A MATTER OF CHARACTER

W hen you look for a groom for your daughter what do you lay emphasis on? Wouldn’t you prefer your daughter marry a person with solid character rather than someone with a suspect background? The way you think about your future son-in-law should be the way you select a mutual fund to house your hardearned savings.

Unfortunately, financial advisors and mutual fund distributors often base their advice on criteria that, frankly, may not be relevant to your investment needs. One such criterion is size.

People are surprised how ‘small funds’, such as Quantum Long Term Equity, have done so well when its peers have failed. Why did the Lehman crisis not hit small asset management companies (AMC)? How is it that large fund houses have star fund managers and small fund houses cannot afford them? I am amused by this obsession with ‘smallness’. Many often even forget that a number of large AMCs even went bust with their fixed maturity plans (FMPs) and had to be bailed out by the Reserve Bank of India after October 2008. No surprise then that it is, once again, large fund houses that have failed to nurture the habit of long-term investing in the country.

In the past, larger and established fund houses actively introduced new products at a pace that would make most fashion designers jealous. Unfortunately, many ‘new’ products were just old funds repackaged using just a new front page, allowing their distributors to earn another round of upfront fees and trail commissions along the way.

This meant that investors have missed out on the biggest boom in equities over the past 18 years when the BSE 30 index gained about 700%. Since the birth of the mutual fund industry in 1993, the collective ownership of the Indian stock market by mutual funds has declined from 10% to less than 3% today. In that same period, the foreign ownership of the Indian stock market has increased from 2% to 20%. Corporate India was booming, your salaries surged to new highs, but your savings were not working for you in a soaring stock market. Instead, your money was working for those employed in the financial services industry, making them billions, a major part of which should have gone to the investors.

The background of how the mutual fund industry has evolved—and which fund houses have hurt investors the most—should be more relevant to how investors choose a mutual fund house than traditional factors. Yet the focus is still on awards, rankings and ratings that fund houses boast of or the size of the assets that the fund house manages. John Bogle, the founder of Vanguard, brands most working in the American financial service industry as charlatans. Character, he said, is what counts the most.

Mutual funds should focus on what is good for the investor and allow a fund manager to be a fund manager, without a marketing person or even a CEO interfering with their stock selection. Every decision a fund manager makes—the stocks we buy, the products we launch, reducing the costs of managing the funds—should answer one question: Is the move good for those invested in the fund?

The focus so far has been on irrelevant factors, such as size or minimum net worth, for the issuance of an AMC licence—for what is basically an advisory business, just like the functioning of a doctor, a lawyer or a chartered accountant. It is time we change our focus and realign our perception, wholly and squarely, to include the investor.