What's Mutual about mutual funds seriously ?

Jellyfish is not a fish. Guinea-pigs ain't pigs either. These are called misnomers. And let me add another word - mutual fund. 

Every name has a meaning. It's supposed to, at least, reflect what it is about. Not India's about Rs 8.8 lakh crore mutual fund industry. There is actually nothing mutual about this, aha -- to borrow a famous tagline. It's your money. It's your risk. It's your loss. The list goes on ...

At the core of this industry was and still today is a beautiful solution for small investors. Everybody tracks the BSE Sensex. You would know it's a barometer that is composed of 30 blue chip companies. At current prices, it would cost you a total of Rs 27,000 to buy one single share of these 30 Sensex constituents. 

However, a mutual fund allows you to buy the same portfolio of stocks with as little as Rs 100. Isn't that beautiful yet convenient?

Fractional ownership. Yes. That's it. You can buy as much as your finances allow. Somewhere between this idea and now, lots of things went horribly wrong.

And the mutual fund industry cannot say it never saw this coming. Because truth be told they were the ones who started the malpractices in the first place. So, today what you see is a pale and impoverished shadow of what it was destined for.

Mutual would mean at least a part of everything would be shared. Here's how nothing is MUTUAL ...

A MIRAGE CALLED MUTUAL FUND

When asset management companies take your money and manage it, they put nothing on the line from their end. That's why there is nothing mutual, according to me.

Look around yourself. Your family, friends or colleagues are there perhaps. Ask them about their experiences with mutual funds. I guarantee just 2 out of 10 will have something good to say.

Mutual fund portfolios may be swelling thanks to the regular dose of corporate money chasing that extra bit of yield but retail investors as measured by folios are falling fast.

Over the past few months, the market regulator Sebi has practically done everything to make the mutual fund industry happy.

Fund houses have often complained about regulatory issues and operational difficulties in attracting investors, although the Securities and Exchange Board of India (Sebi), which also regulates the country's mutual fund industry, has made advertisement code risk-based, given them extra incentives to go beyond top 15 cities, provided for new sets of mutual fund distributors and even allowed provision for up to Rs 20,000 being accepted in cash to make it easier for the fund houses. Its a long list...

It would not be too much to say that Sebi bent itself backwards to accommodate the demands of the blue-eyed boys i.e the mutual fund industry. But have any of those wide-ranging and significant steps really made your life as an existing or a potential investor better? No! That's the resounding answer.  

WHAT CAN MAKE IN TRULY MUTUAL

In an ironic sort of way, mutual funds operate 'schemes'. An investment pool is made from collecting money from entities -- individuals, corporate houses etc etc. The collected funds are invested in a way that has been pre-disclosed and there you have become a fund investor. Hooray! At least this is what the fund industry would like you to believe.

If you are a mutual fund investor, an industry official, a regulator or simply curious ... here are a few things that would make the mutual fund industry really MUTUAL.

1. EVERYBODY INVESTS, YES EVEN THE FUND MANAGER - For every dime you invest, the professionals managing your money should have some similar stake too. The easiest way is they should invest their money as well. There's no shame in this game. Everyone should be an investor first. Instead what is happening is we have a system where the  preacher does only preach. They don't pray. They are far removed from products they sell. Would you like to buy a Honda car knowing that the manufacturer drives an Audi? I think not. Not just investors, the fund managers should also invest their money in that scheme. That's being truly mutual. 

2. STOP CHARGING INVESTMENT FEES FOR LOSSES - The mutual fund should not charge any investment management fee in a period say 3, 6, or 12 months you lost money. If your Rs 1 lakh became Rs 75,000 in a market crash, a real friend would not rub salt into your wounds by charging a so-called investment fee. But that's unfortunately what is happening. They are your friends when it comes to wanting your money but not when you lose. You win or lose, they want their fees. This needs to change and the industry needs to have a conscience. Deliver the right message that we don't want bonuses in a year our loved investors lost money. That's being truly mutual.

3. BE MONEY MANAGERS FOR THE LITTLE GUY - We all know rich and influential people have many people managing their money. A mutual fund is about giving the little guy a big shot. But is that happening? Approach any mutual fund company and the moment they hear you will invest a "few thousands"...oopsie daisy. There must be a reason why global investors are continuing to buy Indian assets and simultaneously domestic retail Indian investors are not interested. The answer is simple -- little guys are not made to feel welcome.  A real mutual fund company would just be about retail guys and they should go out of their way to make little guys feel welcome. That's being truly mutual.

4. A MIRROR, NOT A SHADOW IN TERMS OF DISCLOSURES - Do you like a mirror which becomes hazy whenever you look at yourself closely? Don't know about you but a lot of mutual fund investors feel that about their investment schemes. Rather than having full disclosure of the distribution costs - which is most often borne from by the little guy aka retail investor - the fund houses have supported the efforts of industry lobby AMFI to work for the benefit of distributors and have opaque commission system. Over the past few years, the frequency and quantum of mutual fund industry data disclosure has diminished. Compare that to the data the companies want when they enroll us as investors. Be fair and practice no double standards.  That's being truly mutual.

5. RATIONAL WORKLOADS MEAN GOOD INVESTMENTS - The human body has limits. So, does the human mind. But look at the mutual fund industry. One fund manager would be overseeing and managing 10 schemes.  That itself is a big 'scheme'. You ask them and they would tell you that it's about processes - not just about people. This is the official tom-tommed. In effect, this should mean people are less important than processes. In practice, however, things are very different. The moment you are putting same person in different schemes, it's stretching the limits and diverting their attention. Similarly, while one scheme would be having a size of Rs 10 crore, another one would be worth Rs 3000 crore. If I didn't know any better as money grows bigger, funds become very difficult to manage in an efficient way. The sweet spot is between Rs 100 crore to Rs 500 crore. That isn't happening. Like old bosses who refuse to retire, giant funds exist. Be nimble and have more people service the fund since investors expect you do a fab job. That's being truly mutual.

6. CHUCK MONTHLY OBSESSION - The business and structure of mutual fund companies is a monthly kind of thing. They run on a monthly basis - targets, incentives etc. Why should the investor then be motivated to stay put for years? Why should the distributors be paid fees as soon as they get an investor? These are just questions am asking loudly. The short point is if investment is a long term business, collection of assets is the wrong word to use. Instead, return on assets under management is the only answer. And when give returns, share them on a post tax basis. It's a real world. Taxes matter. The investor and the fund management company need to be on the same page which includes time frame. That's being truly mutual.

7. BUILD THE BUSINESS AROUND THE SMALL INVESTOR - Lastly, mutual fund companies need to be just one thing -- investor oriented. Today asset management companies are building themselves on assets. Start with the investor as the centre-piece. Build the company, processes, investments and everything else around the little guy. Think of it like building a house. Today, they are building the house (however good-looking it may be) with minimal attention to the final resident. Now, think of a house which starts with the room being built only after taking the size and needs of the final resident. The walk-ways, the room height, the open space etc are all modelled on the basis of the wishes of the final resident.

The apprehensions that mutual funds are more focussed on institutional investors and not very concerned about retail investors is actually very real. Today, the country's mutual fund industry is only about the big guy and the assets he/she brings even though profits are negligible. There is no little guy and so nothing mutual.

Till the next time.

Feel free to criticize. I am okay with it. Write whatever you want about this post in the comment section (below)