SEBI circular on Mutual Fund transparency

SEBI has issued a new circular (SEBI/HO/IMD/DF2/CIR/P/2016/42) on 18th March,2016 requesting Mutual Funds(MFs) to provide certain additional disclosures to its investors. A lot of people have already talked about the circular. For example here, here and here. The original circular itself can be found here.

The basic idea of the circular is that investors should have an idea of how much commission they are paying to the distributors. However this information alone won’t be of any help if the investors are not aware of any alternatives (read direct plans) to avoid paying those commissions. Hence the circular also mandates the funds to compare the standard with direct plan of the same scheme. Here SEBI is assuming that the investors will compare the commission paid by them with the service they are receiving from the adviser and accordingly decide whether to shift to direct plan or not. The negatives effects of this piece of regulation has already been discussed extensively in the above articles I have mentioned. However I beg to differ with those authors.

Earlier in 2009 when SEBI had banned front end loads of all mutual funds there was a similar hue and cry over how it will be detrimental to the development of industry. However this paper finds no evidence that the regulation has reduced inflow into mutual funds. Similarly when direct plans where introduced a lot of people were worried that distributors would be out of business. I think people might be over reacting to even the current regulation.

The circular also has requested funds to declare information regarding Fund manager’s name, his/her tenure and compensation; Board of directors, key personnel and Fund managers investment in the fund etc. Academic research has shown that these factors can affect fund performance. At first it might seem unrealistic that investors will use this information. But over time they will develop casual relationship between these variables and fund performance in their mind and use it subconsciously. Hence I don’t think it is a useless piece of regulation.

Only time will tell as to how this new regulation affects market but I am hopeful it won’t be as gloomy as others predict.

Motivation and purpose of this blog

I think it is very important that I write a few lines on the motivation and aim before I kick off the blog.

My introduction to finance has been through some of the articles I have read in the financial press on 2009 financial crisis. As expected most of the stuff in those articles went over my head. It was during this time I have started following blogs by academicians and was impressed by their lucid style of writing. Story cut short, it has been on my mind ever since to start a blog.

The aim of this blog is very simple. Blog as regularly as possible (no assurances) and maintain as lucid style of writing as possible. Rather than always trying to write on all the issues myself I will provide links to various articles from across the web. I will also write short summaries of journal articles from time to time. Most of the articles in this blog will be on Finance, Economics and occasionally on politics.

Finally everyone is welcome to provide feedback/constructively criticize me. I will end this post with a quote from John Maynard Keynes, one of the most influential economist of 20th century.

“The master-economist must possess a rare combination of gifts …. He must be mathematician, historian, statesman, philosopher—in some degree. He must understand symbols and speak in words. He must contemplate the particular, in terms of the general, and touch abstract and concrete in the same flight of thought. He must study the present in the light of the past for the purposes of the future. No part of man’s nature or his institutions must be entirely outside his regard. He must be purposeful and disinterested in a simultaneous mood, as aloof and incorruptible as an artist, yet sometimes as near to earth as a politician.”