What does the CEO of a Mutual Fund really do?

8 JUNE 2010

We know what the research and investment teams of an Asset Management Company or a Mutual Fund management company do: they work on picking stocks that build up to a portfolio for the mutual fund you are invested in.
For this the research teams have a choice of:

  1. watching CNBC and Bloomberg screens all day,
  2. looking at squiggly charts and trying to predict the future,
  3. reading the printed annual reports which may contain the whole truth (and maybe a lot of half-truths), or
  4. calling their best friends in the broking community to get tips on what to buy and when to sell.
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Every mutual fund house has choices on how they wish to manage money. Whatever the path taken, it is the research and investment teams that implement it.

The operations teams and the finance teams are there to ensure that the settlements of the instructions for buying or selling the stocks and securities close smoothly. No hiccups. No failed trades. The operations team have to ensure that bonuses and dividends are accounted for properly and the unit holders get their fair share of what is due to them.

The legal and compliance teams have to ensure that all the employees follow the laws laid down by SEBI and that there is no room for fraud, front-running, or negligence. The head of compliance also has the difficult task of apprising the Board of Trustees - who is there to look after the interests of the investors in the mutual fund. Then there is the Board of the Asset Management Company which needs its reports and comfort that no laws are being broken. And all those filings with SEBI.

Then there is the investor relations team who answer and respond to any complaints that the investors may have. Some need to change their contact details, some may need help in redeeming a part of their investment, and other investors may need help in switching from one product to another within the same fund house.

Yes, there are a lot of busy people in the mutual fund industry.

So, then, if all this work is done by the soldiers and their heads of departments, what exactly does a CEO do?

Meet the boss
So, the Martian comes down to Earth and he says, "I have to spend a day with your leader".
There is a kind of "or else" tone in his voice.

The trembling employee takes him to the boss man.

The boss man has a sign up on the door that says, "CEO - entry loads apply. Exit loads may also be applicable. Trail commissions are a possibility."

Puzzled, the Martian pushes open the door.

And there, behind an ornate desk on comfortable leather chair sits the CEO. His desk is cluttered with phone instruments.

On seeing the Martian, the CEO reaches out to pick up the green coloured telephone. Quick to react the Martian zaps him with a beam which makes the CEO's hand burn momentarily.

"Now, why did you do that?" asks the angry CEO, "I was not calling the security forces, I was merely calling the largest distributor of my fund to see if we could price our units in whatever currency you Martians use."

"Oh, said the Martian, "in all the training videos we have seen, the phone has to be eliminated when someone tries to use it. If we miss the phone instrument, we eliminate the person."

"No, no", said the CEO, "you don't need to worry. These phone instruments are all hot lines to my key distributors. This black one, though, is to my boss. You see 7 of the largest 10 mutual funds in the country - who control 70% of the assets under management in mutual funds - also own insurance companies. So my boss wants to make sure that since we cannot pay commissions to distributors the way we used to, we should use the distribution channels to introduce ULIPs."

"You mean the Uranus Long Inflection Projectile already made its landing on earth before we did?" asked the Martian, horrified that someone else in the solar system got to us before he did, "they promised us there would be no load on their ULIP - it was merely to scan the universe for asteroids."

"No load?" guffaws the CEO in his Master of the Universe voice. "Your friends wouldn't survive here", boasted the CEO, "if you don't pay commission, you die. And if they don't die and still try to build a business that works for the investors, we will plan a second death. I and members of my con-mitee will ensure they go through a living death by using all our intelligence to recommend that the net worth of any company wishing to be in the mutual fund business should be Rs 50 crore at the minimum", said the CEO as he snapped a pencil in two and threw it into the dustbin with finality.

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Help your distributors
"So", asked the Martian, "I was asked to come here and find out what you do."

"Well", said the CEO, "I have two roles. My first job is to ensure that my boss can sell as many ULIPs as possible in the next 6 months. You see, my boss also owns an insurance company which is about to do an IPO. And the investment bankers told us: pump and dump! Grow the business, show the public massive volume sales on ULIPs, and then we can help you dump the IPO shares of the insurance company to the gullible public."

"And what is your second role?" asked the Martian, taking notes with his u-pad.

"Well, it is making sure that these phones in front of me are always working. You see, the distributors may want to talk to me at any time and I must be available. I have one sole objective: to grow the Assets under Management, the AuM. The Hindu scriptures tell us that OM is the omnipresent sound, the sound of creation. They were right. It is all about OM, but they spelt it wrong. Our ancestors were monkeys and their speech was not sufficiently evolved to say and spell the omnipresent sound as AUM."

Table 1: In god we believe, in AuM we sing His praise. Why does the CEO focus more on making his distrubutors rich?
  Money that came in to equity funds Money that went out in the same period The net amount that stayed Net amount that stayed as a percentage of all that flowed in
April 2003 to July 2009 Rs 406,616 crore Rs 287,573 crore Rs 119,043 crore 29.30%
  This means... This means... This means... Conclusion
Money paid to distributors from the pocket of the investors Rs 8,132 crore, if we assume a conservative 2% up front end load fees Rs 1,438 crore if we assume distributors were paid 0.5% as exit load fees The asset management company earned about 1% each year on the money that stayed; the distributors got maybe another 1% each year - no one really knows because this was never declared. Are the CEOs of these fund houses working for you - or working for the distributors? That is why I was told by a distributor in 2006, "the elephants dance to our tune, you are an ant - what will you do?"
Source: AMFI website; Note that SEBI banned payment of front end loads from August 1, 2009.

"Why?" asked the Martian, with a puzzled look on his jelly-scarred face, "do you need to have the phone lines open to your distributors?"

"In case my funds have not doing well yesterday, the distributor will call me and report the matter to me. You know, performance sells. So, if we don't perform well every day, the distributor cannot sell any more funds of ours. And if he cannot sell our funds, then I cannot reach my target of market share. And if I cannot get to my target share, I don't get my higher salary and my large bonus. And if I don't get my salary and bonus, I will ensure that those research and investment professionals get a lower salary and definitely no bonus."

"So, let's say the red phone rings, what will you do?"

"Oh, no - not the red one. Red Bull is my biggest distributor and he needs a lot of energy to keep the machine pumping. In the good old days, we used to pay him 5% up front fees and then charter a plane to send his doc boys to Singapore."

"That must have cost you a lot of money", said the Martian.

"You really must be an alien", said the rattled CEO, "we never paid for any of those holidays, cars, or IPL cricket match tickets. All that money was paid for by the investors."

"Oh, so they must really like Red Bull", concluded the Martian.

"Listen, Martian, I don't know what kind of securities industry you have out there, but this is the world of Wall Street and Dalal Street. The investors don't know a thing. They think that we pay for all those trips to Singapore and for the advertisements on TV and giant sized billboards. They even think that the IPL was good for cricket! You sell them a good story and they will believe anything. Didn't they teach you that at your equivalent of the Hit-hard Business School?"

"In Mars", said the Martian proudly, "they pay doctors, teachers, and farmers the most. The pay investment bankers the least and sometimes they feed them to the hungry lawyers who they don't pay too much either. But, pray, tell me what happens hen the red phone rings?"

"Yikes", muttered the CEO, "I hope our regulators never hear about that. Aha, the red phone. Yes, will when that phone rings it means that my equity mutual fund has slipped from being 51 out of 216 funds to being 61 - that means we are no longer in the Top Quartile, the Top 25%. And if we are not in the Top Quartile, then Red Bull cannot sell. And if Red Bull cannot sell, my AuM targets are at stake and my salary and bonus is at stake."

"Then", asked the Martian eagerly, "then what do you do?"

The CEO got up from his chair. "Then I show them who is boss. I march up to the fund manager and his team of analysts and tell them bluntly. Agar shaam tak nahi kiya, to teri gardan ko ...Oh, sorry, what I tell them is to improve their research process and boost their performance. I give them 24 hours to give me a better NAV. I don't care how they do it. But they are free to buy some stocks, call their friends in the print media, web sites, and the television channels - let them spread some rumour and then see the stock they own surge. I will support them by changing the fees and expense ratios for that day so that the NAV of the fund is better. We have a daily target of AuM. One day's slippage has to be made up the next day."

"But what about products that are focused on your customer and the doing the best for your customers and investors?" asked the Martian.

"Listen, in the end, only size matters. Only wealth matters. Don't you read the magazines and watch TV? When is the last time anyone profiled a poor man? This concept of looking after investors is alien. It is not my job. I am the CEO. I focus on how to grow the assets under management. That's all. No discussions. No losing focus."

"Boy", said the Martian, "you really have a tough job. This is quite revealing. I must note this down in my u-pad".

"So, does that mean, Martian, just in case things get hot around here - what with the regulators pushing us to worry about those damn investors - I can try to relocate to Mars? Will I get a 5-year guaranteed salary and bonus there?"

"The only guarantee, I can give you, Mr CEO is that for all the crimes you have committed against investors here every salary and bonus we give you will be invested in your fund for a 20 year period."

"Oh, no - not that, I beg you", pleaded the CEO, "the costs and distribution fees in a flat market over 20 years will bring my investments to zero. Can you at least invest the money in the Quantum Long Term Equity Fund? Their CEO never has to focus on NAV and he has no phones of any colour. Those strange people focus only on what is good for investors".

Hearing that, the Martian zapped the CEO, picked up the red phone and told Red Bull: "Stop lying about how terrible Quantum Long Term Equity Fund is and start telling your investors about them. And take the fees from your investors. Agar shaam tak nahi kiya, to teri gardan ko...."

Note: While the characters and the terminology in this article may be fiction, the situations may not be. If you really want to know how your mutual fund is managed, write to your fund manager and ask him or her how many times in a year is he/she contacted by the sales team, distributor, or CEO with a comment about the fund's performance and a gentle suggestion that "the fund manager must do something or they will not get more assets". Feel free to ask the same of the fund managers in Quantum Mutual Fund - a fund house where no CEO or sales person would have the guts to ever make any suggestions on performance.

POLL: Do you believe that the CEO or sales person influences the way your money is managed because they have targets of Assets Under Management?

Suggested allocation in Quantum Mutual Funds (after keeping safe money aside)
Quantum Long Term Equity Fund Quantum Gold Fund
Quantum Liquid Fund
Why you
should own
An investment for the future and an opportunity to profit from the long term economic growth in India A hedge against a global financial crisis and an "insurance" for your portfolio Cash in hand for any emergency uses but should get better returns than a savings account in a bank
Suggested allocation 80% 20% Keep aside money to meet your expenses for 6 months to 2 years
Disclaimer: Past performance may or may not be sustained in the future. Mutual Fund investments are subject to market risks, fluctuation in NAV's and uncertainty of dividend distributions. Please read offer documents of the relevant schemes carefully before making any investments. Click here for the detailed risk factors and statutory information"

Disclaimer: The Honest Truth is authored by Ajit Dayal. Ajit is a Director at Quantum Advisors Pvt. Ltd and Quantum Asset Management Company Pvt. Ltd. The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and has not been authenticated by any statutory authority. The author, Equitymaster, Quantum AMC and Quantum Advisors do not claim it to be accurate nor accept any responsibility for the same. Please read the detailed Terms of Use of the web site. To write to Ajit, please click here.

Suggested allocation in Quantum Mutual Funds (after keeping safe money aside)

Quantum Long Term Equity Fund, Quantum Equity Fund of Funds, Quantum ESG India Fund Quantum Gold Savings Fund Quantum Liquid Fund
Why you
should own
An investment for the future and an opportunity to profit from the long term economic growth in India A hedge against a global financial crisis and an "insurance" for your portfolio Cash in hand for any emergency uses but should get better returns than a savings account in a bank
Suggested allocation 80% in total in both; Maybe 15% in QLTEF, 10% in Q ESG and 75% in QEFOF 20% Keep aside money to meet your expenses for 12 months to 3 years
Disclaimer: Past performance may or may not be sustained in the future. Mutual Fund investments are subject to market risks, fluctuation in NAV's and uncertainty of dividend distributions. Please read offer documents of the relevant schemes carefully before making any investments. Click here for the detailed risk factors and statutory information"
Disclaimer: The Honest Truth is authored by Ajit Dayal. Ajit is Founder of Quantum Advisors Pvt. Ltd. which is the Sponsor of Quantum Asset Management Company Pvt. Ltd – the Investment Manager of the Quantum Mutual Funds. Ajit is also the Founder of Quantum Information Services which owns Equitymaster and PersonalFN. The views mentioned herein are that of the author only and not of Quantum Advisors, Quantum AMC or Equitymaster. The information provided herein is compiled on the basis of publicly available information, internally developed data and other sources believed to be reliable by the author. The information is meant for general reading purpose only and is not meant to serve as a professional guide / investment advice for the readers. Readers are advised to seek independent professional advice and arrive at an informed investment decision before making any investment. Whilst no specific action has been suggested or offered based upon the information provided herein, due care has been taken to endeavour that the facts are correct, accurate and reasonable as on date. None of the Author, Quantum Advisors, Quantum AMC, Equitymaster, their Affiliates or Representative shall be liable for any direct, indirect, special, incidental, consequential, punitive or exemplary losses or damages including lost profits arising in any way on account of any action taken basis the data / information / views provided in The Honest Truth.

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16 Responses to "What does the CEO of a Mutual Fund really do?"


Jun 14, 2010


The mantra shud be QLTF shud be a part of you portfolio, and not the only fund in the portfolio..



Jun 12, 2010

Hey guys..cool down. Ajit was only trying to reveal the shady dealngs that go behind the curtan of Mutual funds.What he said in the end was only to make a point about the ethics or the lack of it. Take it with a bit of jest.

He really tried to present the happenings in a jibey manner.I appreciate that.

I am sure other mutual fund houses have been sending their agents to cavil and criticize Equitymaster. A concerted attempt by the bullies to demoralize this ethical team. Go find a life.



Jun 10, 2010

While the post is fine, the presentation and tone of the whole presentation needs to be changed. You potentially are saying that you are the only ethical people on the planet. I believe there are other MFs who have simply given up on this distributor nonsense and caved. Does not mean they are sleeping with them. It may be happening in some places but not sure where. Please do acknowledge the same.

To other fellow investors,

Part of the so called under performance, I feel, is due to the reluctance on the part of the research team to touch anything which potentially smacks of trouble.

Take RIL or any of the stocks from both the brothers or something like Satyam etc. That in itself rules out lots of potential returns. To my mind, I am fine with that. I myself have tried looking at RIL's balance sheets and never makes any sense to me as to what is happening with some many mergers, demergers, treasury shares nonsense.

The CIO of Reliance MF was negotiating the purchase deal with Air Deccan deal on behalf of ADAG. That in itself is ridiculously dangerous with lots of potential problems right there with insider deals.

It comes down to risk to reward. I would rather wait on the sidelines of reward more than take risk.

To each his/her own.



Jun 10, 2010

Even if I agree that QMF is best I can't agree it's the only best. So, who are the others and why you can not project them in your article, at least those funds that has been recommended by Equity Master and PF. Hope the "Honest Truth" is not the latest marketing tool of QMF.



Jun 10, 2010

Dear Mr. Ajit,

First of all through your article you have completely exposed the tarnished image of fund industry and the practices followed by them and you have further confirmed it with your note that is is not an structured story.

However, with SEBI's ruling there is no entry load and the only fees applicable for managing the fund is max. 2.5% and most of the reputed fund house's flagship schemes expense ratio is 1.85% including QLTEF, if fundhouses pay commission or sends the distributor to exotic location or gift a car all that is part of 1.85% which includes also the actual fund managment fees how does it matter to the investor. Since the fund management fees are almost same for most of the flagship beating the bush about commissions is not valid anymore.

About NAV's being pushed up for the day through adjustments in expenses etc., I think it is too much exaggerated since systems are computerized and calculated automatically and its not possible to manipulate the figures on a consistent basis.

At the end of the day the investor is looking for returns on in his investments within his risk taking capacity. Quantum has done it and also other fund houses have put in similiar performances (some have put in better performances also).

While I do respect the ethics of Quantum in many ways and I have personally experienced about it, but all other fund houses are not as bad as you have portrayed. If what you wrote is honest truth in the Industry why do the honest and ethical financial advisor like PFN (a unit of yours) recommend funds for investing from HDFC, DSPBR, etc. They should be advising the same what you are writing here to the investors (since we pay there for financial advise to them based on the thier ethics).

Anyhow, I take this opportunity to thank you and Quantum for taking another major initiative to limit the expenses of a QLTEF to 1.5% from the earlier 2.5%. Wish the other fund houses follow your foot steps or SEBI may have to step in to make it as regualtion again!!!

I would suggest Ajit to write wish list for SEBI in regard to AMC and Fund Management instead of blaming the industry...


Kannan V

Jun 10, 2010

Dear Ajit,

While appreciating your communication on imposing minimum net worth for AMCs, few things that strike a difference.

Should the AMC take away the investors money in the names of Trailing commission, agent commission etc. the annual performance of the fund is going to deplete to the extend of the commission taken away. Can Mr Ajit educate his readers, on how HDFC Eq fund has delivered more return than the comparable Quantun fund - inspite of the so called commission practices ? Further the fund charges of Quantum LT Eq fund at 2.3% plus is one of the highest. Net to net one need to look at the return generated by the fund when comparing them rather than going too deep in to the AMC's way of paying commission.


Akash Sethia

Jun 9, 2010

Dear Mr. Dayal

I have been reading "The Honest Truth" for some time. While I don't want to join ranks with the likes of amrinder, however this piece of yours is not in good taste.

If your coloumn is about educating retails investors - there was little education in this one. It looked more like mocking at the CEOs of some large industry houses - which they surely do not deserve. Neither do we deserve this article as sincere readers of your website or your coloumn.




Jun 9, 2010

The biggest service to the investor is to give amongst the best consistent returns to the investors net of fees. When my investment can move 2% per day when i mut not bother too much about the fees but bother about outperformance. In fact its not that after abolition of fees the net to me has increased. In fact if amc's do not make money,they may just put some poorly paid trainees on the job for managing my money.

And pl do not slip in your ads in the garb of telling us all what is wrong. It is just unethical, separate he two.

and on distributors, they have a role to play in this world, imagine how you would have even brushed your teeth in the morning without the distributor,magine having only factory outlets for sale. Everyone should be adequately compensated for any system to work.

anyaway i invest online and i happily pay because there is value add, i cannot wait interminably for an agent to arrive or me to take a car out to visit a bank branch,it costs too much time and money,

we are happy to spend 50/- on parking and 100/- on ice cream but scream about paying for advice. This way we will all get reduced to the lowest common denominator



Jun 9, 2010

I am not at all happy seeing this article. Also the Blind Opposition that Quantum and Team have to Reliance and to ICICI is just inexplicable. Can the team of Quantum explain with logic and facts/figures the reasons for their Blind Beliefs against Ambanis and the Kamath teams.? No Wonder despite the 5 star ratings, the Quantum Long Term Eqity Fund has not managed to really deliver. While its above average, its still not ranked in the Top 10 or so. Thats only because of the fixated ideas of the Quantum team.


Harit Shah

Jun 9, 2010

Dear Shweta/Arminder,

I believe what Mr Dayal is attempting to communicate here is the shady workings of the industry, "behind-the-scenes" as it is called. There is a very simple reason as to why the AuM of Quantum MF is considerably lower than those of the other MFs - as Arun so rightly says, "in India Financial Products are not bought they're sold, hence the omnipresent distributors." Consequently, it is the distributors who are the primary drivers for investors to choose their MF and obviously, given the inherent conflict of interest here, the distributors will only recommend those funds that pay them the maximum, in terms of fees, foreign trips, etc! Quantum MF having a direct model with no distributors obviously does not fit into the "preferred MF" category from the distributors' perspective even though it may actually be a good investment option from the investors' point of view. Do not get me wrong, I am not "selling" Quantum MF here, just saying how things work in our industry. I have been working in the financial services industry for over 6 years now and am ashamed to say that our industry is undoubtedly one of the most shady and unethical in terms of its business practices - the workings of the MF industry is just one example!

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