With just a 3000-point correction in the Nifty, mutual fund portfolios have turned red, and Systematic Investment Plan (SIP) returns have slipped into the negative. Small investors are feeling betrayed as their trust in fund managers’ abilities appears misplaced. If fund managers can’t outperform the market, then what does it say about the quality of their fund management? It’s time to hold fund managers accountable for their performance and establish a clear system for rewarding and penalizing them. A look at recent developments in China’s mutual fund industry might offer some lessons for India.
What’s Happening in China: According to a recent report by The Economic Times, the China Securities Regulatory Commission (CSRC) has proposed a dramatic measure: a 50% pay cut for fund managers whose products either record a loss or return 10% less than their performance benchmarks. This proposal raises a pertinent question: what if such a system were implemented in the Indian mutual fund industry?
The Indian Scenario: A Cause for Concern: The situation in India is troubling. Over the last three years, nearly 63% of equity mutual funds have failed to beat their respective benchmarks. Out of the 213 equity mutual funds available, 135 have underperformed their benchmarks. In this context, most Indian fund managers would face significant pay cuts under a performance-based system, like the one proposed in China.
Currently, 482 fund managers oversee a mutual fund corpus of around ₹65 lakh crore, but there is no clear mechanism for investors to lodge complaints about their performance. Fund managers are evaluated by those who are least affected by their underperformance, making the system ripe for a reassessment. It’s high time for a regulatory framework that not only tracks their performance but also rewards excellence and penalizes failure.
Current Checks and Balances: Are They Enough: Fund managers in India are often seen as the experts in the mutual fund industry, entrusted with the knowledge and skill to deploy investors’ money wisely. Some fund managers have consistently beaten their benchmarks for years, but the list of those who have failed to do so is alarmingly long.
Despite regulations such as the “skin-in-the-game” principle—which penalizes fund managers for actions like front-running—there has been little improvement in overall performance. Furthermore, performance appraisals by their superiors have often proven ineffective. The usual disclaimer—*“mutual fund performance is linked to market performance”—cannot alleviate the pain of a negative NAV for investors.
Conclusion: Time for Accountability: The time has come to rein in the mutual fund industry’s fund managers. Their performance, as well as their salaries and perks, should be transparent and accessible to the public. The assets owned by fund managers and their families should also be disclosed, providing greater insight into potential conflicts of interest.
A penalty system akin to the one proposed by the China Securities Regulatory Commission could be a step in the right direction for India. By holding fund managers accountable, we can ensure that the interests of investors come first and that the mutual fund industry serves its primary purpose: generating wealth for investors.
