Strange inequities

When nine out of 10 diversified equity funds underperform the Sensex, as this newspaper’s study on Monday shows, it’s time to ask questions. First, the stock market benchmark is just that, a yardstick to measure the performance of India’s most valuable, most sought after companies. An equity mutual fund is expected to do better. So what happened? Second, the performance of funds across six timeframes (from one week to one year) indicates a sharp and consistent performance lag. Why? Third, could it be that in a bid to outperform the benchmark (which, incidentally, could be other indices like Nifty, BSE 100 and so on), fund managers extended themselves into territories they shouldn’t have been in — small caps, for instance?

We all understand that funds can, and do, underperform. But when 75-96% of them fail to match the market, it’s time for trustees of funds to ask the AMCs they’ve outsourced investment management to, just what’s going on. The other issue the trustees must raise, and which Sebi chief M. Damodaran hopes to get them to raise, with their AMCs is one of intermediaries. With commissions being the first, second and last objective, the past two years saw intermediaries arm-twist the industry into launching new schemes and getting their clients, us investors, to needlessly churn their money from one to the other. Of course, that has ended after Sebi changed amortisation norms for open-ended funds, but questions about mis-selling and short-duration closed-end funds being launched remain and need close monitoring.

For investors wishing to partake of the Emerging India story, the best vehicle is an equity mutual fund, no doubt. Riding those expectations, the industry has grown 65% over the past 12 months to Rs 276,343 crore, with the percentage of assets in equity funds having risen from 26% to 34%. If this is a take-off point for the industry, it is equally its question time. And for the 2.5% of their growing wealth investors pay the AMCs, every year, the funds better have some answers.