You trust your toothpaste, but not your mutual fund - The Honest Truth By Ajit Dayal
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Investing in India - Honest Truth by Ajit Dayal
You trust your toothpaste, but not your mutual fund A  A  A
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21 DECEMBER 2010



The Brand Equity / Economic Times survey of the 100 Most Trusted Brands, completed a few months ago, ranks Nokia mobile phones as the most trusted brand. Colgate is number 2, followed by Lux, Dettol, and Britannia to complete the list of the Top 5.

Amongst the financial service companies, State Bank of India makes an entry at number 49 and LIC clocks in at 68.

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In the Top 100 Most Trusted Brands, there are 2 financial service companies: one where the government is the dominant shareholder (State Bank of India) and the other which is fully owned by the government (LIC).

There is no mutual fund company in this list.

Mutual funds control an estimated Rs. 700,000 crore of money. About 30% of this comes from individuals putting their hard earned savings to work. So, even though Rs. 200,000 crore of retail savings is in mutual funds, consumers don't trust them a whole lot. Despite all their advertising and their army of sales people and distributors, the mutual fund industry is unloved.

To be fair, in the Top 50 Service Brands category, the mutual funds do find some recognition. Though Vodafone was ranked as 1 and BSNL (surprising, to me) was ranked number 2, LIC Mutual Fund comes in with a rank of 25, HDFC Mutual Fund has a rank of 37, SBI Mutual Fund is ranked 42, Reliance Mutual Fund ranked 44, ICICI Prudential Mutual Fund is ranked 45, and Tata Mutual Fund is ranked 46.

Money down the drain?
But the judgement is clear: Indians have more faith in their Nokia mobile phone working on their Vodafone or BSNL connection than they have faith in how their money is invested in mutual funds.

Indians have more faith in what they brush their teeth with (Colgate) than the brands where they put their savings to work. Even though the life span of toothpaste is a few minutes and it needs to be spat out into the sink, consumers believe that their money in mutual funds is probably going down the drain faster.

While the Lux soap can clean you, investors believe that a mutual fund cleans you out in other ways more efficiently. While Dettol cleans out all the dirt and disinfects, the savings lying in mutual fund products could be infectious and dangerous to our health.

As consumers we probably spend Rs 10,000 crore a year on Lux and Dettol and we invest maybe Rs 20,000 crore per year in mutual funds - but we trust those tubes and bottles which are lying in our bathroom a lot more than we trust those receipts confirming that we own mutual funds.

Is that because Lux and Dettol spend more time focusing on what's good for their customers, rather than focusing on what's good for their CEOs and senior members of the management?

Do mutual funds focus on you - or themselves?
Honestly, I'm not surprised at the low rankings of the financial service companies in the main list of the 100 Most Trusted Brands and at the pathetic performance of the mutual fund companies in the sub-category of the Top 50 Service Brands list.

I helped start a mutual fund company, Quantum Mutual Fund, and I can tell you that the industry is - by and large - focused more on what's good for the people who run it, rather than what's good for those who they were set up to serve: their investors.

It's a shocking statistic that Quantum Mutual Fund was the 29th fund house in the country and, when we launched our mutual funds in March 2006, we were the 1st fund house to refuse to be a party to an opaque distribution system that, in many ways, cheated the investors.

We were the smallest fund house out there and refused to compromise the interests of the investors by following a rate card given to us. The rate card stated that if we agreed to pay distributors a certain percentage, they were willing to give us your money for a defined period of time. A bit like buying votes in an election.

There was never a discussion on whether the Quantum Mutual Fund product was good for you or not; or whether Quantum Mutual Fund deserved the money on merit, or not; or whether investors needed a product like ours, or not.

It was all about the fees. You may be the worst candidate for the electorate, but you spend the right amount of money, and you can win the election. Nope, there were no questions of any relevance from the perspective of the distributor.

Unlike a Colgate that wants to ensure that your teeth do get clean and smell nice once you use their toothpaste.
Unlike a Lux that wants to ensure that you enjoy the fragrance as your body gets cleaned.

The only discussion that the large distribution channels - like the banks and the wealth management team at the large brokerage houses - ever had with us was: how much are you willing to pay?

Just like a minister selling spectrum: how much are you willing to pay?
Just like a minister selling an airline licence: how much are you willing to pay?

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We are, Quantum Mutual Fund, a fund house that works on a set philosophy - the same philosophy reflected in the Honest Truth - Non-commissions, Transparent Costs, Basic Products, Long Term Investing!
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Dragging and fighting
It took a SEBI ban on front end loads to stop that malpractice in August 2009.
Well, most of that malpractice.

Being the creative geniuses that we are, we folks in the financial service industry are finding ways to pay opaque commissions to distributors. Well, not Quantum Mutual Fund. We have not paid a single paisa of commission in our 5 years of existence.
And we remain the only mutual fund house committed to that practice.
Even those that don't pay for airline licenses are willing to pay distributors.

Don't get me wrong: we have nothing against paying commissions to distributors. Our problem is that the commission is not disclosed. The costs and payments to every service provider in a mutual fund is known and declared: the cost of managing your money charged by the Asset Management Company; the cost of the auditor to audit the accounts; the cost of the custodian for offering custodial services to keep all the securities bought by the Fund; the cost of the registrar to transfer and record all the units that you purchase or redeem; the cost of the Trustees to oversee that your savings are being managed as per the investment objectives and the various rules and regulations.

Yes, all these costs are known and declared.

But what your distributor or financial advisor got paid from the mutual fund house when they piled your savings into their many unnecessary mutual fund products was never declared.

The consumer is smart. And they wise up pretty quickly.

The fact that a Lux and a Dettol can score much higher than the mutual fund industry is a confirmation of what we intuitively know: many in the mutual fund industry have been focused on their own wealth creation and the wealth creation of the distributors.

And, despite regulatory changes brought in by SEBI, many in the mutual fund industry are still fighting the change. In fact, if you took a poll and asked every mutual fund CEO what their one wish for the year 2011 is, it would be a rollback of this ban on paying upfront fees to the distributors.

The industry hates the fact that they cannot grab money from your wallet by paying an opaque distribution fee - the same kind of opaque fees that one pays to grab some spectrum or get an airline license. Or buy a vote.

And while the industry lobbies for a return to the old ways of doing business, Quantum Mutual Fund - the 1st, and only, mutual fund house in the country to refuse to pay bribes to distributors - continues to go about its mission of working in the interest of investors by ensuring that we launch few, simple, and sensible products for you. And, the beauty is, that being honest does not mean that we have bad performance. In fact, the Quantum Mutual Funds are doing very well for their long term investors (please read our Offer Documents, our Disclaimers, and our approach to investment before you consider an investment with us).

So, is it possible to have an honest government that can deliver?
A government that you can trust - and one which enhances the wealth of our country.

We think so.

We built Quantum Mutual Fund as India's first investor-focused mutual fund house and - as our growing number of investors will vouch for and as the statistics and ranking tables will confirm - we can deliver sensible returns for long term investors.

Meanwhile, many in the mutual fund industry need to use a lot of Colgate, Lux, and Dettol to clean up their act.


Suggested allocation in Quantum Mutual Funds (after keeping safe money aside)
Quantum Long Term Equity Fund Quantum Gold Fund
(NSE symbol: QGOLDHALF)
Quantum Liquid Fund
Why you
should own
it:
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.


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17 Responses to "You trust your toothpaste, but not your mutual fund"

Jamshed Mehta

Feb 4, 2011

Dear Sir:
Nokia, Lux etc., etc., pay a commission/dealer discount to their distributors. Does the end-user know how much or what % ?
There are direct sellers - Amway, Tupperware etc. who also give a discount to their resellers.
Who ever heard of a market where the manufacturer/principal does not pay the distributor ?
What is needed is transparency not believing that the MFs are capable of selling by themselves directly.You seem to be advocating a Soviet era type of command market.
Let me also mention that Indian investors are not fools and are quite capable to judge the offerings of a FA. Further you know how honest the investor is when she/he wants a cut back from the LIC/PPF agent.
There are also buyers who make the FA do the donkey's work and buy else where.
Please give us a more unbaised and well thought out scheme as to how honest FAs can be remunerated and protected.
Thanks,
Jamshed F. Mehta

Like (2)

milind chitnis

Dec 23, 2010


Ajit is now tiresomely repetitive. Just keeps on going on & on about the commissions that his mutual fund does not pay.

Two questions :1) As already pointed out here, has this practise made his funds far superior to other funds like HDFC & DSP (Ultimately is that not the result that investors would look for?) 2) Is commission paid to distributor in all other products disclosed to buyer upfront?

I am not justifying wrong practices in the mutual fund selling in any way. But what Ajit tries to create is a picture where everybody from HDFC to Tata & all distributors are painted as bandits. I wish he could make performance of his funds (which is quite good) as his USP & not keep on harping about his not parting with commission to distributors.

Just a passing thought, when all the funds were paying distributors & Quantum was not, did this practise result in lower fund management charges to investors. If yes fine, if no it means that the money which was paid to distributors by other funds was pocketed by Quantum. Not such a great help to investors.

Like (2)

N.M.R.Shreedhar

Dec 22, 2010

To me, it seems pretty silly to compare FMCG with an intangible like Financial services-- people need to use soaps and toothpaste in their daily lives, whereas you can spend an entire lifetime comfortably without mutual funds--just ask your parents how many of them knew about MF's in the 60's and 70's even when UTI was around. Looks like the author has run out of ideas , or he is coming up with innovative ways to promote Quantum MF-- agreed, Quantum is a good fund house, but can't call it outstanding by any means when compared to HDFC MF or DSPML MF. regds

Like (3)

Goutam Shetty Sirigeri

Dec 22, 2010

Mr Dayal... Why are we comparing Faith and Brand? Faith in certain brands may not necessarily propell buying decision, there are many other aspects which gets in to picture. I would like to have this in 2 different containers rather than comparing!

No doubt your Quantum Mutual Fund company is one of the best AMC which is investor friendly. Kudos to you!

Like (2)

Lokesh

Dec 21, 2010

According to me mutual fund in India needs a awareness to increase the ranking.Now a days people have money to invest but they think that investing in mutual fund is risky but is is not like this.So Retail experts of mutual fund should take some initiative to increase the awareness regarding investment in mutual fund..

Like (2)

sashikumar

Dec 21, 2010

please understand that finacial literacy is very low in our country. All financial products have to be pushed/sold in our country. if you give peanuts only monkeys will work for you. see the plight of NPS, a good scheme with the lowest FMC, but failed to take off because of poor marketting/low compensation to distributors.There should be a reasonable commisson structure for the distributor who acts as a bridge for the AMC and client. you have not mentioned anything about the margin that the retiler gets by selling LUX/ DETTOL/ COLGATE.

Like (2)

sethu

Dec 21, 2010

yes.Mutualfunds in General takes care of their promoter and employees and not investors.After having very bad experience with MFS i have 99 percent exited my mf holdings.

Like (2)

P Kashyap

Dec 21, 2010

Financial services companies and their brand image cannot be compared with FMCG product companies' brand image. Well Coca-Cola is also world's famous brands, but they also cheat consumers by mixing essence, water and CO2, isn't that true? I disagree with the author's comparison. There is an obvious disconnect - can't compare Gold with apples. While most of the consumers would recall Colgate / Cibaca / Lal Dantmanjans,How many consumers would know Financial services? I think the author has mixed up Brand recognition with Trust. Not quite apt.

Like (2)

Ganesh K

Dec 21, 2010

Mutual funds taken prior to year 2003 give you good return. Mutual funds after 2007 are loot. They only give fat salary & perks to their employees.i would rather directly invest in equity or nationalised bank FD. You wonder why BSNL number 2 service provider? Its mobile network is available almost everywhere ( though signal strenght is low in basements & closed areas) hence it is popular.

Like (2)

Dr Ketan Jinwala

Dec 21, 2010

Thank you Mr.Dayal. I like your transparancy & honesty. In India still people are not aware of mutual fund. I pity on my relative who lost rs 1 coror in fixed deposit of cooperative bank.

Like (2)
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