Morgan exits, HDFC buys. - The Honest Truth By Ajit Dayal
Investing in India - Honest Truth by Ajit Dayal
Morgan exits, HDFC buys. A  A  A
30 DECEMBER 2013

The mutual fund industry, which is "celebrating" 20 years of private sector "participation", has achieved another dubious milestone: Morgan Stanley has sold its mutual fund business to HDFC Mutual Fund, reducing the choices (good or bad) to Indian retail investors.

For tens of thousands of investors in the high-profiled "IPO-style" launch of the Morgan Stanley India Growth Fund in January 1994, the news of the sale will be a bitter reminder of the Wild West attitude adopted by a global name in its maiden Indian mis-adventure.

The Morgan Stanley Fund was launched under the bold advertising campaign of a global powerhouse bringing its global knowledge to a local market. What happened instead was the loot of the retail Indian investor. Sold like an IPO with a limited supply of some scarce shares by eager merchant bankers, supported by the silence of Morgan Stanley, the Morgan Stanley India Growth Fund excited thousands of investors. Enticed by a perception of a premium on listing, investors circled the bank buildings to beat the deadline of submitting the scarce application forms on the last date. In fact, individuals who could not get the forms were "willing" to pay a premium of Rs. 10 to have the opportunity to fill in the form and pray for an allotment. This closed end - and scarce - nature of the investment created a false demand from the mis-informed investors. People who were sold forms for Rs 10 (their cost of acquisition was therefore Rs 20 for a Rs 10 unit) effectively meant that individuals were paying 8,000 for an Index that was trading at the 4,000 levels.

The subsequent downturn of the Indian stock market caused by the Tequila crisis in Mexico in December 1994, resulted in an obliteration of individual investors' wealth. To be fair, the Morgan Stanley mis-launch was not the first - or last - swipe at an unsuspecting retail investor. Despite the fact that this event occurred nearly 20 years ago, the Morgan Stanley name was forever blemished in the minds of the retail investor. The sale of its Rs 3,200 crore business, in that sense, is not a surprise.

What, to me, is also not a surprise is that HDFC Mutual Fund is the buyer.

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The perpetrator buys the creator?

As much as I like HDFC as a company, I continue to be amazed why it tolerates the business practices of its affiliate, HDFC Mutual Fund. While HDFC is reputed for setting higher standards in the home lending business, HDFC Mutual Fund - and most of the other fund houses in this "business" of mutual funds - cannot claim any such distinction. (Before I move on, a disclaimer: I am associated with Quantum Mutual Fund and have witnessed the struggle of following a more correct path in an industry where doing the right thing has earned us the reputation of being a maverick!)

HDFC Mutual Fund and its representatives have been involved with various committees of AMFI - the association of the people who run mutual funds - and have had ample opportunity to build something of immense value for India's retail investors. Yet, HDFC Mutual Fund, which - in my opinion - sponges off the immense goodwill of the HDFC brand name, has been a party to practices that hurt retail investors and protect the franchise of the business houses that control the mutual fund industry.

If there is any doubt off the hollowing out of the retail investor base, all that AMFI needs to do is to chart the number of folios and investors in mutual funds since the year 2005. And to this data point they need to add the chart of foreign flows. The stark contrast in the direction of participation is shocking. There must be a reason why global investors are continuing to buy India and why domestic retail Indian investors are selling out? Retail, domestic investors could have added to their wealth by being investors in the stock market over the past 20 years. Yet, the terrifying experience of wealth annihilation has made them stay away from mutual funds.

The leaders in the mutual fund industry, who hold high positions of power in AMFI, have failed to help retail investors build wealth by generating the confidence to invest in mutual funds. To name a few of the actions which could have kick-started a surge in retail confidence:

  1. Rather than fighting for a disclosure of the distribution costs - which comes from the pocket of the retail investor - the fund houses have supported the efforts of AMFI to work for the benefit of distributors and reinstate high, and opaque, commissions. There has been no public voice of persistent dissent by the leadership of HDFC Mutual Fund or any of the "leading" fund houses;

  2. Rather than using their position as a leader in the mutual fund industry to force the industry to adopt better disclosure standards on portfolio turnover, payment to brokers as commissions, payment to investment professionals and senior managements, the opaque practices of limited reporting carry on. In a typical "double-standard", the research analysts working in these mutual fund houses would be really upset if the companies they track and cover were to stop reporting salaries of their senior personnel. Yet, any light to be shone on their salaries is deflected as "confidential".

  3. Every mutual fund has a capacity, just as a cement plant or an automobile plant has a "capacity". Beyond this stated capacity the fund manager will fund it difficult to manage money the way they are supposed to as per their investment objectives. Yet the industry shuns this practice of declaring its capacity and the assumptions behind these capacity levels. Collecting assets and growing AuM - on which higher revenues are earned - is the sole focus of many fund houses and their head honchos. They need their monthly fix of money to maintain their lifestyles even if it means dumping you with an inferior quality bag of cement, a less reliable two-wheeler, or a fund that can no longer invest (and perform) the way it is supposed to.

  4. Similarly, the recent attempt by SEBI to raise the minimum net worth to run a mutual fund "business" from the existing Rs 10 crore to Rs 25 crore smacks of a bad policy influenced by a desire to have a closed club of limited members. A smaller number of mutual funds will mean that the industry can play around with their mutual fund investors the way they wish to. Again, the analyst and fund managers at these mutual fund houses have stayed silent and not issued any public statement on the irrationality of this idea. They will happily comment on bad regulation in any industry in which they invest, but a questionable proposed regulation in their own industry is not commented on. The "double standards" in practice, once again. Their silence ensures they have the opportunity to make more money, even at the cost of intellectual bankruptcy. Furthermore, I would love to hear the CEO of Standard Life, the foreign jv partner of HDFC Mutual Fund, ask the regulators in UK and Europe to raise the minimum net worth of the AMCs there as a prescription for delivering a better mutual fund industry. If they support SEBI's proposal here, should they not take it to their home regulator as a way to ensure that only "serious" players enter the business in UK and Europe? Let me know if you read such a statement anywhere.

Be prepared to keep hiding your wallet!

HDFC Mutual Fund, with the brand of HDFC behind it, should be aiming to lead the charge of higher standards, better business practices, and more competition. It is, after all, a "leader". But don't hold your breath for this.

Reading the Chairman of HDFC Group, Mr. Deepak Parekh's recent comment about a need for "consolidation" in the industry and the view that India has too many mutual fund houses shows the complete lack of understanding of our profession. Or how to protect retail investors.

But it does show the naked desire to convert a profession into a business: a "business person" wants less competition, a "business person" wants less disclosure, and a "business person" wants growth at any cost. A professional is trained to honour the contract with a client and look after the clients' best interest.

Fund managers are professionals: most have rapidly and willingly been converted into doormats for the CEOs who run the mutual fund business.

Doctors are professionals: they are now being made part of the profitability chain of diagnostic centres and hospitals via undisclosed commissions for recommending unnecessary tests. The mutual fund industry had endorsed this methodology. The distributor is king and the Indian retail investor has been the sacrificial offering at the slaughter house. Hail the CEOs and their focus on growing Assets under Management! Hail the Fund Managers who pretend that their only job is to manage the investments and turn a blind eye to how the assets were collected or how many lives have been decimated from suspect practices. Their intellectual superiority would make the MBA schools they graduated from proud of their achievements. "Ethics in Business" was a course they probably skipped.

Are investors safe in mutual funds?

At a recent event, Finance Minister Chidambaram apparently said words to this effect: I have just returned from a workshop of the mutual fund industry and I know what the problem is - the problem is that we need to incentivise the distribution channels.

The Finance Minister, like the frenzied investors standing in the long lines to submit their application forms for the Morgan Stanley IPO in January 1994, has been mis-informed about the problems facing the mutual fund industry. A lawyer is only as good as the brief he gets. Policy is only meaningful when selective inputs are avoided.

With the sale of the Morgan Stanley Fund, one chapter of the sordid history of India's racketeering mutual fund industry is over.

Sadly, the chapters of the persistent battering of the Indian retail investor will continue to be written. And it is a shame that "leading" mutual fund groups like HDFC Mutual Fund and their well-respected Chairman - who are in prominent positions of leadership or are respected because they carry the HDFC tag on their visiting cards - continue to perpetrate this sorry state of affairs: whether by design or by sheer ignorance.

Meanwhile, the commitment from Quantum Mutual Fund to continue to work diligently for its clients and investors stands in stark contrast to the practices of the industry. The only "consolidation" the industry needs is a suspension of the license of fund houses and their officers that have abetted in the decimation of investor wealth and confidence. Every other criterion of "consolidation" smacks of a desire to limit the choices of a free market and allow the regulator to favour the large, established players and leave the investors at the mercy of their greed and avarice.

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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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8 Responses to "Morgan exits, HDFC buys."


Jan 16, 2014

Retail investors should AVOID Mutual Fund Industry for wealth accumulation - instead they should adopt and choose the Fixed Deposit for their wealth as well as safety of their capital. Do not buy or get confused with the TAX and TDS etc., these are all the confusing words to entice you to invest in MF by the MF and AMC promotors to accumulate and amass their own wealth. Beware - Beware.

It is a fact vent out by the author that can not be masked - is that the standards and ethics of Indian MF industry and AMC has been eroded and diving down every year, which is a fact and can not be denied.

Fall or Rise,Bull or Bear markett , always the loosers will be Retail investors - enticed by the Quack consultants and so called reputed portals for SIP in MF. Accumulation of wealth or gain is only for the AMC promotors and the Investment managers.

Like (2)

Vel Murugan

Jan 4, 2014

I think Mr. Ajit Dayal is grossly misinformed about HDFC and its chairman Mr. Deepak Parekh.

Mr. Deepak Parekh played a 5th army role in getting the Satyam Computer Services Ltd to the Mahindra group, at a throw away prices.

Like (3)


Jan 1, 2014

This ranting against a fellow competitor will do more harm to you (Quan MF), and to a lesser extent, the industry in the long run. I am an investor and not associated with the MF industry so let me assure you that my views are independent.

I think you should compare what MFs have in offer vis-a-vis other investment avenues such as real estate, insurance, gold, nbfc etc. The MF industry has made investing and redeeming so easy. The disclosure standards are much better compared to other avenues available to the investor. You need to study the industry in this light as well, rather than take a high moral ground.

If Quantum MF is so superior let me ask you this - Why does the ingovern report say that your fund has abstained from voting in 47.9% and voted FOR 50.7% of company resolutions that your fund has invested in? Meaning only 1.9% you have disagreed with management. You might be independent in mind, but you should show that in activity.


P.S Ingovern report of Aug 2013.

Like (2)


Dec 31, 2013

Dear Mr Dayal,
Thanks for sharing your views- appreciate the perspective. In fact media articles were projecting this 'buy' as positive for HDFC & investors as well.

Like (4)

sundar rangan

Dec 31, 2013

I don't buy your argument that HDFC or for that matter Deepak Parekh represent "highest standards" of business practices. Both have managed to build an aura around them thanks to some wonderful media management. Deepak Parekh went on record saying, he is not bothered about corruption in Govt. In fact that one statement betrays his cosy feelings towards powers-that-be in a "let's scratch each other's back" relationship. HDFC Bank too is known for its meanest tactics in terms of levying charges on customers. If it were a PSU bank, it would have all come out in newspapers. But as I said, the entire halo around HDFC is a great credit to its media managers.

Like (10)


Dec 30, 2013

Hi Ajit,

Quantum AMC will be rewarded like Vanguard in near future for its novel approach of value creation to its customers. Thanks for your work.

Like (5)

R Tayal

Dec 30, 2013

One aspect of mutual fund industry that I believe needs regulation is the variable pay and bonuses of fund managers. MFs declare their performance with respect to the benchmark index, and further declare the Rate of Return on a gross basis whereas what the investor gets is net basis. If the fund has performed below the benchmark or if the return to investor is less than say 10% p.a. then variable pay & bonuses should not be paid by MFs to the fund managers.

Like (4)

bharat shah

Dec 30, 2013

thank you QUANTUM MUTUAL FUND for working for we, investors!

Like (4)
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