Saturday, August 1, 2009

Freedom from Hidden Commissions in Mutual Funds

From the newsletter "The Honest Truth" from EquityMaster.
On August 1st, 2009 the Indian mutual fund industry enters a new era.

After years of pushing mostly irrelevant products through a distribution channel that grew fat on the ignorance of investors, the Indian mutual fund industry has been forced to lay bare the facts. From August 1, 2009 all Indian mutual funds will have a cap on what they pay their distributors. And investors can pay their distributors and financial advisors what they believe to be the value of the advice given.

Over the years, the elephants in the Indian mutual fund industry - and the distributors that made these elephants dance to their tune - have spread a series of questionable "facts".

Each "fact" was in many ways designed to support the immoral practice of letting commissions earned by many distributors determine which mutual funds they recommended. Funds were sold based on the commission structures paid to distributors, not based on which funds were best suited for the investors.

The elephants in the mutual fund were happy to dance along to the tune of many distributors. Every time a fund was sold (or mis-sold) it meant a larger "total assets under management" for the industry - and more fees for the mutual fund house. And better salaries and bonuses for all in the system.

Now, the mutual fund industry is in new territory, not because the giants chose to take the side of the good and right (in fact, they fought it) but because the regulator put a stop to the rot. The days of the symbiotic relationship between the elephants and the distributors are over.
From August 1st the mutual fund industry has to learn to focus on what is good for the investor. A new playing field for those not used to it. So many in the mutual fund industry stand at the gate, nervous and anxious - they don't know what is on the other side. The side that says, "This area reserved for those who are fair and care about their investors".

Welcome to the world of Quantum Mutual Funds
Well, the good news for investors is that Quantum Mutual Funds - the ant of the mutual fund industry - has been standing on the "correct" side of that gate for a long time.

We have been here since 2006. Not paying commissions to any distributors because we were alarmed at the scope for mis-selling in the industry.

Not because the law told us to be on the "correct" side, but because we were keen to build a business around a "correct" practice.

It has been a lonely existence, talking to investors, explaining to the media why we do what we do.

Quantum Mutual Fund was the 29th Asset Management Company, but the 1st to be clear which side of the gate we were on.
We were the smallest mutual fund house amongst all the dancing elephants, but we had the biggest idea: we were keen to build a piece of heaven here in the troubled world of mutual fund investing.

Ranjan Varma
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