the fund's capital; that in some sense, the AMC's own capital stands behind the fund. This is wrong, to put it very simply. It should be crystal clear to all investors that the fund is there only to provide investment management services for its customers. All the returns and gains as well as the risks and losses are the customers' alone.
This article was originally published on June 18, 2010.
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