A reader asks, “I have been continuously investing in MF for the last 6+ years. My brother tells me to invest in direct equity instead of MF for the main reason that the fund manager’s decisions can be driven by their relationship with the company or some conflict of interest. I buy direct equity in chunks but prefer mutual fund investing as mainstream. How much of this is true? Is this something we have to worry about while investing in active funds?”
Just as I was about to reply, this news broke: “Sebi fines Kotak AMC, its MD Nilesh Shah and 5 other officials for violation of rules“. Fixed Maturity Plans of the AMC were extended against SEBI rules to prevent the default of Essel group bonds. This extract from the order is of particular importance.
“By not taking investment decisions solely in the interest of unit holders, not rendering high standards of service, not exercising due diligence, not ensuring proper care at the time of investment by assessing the adequacy of the collateral, not recording of the rationale as to how 1.6/1.5 times security cover is adequate collateral, (and) not assessing the credit quality of the underlying bond and repayment capacity of the issuer in the investment rationale, the noticees (Kotak AMC and its senior officials) have allegedly violated… mutual fund regulations,”
Franklin Templeton is also guilty of falsely pacifying unitholders that “all is well” when corporate investors were busy redeeming along with some senior AMC personnel including board members and trustees. See: SEBI imposes ₹15 cr fine on Franklin Templeton, 8 others over wound-up schemes.
The Axis MF front-running case is a bit different as the AMC is accusing its own fund managers of illegal actions.
Join 32,000+ readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! (Link takes you to our email sign-up form)
🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥
The message should be clear, be it the AMC or the trustees, we cannot blindly trust anyone to always act in our interest. So does this mean direct equity is a better choice?
All companies have their own share of scams, incidents and whistleblowers (Asian Paints, Infy etc). The risks of managing a direct equity portfolio are also higher for the typical retail investor. It is no rocket science but experience in the stock market comes only after a few hard knocks and not everyone can afford it.
The web of scandal has also touched RTAs (Karvy) and market curators (NSE).
The simple and clear truth is, that all entities in financial services care about themselves first. Retail investors are the last in the pecking order.
Yes, mutual funds are structured in a “safe” manner as trusts. There are enough compliance safeguards in check, yet AMCs getting fined for breaches is a routine year-round affair.
A mutual fund portfolio is just as reasonably safe as a stock portfolio. Both have several factors beyond the control of their investors (at least the small ones) and we have no way to tell what drives the decisions of active fund managers. All we can do is hope/pray that most of them are for our benefit – the odds of which are quite reasonable.
This is why diversifying across 3-4 AMC is essential particularly as our networth grows. Over a 20-30 year investing period, one of the AMCs we are investing in could be hit with some scandal! The same is also true of direct equity or insurers or banks! We can run, but we cannot hide!
Perhaps index funds are relatively a safer place for investors. Not because they are passively managed but because, at least for now, the AUM is low. Index funds are subject to curation risk! See: Should I exit Nifty Next 50 because of Paytm, Zomato and Nykaa? So there will always be something to worry about!
So what should investors do? Avoid extreme reactions. Both blind trust and paranoia are harmful. Diversification across mutual fund AMCs, direct equity (if that is your cup of tea) and other asset class is the only rational step we can take along with constant vigilance. Then we stop worrying because beyond this, it is up to luck and prayer.
🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 7000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! ⇐ More than 2,500 investors and advisors use this!
Track your mutual funds and stock investments with this Google Sheet!
We also publish monthly equity mutual funds, debt and hybrid mutual funds, index funds and ETF screeners and momentum, low-volatility stock screeners.
- Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
- Have a question? Subscribe to our newsletter using the form below.
- Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.
Join 32,000+ readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! (Link takes you to our email sign-up form)
About The Author
Dr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! ⇐ More than 3,000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter the market condition is!! Watch the first lecture for free! One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course! Increase your income by getting people to pay for your skills! ⇐ More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!
Our new book for kids: “Chinchu Gets a Superpower!” is now available!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Do you want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or get the Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & its content policy. Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
- Twitter @freefincal
- Subscribe to our YouTube Videos
- Posts feed via Feedburner.
Our publications
You Can Be Rich Too with Goal-Based Investing
Published by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want
This book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.Your Ultimate Guide to Travel
This is an in-depth dive into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically, with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)