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Good Governance Missing: SEBI Flag 23 Irregularities With Mutual Funds
Aug 6, 2019

The SEBI has decided to take matters more seriously in the interest of investors. It has pulled out 23 irregularities of Mutual Funds.

SEBI sent a letter notifying the Association of Mutual Funds in India (AMFI) about the irregular practices of mutual funds that the inspection team observed for a period, from April 01, 2016 to March 31, 2017.

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Some of the major observations from the letter are:

  1. Failure to liquidate equity portfolio of close-ended schemes on or before the date of maturity of the scheme.
  2. Instances of misleading the investors by reporting incorrect data on investor complaints in Annual Reports on the MF/AMFI's website.
  3. Instances in which the performance of only selected schemes were presented to the Board of AMC and Trustee for periodic review and not all the schemes.
  4. Failure to report OTC trades in debt securities on reporting platforms within 15 minutes from the time of execution of the trades by the dealers. Such delayed reporting has impacted effective price discovery and valuation of such securities.
  5. Instances of non-disclosure of transactions of debt and money market securities (including inter scheme transfers) in its schemes' portfolio on AMCs' website.
  6. No internal system to segregate between existing and new investors which lead to AMCs levying additional transactional charges on existing investors considering them as new investors.
  7. Failure to institute internal systems to detect splitting investments of investors by distributors in order to enhance the amount of transaction charges. Also, failure to take action against such distributors including recommendations to AMFI to take appropriate action.
  8. Failure to identify and appropriate all expenses in the individual schemes as per the regulatory requirements.
  9. Failure to ensure that direct plans have lower expense ratio than regular plan and the difference is to the extent of all distribution expenses & commission paid.
  10. Instances where the compliance officer has further delegated the responsibility to other staff members to process applications of access person with respect to trading in securities.
  11. Redemption transactions are processed for non-PAN exempt existing folios without getting PAN details which is not in line with various SEBI circulars.
  12. Instances wherein AMC continued to accept business from distributors who were suspended by AMFI. Further AMC also failed to ensure that no commission is paid to such distributors during the period of suspension.
  13. Instances of distributor's empanelment by AMCs with expired AMFI Registration Number (ARN).
  14. Delay in transferring unclaimed redemption/dividend amount to a separate scheme launched as per SEBI/HO/IMD/DF2/CIR/P/2016/37 dated February 25, 2016.
  15. Instances of inappropriate utilization of funds meant for investor education, such as spending on programs meant for Financial Advisors, charging of expenses to the said funds for printing materials such as notebooks, planners and calendars, and charging of expenses without adequate records, etc.
  16. Instances wherein interest accrued but not due, on fixed income securities, was not included in the calculation of exposure leading to the scheme breaching cumulative gross exposure limit as per the regulatory requirement.
  17. Instances of not sending physical copy of annual reports or abridged summary of annual reports to the unit holders whose email has bounced back. Further AMC has not taken steps to update the correct id of such investors.
  18. Failure of internal control systems whereby AMC failed to check investment in cash for more than Rs 50,000/- by single investor in a financial year.
  19. Instances of incorrect and inadequate submissions in periodic reporting to SEBI.
  20. Instances of investment in NFO through switch out transaction request from an existing scheme and the reversal of the said transaction at the earlier NAV in case of failure of the NFO.
  21. Instances of non-allotment of direct plan to investors within 30 days wherein correct ARN/complete ARN was not received which leads to unreasonable gain to the AMC as distribution commission is charged to the investor but not paid to any distributor.
  22. Failure to do regular reconciliation of funds received in different schemes which led to funds of one scheme being invested in another scheme for long periods resulting in loss to the scheme in which funds should have been invested.
  23. Failure to pay consolidated amount along with break up for interest for the period of delay in dispatch of repurchase /redemption warrants when such payments are made to the investors.

These observations made by the market regulator highlight so many instances, wherein the investors' interest has been compromised.

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Amidst all the upheaval going on in the economy; subdued growth, lower consumer sentiment, the volatility of the equity markets, corporate ratings downgrading, global political movements, crude price changes, trade war tensions, etc., this letter is another big blow for the investors, who are trying to adapt to the dips that their investment portfolio has witnessed.

Considering the diversification and rupee-cost averaging as the key benefits of investing in mutual funds, many investors invested heavily in mutual funds.

But this letter highlights the multiple ways, in terms of the transaction cost, incorrect reporting, collaborations with suspended distributors, breach of a regulatory framework, misuse of investor education funds, etc., investors have been betrayed because of the irregularities of mutual fund houses being unethical and non-transparent in their dealings.

[Read: Are Mutual Funds Crossing Their Limits?]

Plus, in one of the recent news reporting, by The Economic Times, 'Union minister Anurag Thakur said that SEBI noticed various irregularities with respect to functioning of mutual funds like failure to identify and appropriate all the expenses in individual schemes as per regulatory requirements.' Anurag Thakur even added, "During 2018-19, 47 warning letters and 24 deficiency letters were issued to mutual funds/ Asset Management Companies and two warning letters were issued to trustees of mutual funds while adjudication proceedings were initiated against five AMCs, four trustee companies and one CEO of AMC."

Despite the many stringent measures taken in the past for the financial wellbeing of investors, which the mutual fund houses continue to cope with, the audit report and letter of warning based on the observations do not paint a good picture of Mutual Fund industry.

Disgruntled investors losing trust is the biggest failure for investment and every player in the mutual fund industry.

If mutual fund industry has to see growth, each and every one is equally responsible. Mutual fund houses need to put in practice the best fiduciary standards as custodian of peoples' hard-earned money, be more responsible asset managers (and not become asset gatherers) to uphold their investors' interest as the topmost priority.

Fund houses should not mis-sell products; but instead educate investors, adequately use funds allocated to the schemes responsibly through ethical intermediaries/advisers who are certified from a recognised governing body and follow ethical practices. The fund managers should not invest investors hard-earned money in an ad hoc manner in order to generate higher returns.

Even the advisers play a key role, hence they should follow ethics to earn trust, placing the investor's/client's interest first and always follow high fiduciary standards. For the Indian mutual fund industry to scale new heights, the collective effort of distributors and investment advisers are necessary. Mutual fund distributors and investment advisers also need to well receive regulatory changes.

In addition, advisers should recommend products after due diligence to the investors based on their needs, risk profile, investment objectives, financial goals, and their time horizon. Also, educate investors on the importance of asset allocation, which is a strategy in itself. This judicious approach can help IFAs gain the confidence of investors.

[Read: How IFAs Can Prepare Clients For Uncertainties]

So, be the "Certified Financial Guardian", who the investors can trust to handhold them and empathetically address the clients' financial concerns ethically.

Certified Financial Guardians can help advisers grow their business, but for investors/clients to stick around for the long term, it is important for IFAs to build a relationship founded on ethics and prudent business practices.

[Read: How IFAs Can Gain the Trust and Respect of Their Clients]

Remember, building trust and gaining the respect of investors/clients is a process; IFAs need to earn their goodwill. It will not happen by chance, but with renewed diligence. As a dedicated adviser, IFAs should consistently be there for them throughout their financial journey and make a conscious effort.

Besides, it is equally important that even the investors do their own research to choose the unethical, unbiased, experienced, and research-backed adviser from a reputed company.

PersonalFN has a proven track record in investment planning, has offered investment recommendations to more than 8,000 clients, and has created customised financial plans for more than 2,000 clients to date. This has been possible because PersonalFN provides unbiased and ethical recommendations, guiding along the way investors to assess their risk profile before any investment, and advises them on direct schemes by thorough research.

PS: Consider PersonalFN's flagship premium mutual fund research service-FundSelect, if you want insightful guidance and recommendations on some worthy funds having high growth potential, in the years to come.

If you haven't subscribed to FundSelect yet, you can do now!

Author: Aditi Murkute

This article first appeared on Certified Financial Guardian.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.

Disclaimer:

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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