More SEBI Support Required for Investor Protection

By | November 13, 2011

With the Securities and Exchange Board of India adopting a proactive approach off late so as to ensure investor protection and growth, many market observers feel that more steps have to be taken so as to make the Indian market scene more reliable for exchanges and transactions. While several crucial decisions like regulation of liquid funds, abolition of entry funds and propagating investment in Fixed Maturity Plans or FMPs in order to empower the investor, industry observers are demanding for three more disclosures in order to make the marker a better place for investment. They are:

Compensation Policies

Since there is an irrevocable link between an Asset Management Company’s policies related to compensation for its investment team and its investment practices, it would be safe to conclude that the AMC lays more emphasis on the growth of assets rather than the results of investments. Also, equity managers tend to have a short-term investment focus in this type of scenario. If the AMC decides the bonus payouts of its equity managers on the basis of the delivery of performance over a period of one year, its compensation structure will solely show interest towards short-term investment plans. Although many may deem this to be a drawback, the AMC has the power to determine and set its priorities, while also providing investors with the independence to be aware and informed of the same.  Thus, the SEBI must ensure the AMC discloses its compensation policies listed in its annual report.

Investments of the Fund Manager

The SEBI must ensure that a fund manager discloses his assets in an honest and objective manner, at regular intervals. This is to ensure that fund managers do not invest their personal funds in investments, leading to frauds or financial malpractices in the markets. An objective of an investor is to grow his investments by seizing good returns he earns on his funds and not to deficit his earnings by borrowing loans like home loan, personal loan etc., to finance his requirements. This can also help empower investors and boost their confidence to invest in the markets. Generally, AMCs make it a point to release fact sheets monthly where portfolios are discussed along with other topics like the minimum investment amount, the investment objective of the fund, and the name and credentials of the fund manager, among other prominent details. SEBI must ensure that along with the fund manager’s details, other prominent information like number of units held by the fund manager in the investments will help promote the interest of investors in the fund market of the country.

Communication of the Fund Manager

Although AMCs provide relevant information on the communication between fund managers and Chief Investment Officers (CIOs) in fact sheets and online sources, the content is not satisfactory and comprehensive for an investor. Often written in a flimsy manner with broad inputs on the current market scene and economic trends, that is moreover outsourced from inexperienced third parties, does not contribute valuably to its purpose in any manner. Investors will be benefited only with brief and relevant information such as the communication by managers on the strategies deployed by them for their various funds, why investments were made in a specific stock or sector, and how well have the investments played out. With this unifying measure, fund managers and AMCs will help bring investors and closer together, treating those more as stakeholders rather than an exterior party to the organization. This decision, that can be made mandatory to be disclosed annually, will also facilitate investors to understand the behavior of funds they have made investments in.

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