Dear Mr Kejriwal: lessons from the mutual fund industry - The Honest Truth By Ajit Dayal
Investing in India - Honest Truth by Ajit Dayal
Dear Mr Kejriwal: lessons from the mutual fund industry A  A  A
16 JANUARY 2014

Dear Mr. Kejriwal:

The AAP is still drawing a lot of interest.
That is good.
But from my limited reading of the press, the first signs of rot are trying to seep in to AAP as I had feared (Dear Mr. Kejriwal: Beware the enemy within).

AAP is where the mutual fund industry was in 1993: riding on a strong wave, armed with the goodwill of millions of hopeful investors.

And that is the danger: AAP should avoid what the mutual fund industry has become in the past decade: a selfish machine for decimating the wealth of its clients and burying principles and ethics with no cognitive sense of right or wrong.

Come to think of it, the mutual fund industry sounds like one of the more successful established political parties that AAP is trying to replace: the people who run the party or belong to the party organization are rich while the voters and followers are impoverished and cursed into poverty!
Yes, many investors in mutual funds would relate to that experience.

The evolution of ideas - and their death.
Victor Hugo, the French Romantic poet of the 19th century said, "There is nothing as powerful as an idea whose time has finally come."
But, sadly, ideas are hijacked for ulterior and mean motives.

The mutual fund, by itself, was a great idea:

  • People with a desire to save - but no expertise in investing money - would hand over charge of their money to those with expertise,

  • For this expertise the professional money managers, working in the mutual funds, would get fees

  • The professional, full-time managers of money would always keep the interest of their clients at heart. Always. That is what a professional does.

  • There would be a wave of future prosperity and the simple, uninformed investor would ride the wealth effect of a growing and developing India.
Indeed, there was nothing more powerful in Indian financial markets than the birth of the mutual fund industry in 1993.

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What a powerful and simple idea: pool the resources of tens of millions of individuals for India's economic development and share the benefits and returns with them, after deducting a reasonable fee.

But, in a world driven by big businesses and big conglomerates - most of whom are driven by big greed, as opposed to any balanced and responsible behavior - the mutual fund has become a "dhanda".

The doctor has sold his ethics to the diagnostic testing companies and to the hospitals.
Revenue generation is the key.

The mutual fund employees have sold their souls to the brands they worked for. The brands they work for - who speak the language of "consolidation" and "market share" - have relied on the distribution channels to sell their inappropriate, dangerous, high-priced products. Assets under Management is the key.

SEBI, as a regulator, failed to protect the investors.
In fact, SEBI - by binding itself to suggestions from the large mutual fund houses - may have inadvertently encouraged the theft.
In 1993 the minimum capital required to run a mutual fund business was Rs 3 crore.
By the late 1990s it was raised to Rs 5 crore.
By the early 2000's it was raised to Rs 10 crore.

In the world of politics, one needs Rs 10 crore to fight an election.
The candidate needs to "reach out".
And then once you have reached out and done all your purchases of votes, you need to recover your money.
And to recover the "investment", the politician does things that hurt the public and enrich their friends and families.
Everyone is happy - except the voter.

It is the same principle in the mutual fund "business".
The more capital you need to "show", the more the people with the capital will want as a return!

SEBI wants mutual funds to have a high net worth as they need to build an infrastructure to "reach out".
This "reaching out" has its consequences.
CEOs use the friendly distribution channels to grab the wallets of investors, share the loot with the distribution channels and their key employees, and everyone is happy - except the investor who got looted.

SEBI has failed to understand this simple equation: they now want to raise the minimum net worth and keep it somewhere between Rs 25 crore and Rs 100 crore.
If this intellectually bankrupt proposal finds its way to a law, then investors better watch out: now that their wallets are gone, they should protect whatever little they have left.

So, an idea - like the mutual fund as a product to channel savings, or the birth of a party trying to fight for true independence of decision-making - may be powerful but it may not always have the power to overcome the locusts that prey on an unsuspecting humanity.

AAP is a great idea: but beware these locusts that will strip you off your idealism and make you like any other political party.

It is worth nothing that Victor Hugo was a Romantic.
Romantics don't write poems about locusts, they write poems about the flowers: the flowers that the locusts eventually destroy.

So, follow the dream and the inspirations of the romantic - but don't look to them for a flawless execution for their heads are in the clouds. Their feet are rarely on the ground.
For, if even 1% of the words of every Romantic, idealist and do-gooder who ever lived were implemented, the world would be a far better place.

A musician or artist, on average, would be earning more than a person working for Goldman Sachs or Morgan Stanley, on average.
Aah, what a wonderful world that would be: where true creativity from those who produce some sort of happiness is actually rewarded.

But the well-connected (who reportedly consist of only 1% of society) have ensured that 99.99% of the idealistic words ever written remained as conceptual ideas; as a romantic notion - like a mutual fund.
The 1% sealed the fate for the 99%.

Lessons from a good fund manager
As much as the mutual fund business - run by the CEOs and their courier-pigeon fund managers - is not the model for building a new and ethical political party, there are some lessons from the mutual fund industry to help AAP. One needs to ensure that AAP is not just another idea whose time had come - only to be dealt an untimely death providing more fodder to future Romantic poets.

A good fund manager faces some choices on a daily basis: there are over 6,000 listed companies on the stock exchanges and there is room in the portfolio for maybe 30, 50 or 100 stocks.

How does a good fund management company handle this selection process?

The easy answer suggested by SEBI would be to say "show me Rs 25 crore" and get the license to run a mutual fund business.

But in the real world of mutual funds in many parts of the barbaric financial world "might is not always right". In USA, UK, and Europe (where requiring a high net worth of AMCs is a laughable concept that would land the proposer in a lunatic asylum) some fund managers have processes in place that identify good stocks.

A few important steps to guide AAP as it faces the challenges of trying to figure out which of the people who are banging on your doorway to accept, what role they should play today, and what role they could play in the future:

  • Never work as an individual - always work as a team; a star fund manager is only as brilliant as his/her last "call" on a stock or on the market. A team built with committed individuals, open minds, a common focus, and low egos can work wonders that, over time, no individual genius can. And individuals die - or leave fund management firms for other firms. Teams can sustain longer if built on sound principles. In your book, Swaraj, you correctly gave the example of Switzerland as a country where the local people living in the 23 cantons decide on many issues. Switzerland is run by a 7-person Council where one individual rotates and takes over the Presidency each year - largely a ceremonial role. So AAP needs to build teams quickly and ensure that there is a respect for the team process.

  • Do your research: what is the history of this individual who wishes to join AAP? Why now? Where were they when you were fighting and unknown? Now that AAP has won the New Delhi elections, there are a bunch of people knocking at your door to join the bandwagon. But there is a huge difference between growing and growing without baggage. True, not every individual is a firebrand and a revolutionary. A fund management firm needs a core group of people who define and set the tone of the research and investment process. The criteria are laid out, the results of the stock picking trickles in over time, and - impressed by the result - other people wish to join the fund management company. It is time to ask these new interested applicants: where were you when we began the fight, why did you not wish to be a part of the core team then? Were you waiting to see what the outcome of the New Delhi election would be? Well, you know the story of the Aya Rams and the Gaya Rams and even supposed strongmen who change parties based on which way the wind is blowing. No, you need commitment. And the willingness to stick together in challenging times -and there will be many challenges in the days ahead.

  • What does your team think of these new joiners? Have senior members meet senior new entrants to gauge the background and possible "fit" of these new applicants. Have the senior new entrant meet a group of the junior most persons and ask the junior most persons to gauge whether these new senior candidates are fit to join an inner decision-making body and be part of the senior team. If any one person says no (no matter how junior) - refuse the membership and refund the Rs 10 - or accept them but make it clear that they have no responsibility barring using the broom to sweep the streets clean. The issue of commitment will come out pretty quick.

  • Now that you have a well-screened database built after multiple meetings, after multiple rounds of sifting the good candidate from the bad, you are ready to build your portfolio of good individuals into a formidable and harmonious team. In every portfolio there are some stocks that will do well immediately: they have positions of "leadership". There are some that will do well in a short time, when the environment is in their favour, and there are some that sit there and will do well much later. The "laggards" as they are called, will bloom once they have absorbed and performed - and the market recognizes their true, inherent worth. This is similar to what you will see in your new members: some are leaders, some need to wait for a short while, some need to be groomed longer.
But you need an "investment objective"
What AAP has done continues to draw huge interest.
That is the good news.
The bad news is that you may be stuck with people who do not share your economic vision and will end up de-stabilising the powerful trajectory you have chosen.
For this you need to communicate what that trajectory is in a lot more detail.
Like the fund manager running a mutual fund, you need to decide your "investment objective".

While Swaraj was a book that correctly reminded us of our civil and civic history and moral science classes - essential lessons for the improvement of life - there is nothing that exists yet with an AAP stamp which outlines all the issues we need to gauge you on: Pakistan, nuclear options, relations with USA, Europe, China, Sri Lanka, industrial policy, import policy, export policy, SEZ policy, pharma policy, coal and iron ore policy, oil and gas policy....

The candidates must be able to read this economic and foreign policy statement of yours and say, "Yes, I agree with their detailed policies, they have my vote and I plan to join them" or "No, forget this strange lot - I had better stay with the traditional choices we have."

As much as AAP has a right to interview the candidates, the candidates have a right to know more about AAP.

The team you hire must have a "fit" with your various objectives or policies and with your existing team.

This, then, is the lesson from the mutual fund industry:

  • Don't leave AAP to idealism - if the BJP and Congress don't sabotage you, the businesses will kill it;
  • State the objectives and policies of AAP clearly;
  • Have a solid, team-built vetting process to write, execute, and monitor policies;
  • Accept your members - particularly senior members of teams - very carefully;
  • Keep your membership fee low - if you make your membership fee equivalent to the proposed minimum net worth criteria at Rs 25 crore for the mutual fund business, you will get all the rich individuals as members and they will work to eradicate whatever little wealth remains with the aam aadmi. Just as the mutual fund industry has so successfully done.
Good luck in your endeavours!


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6 Responses to "Dear Mr Kejriwal: lessons from the mutual fund industry"

Rishi Poddar

Jan 25, 2014

I read with interest the two articles of Ajit on AAP and Arvind Kejriwal. Your warnings have turned out to be true. The entire media has ganged up against AAP and trying to manipulate public opinion to trash this new party by branding them anarchists, racist, women haters, etc. The power of the Corporates and the political class behind this is clearly visible. It is amazing that the parliament does not function for 5 years and still nobody calls the opposition party anarchists. The proposal for FDI in retail and Nuclear Deal during NDA regime was vigorously opposed by the same party during the UPA regime and they call themselves patriotic. There is no discussion on administrative reforms that India needs by the big 2 national parties. NaMo is supposed to have a magic wand which will rid India of all problems. 5 years ago, we were similarly elated when the LS election results came in and the dream team of experienced, Harvard & Oxford trained economists took charge and the result is there for all to see.

Like (3)

Krishnan B S

Jan 22, 2014

I dont understand how you are praising Arvind Kejriwal in the first place. The first thing to scrutinize for any Mutual Fund is the integrity of the Promoters. And you have been continuously ignoring this for long now. Mr. AK has a history of Bitching and Ditching his associates in the last 5 years. He was with Kiran Bedi, Baba Ramdev and Anna Hazare. He was dancing to the tunes of Kapil Sibal even during Anna's protests.
So to support a Mutual Fund with dubious Background is clearly suicidal. And unfortunately you are doing it. Please do some research on it immediately, or else you will have the same fate of anyone who invests in a Mutual Fund of Dubious Management after a few years.

Like (2)


Jan 20, 2014

Great article and well written.. but citing switzerland even though appealing may not be appropriate. While i concur with many of the views about mutual funds, it is not right to criticize the capital requirement. High entry barrier will only ensure that only competent persons enter the fray. Just because some AMCs have sold their ideals , it is not right to point out the capital requirement as one of the reasons for sell out.

On the political front, does not Panchayat Raj sounds familiar. What has been proposed by Kejriwal is the same panchayat raj envisioned. there is nothing new in that..

AAP from their actions in past one month hastens me to conclude that they can good foot soldiers but need not be good leaders.

Like (1)


Jan 19, 2014

The article is finely balanced at pin pointing the vaccumm AAP(th most successful start up of recent times) is facing after the delhi elections.Yes,they have reached a stage where the revolution needs to take a breath and redesign its future course as they are no more civil rights activist. Ajit has aptly pointed out the need to introspect on national issues and simultaneously run the govt.more cohesively in the capital. Never mind some impatience in the begining (as we all crawled as a child b4 we started walking)but the core should not be harmed in the long run. Arvind, on its way to empower the AAM aadmi, carries the entire nations hopes and we wont mind if you take 2 extra years to deliver. Good luck

Like (1)

Prof. B. K. Garg

Jan 17, 2014

A realistic & brilliant write up.Hope Kejriwal's and his team notice it & implement the suggestions.The advent of AAP looks promising,but then there are malicious forces which are out to devour the promising effort.

Like (2)


Jan 16, 2014

Mr.Ajit has amazing ability to articulate the various subjects and connect the dots or taking leaf from MF industry. This no-nonsense article lived upto the expectation of title "Honest Truth". Btw,It's a tautological title, the Truth always implies Honesty, it can never be dishonest. Anyways, honesty was always bitter, but now getting even more bitter & bitter everyday.

On AAP, I would like to say that India need good leaders with honest intentions and transparent actions. We've a demographic dividend in terms of being youngest nation of
the world, but where is the dividend re-invested? By giving chance AAP, is definitely a new change, but as explained in article, they've to reach out to a larger canvas by at least settings up the goals or revealing their outlook towards other national and global issues.

To survive the hurricane, trees need to bend. Persistence to stand tall will cause premature death. AAP has to flexen the stance on some of the ideology to survive. Like in today's time, you can't do away w/o security, and can't manage on populist ideology.

Yes, AAP has to first decide the strategy to hold the power and survive to serve Delhi, and then nation. If this opportunity is lost,then all will be left is nothing but a wishful thinking of few bunch of individuals.

Good to luck to AAP. and another great insight from Ajit in his Ajitism style!! Keep writing.


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