I have always said that investing in Indian mutual funds is a dumb idea given the lack of regulation , under performance, high fees and front running and fraud conducted by mutual fund managers. It is best to invest in a good ETF with low fees such as the Nifty Bees ETF which was one of the first ETFs to track India’s benchmark Nifty 50 . However lack of sophistication amongst retail investors have not allowed these ETFs to gain popularity. Now there is one more reason to stay away from the chills of the Indian mutual industry as the stock market regulator SEBI has said that 50% of the MFs under perform the benchmark and some fund houses have underperformed over their entire history. It also cites the example of a fund trading circulatory with an investing bank flouting regulations. However lack of criminal cases against these white collar crimes emboldens the fund managers to keep indulging in frauds enriching themselves at the expense of the investors. Note insider trading is quite rampant in India and the fund managers are known to be active participants along with the promoters of the companies.
The Mutual Fund Companies in India like other sectors such as Real Estate and Telecom too has come under the spotlight for some illegal activity. While you can’t call the industry corrupt because of some fraudulent activities it does raise questions on the industry ethics. Top Mutual Funds in the country like HDFC and L&T have been fined by the stock market regulator SEBI for front running. For those who don’t understand what the term means,front running is an illegal activity whereby a fund manager or fund official makes personal gains by making trades on his account before doing a trade for the fund. This causes losses for the fund investor and is akin to stealing. However like other corrupt practices in the stock market industry, SEBI lets them go with small fines which don’t deter more such frauds. It is also not unknown that some fund managers connive with company promoters and market operators to rig and do circular trading. Not only is this a problem,another massive problem with the industry is its underper formance as compared to the benchmarks. While earlier mutual funds were known to outperform the benchmarks like the Nifty, a recent Crisil study has dispelled this myth. Given these disadvantages of mutual fund ,it is time to invest in Indian ETFs though not a lot of variety exists in the Indian stock market yet.
He said over 50% of the schemes of nine fund houses have underperformed their benchmark indices and there were nine other fund houses where up to 50% of the schemes were underperformed by their respective benchmark indices.“Some AMCs’ (asset management companies) schemes have underperformed since inception. Sebi will engage with them and ask what measures they are taking to address the issue. We will perhaps review their performance on a half-yearly or annual basis,” Sinha said at industry lobby Confederation of Indian Industry’s annual mutual fund summit.Moreover, Sebi was concerned about fund houses flouting regulations on several fronts in recent months. “One scheme even had a single entity investing at least 25% of the assets under management (AUM) in the scheme. Then we found that a mutual fund was investing money in the fixed deposit of a large bank, which itself is an investor in the fund,” Sinha said. Rules stipulate that a single investor can only invest up to 25% of the AUM in a mutual fund scheme.