A Red Light is a Suggestion: Honoring Ethical Investment Principles Over Permissible Practices

It is now official: people from New Delhi are rude.

Not only do they move around with guns in their cars to shoot women who question male drivers on why they cut lanes, but Delhi drivers are ill mannered.

The commissioner of Mauritius, according to DNA, said, "Delhi drivers are very bad. They do not drive in lanes. Please ask them to drive in lanes."

"We cannot expect mega city policing (to) function properly if people do not change their behaviour. We still find vehicles jumping red lights, and police vehicles...too jump lights", Union Minister P. C. Chidambaram said at a function to inaugurate 22 police stations. This was a report in DNA on September 23, 2009.

To be fair, this jumping a red light - or not driving in a lane - is not a sickness confined to people from New Delhi.

It is an Indian problem.
It is a national habit.

And it comes from years of being ingrained with the most Indian of Indian traits.

"A red light", explained a friend of mine "is a suggestion."

Those six words capture the Indian-ness of being Indian.

If there is a law, don't treat it like a law.
If there is a rule, don't treat it like a rule.

Consider it to be a suggestion.

A suggestion that you can casually ignore and, if you are in the mood for it, happily break to any degree you are comfortable with.

The rules of the game

I marvel at the ease by which we pray to all our gods every morning and then go about doing some not-so-goodly acts for the rest of the day.

When one is so ready to break the letter of the law, of what use is the spirit of the law?

For years every mutual fund house in India - barring Quantum Mutual Fund - continued to play ball with a distribution channel that was working overdrive to shift investors from one new fund offering to another.

A chunk of this advice to switch from one fund to another was probably a function of the fees paid to the distribution channel. This made many "large" funds shrink in size as their "bought" assets were auctioned off to the next new fund offering.

At Quantum Mutual Funds, we did not suffer this deflation of assets.

Our funds were not sold by any distribution channels: we pay no commissions.
Our funds are bought by long term investors who understand and appreciate what we have built: a fund house that always cared for the investors even when the rules allowed certain practices.

From the data in Table 1 above, we can see that the typical fund that used the typical distribution channel probably paid 2% to raise the assets (so, 2% of Rs 3,096 crore = Rs 61.92 crore).

This fund house probably ended up paying an exit fee of another 1% when the investor left (so, 1% of the "missing" Rs 2,398.4 crore = Rs 23.98 crore).

The typical distributor that worked for the typical fund probably earned Rs 85.90 crore (Rs 61.92 crore on the entry load and Rs 23.98 crore on the exit load).

Not bad for a hard day's work.
The problem was that this Rs 85.90 crore came from the investor's pocket.
Yes, from your pocket.

These numbers may not be accurate, and they are based on assumptions and ignore dividends paid out by the fund house and does not capture the precise dates when investors may have exit the fund. But they are representative of what did happen.

The table is representative of all the orange and yellow and red lights that were broken.
And the lanes that were constantly being cut.

SEBI steps in

Just as the Home Minister is trying to get drivers in Delhi to get their act together, SEBI has stepped in to make sure that sensible rules are in place.

So, there are a lot of green lights in the industry now.
Go-go green, to be precise, for those who are driving in their lanes.

The honest distributor and the honest financial planner (there are a lot of them and we would love to work with them - please email us at [email protected] to see how we can work together) will now be able to advise their clients with no distractions.

They will be paid a fee directly by the investors.
No more opaque payment structures that made lane cutting a way of life.

In the past few years, these honest advisors and distributors saw the "competition" taking away their honest business. They were at pains to warn their dwindling client base about the risks of following the aggressive fund-flipping strategies that commission-driven distributors were recommending.

So SEBI has banned the concept of entry loads.

On exit loads, there is a debate.

There is uncertainty.

Are mutual funds allowed to pay distributors any exit loads - from the pool of money that belongs to investors?
Or do all payments for the exit loads have to come from the mutual fund house? A fund house earns management fees, it is free to give as much of it (or as little of it) to any distributor.

While the industry awaits these clarifications on the exit load, the steering wheel is ready for a sharp turn.
And the foot is ready to be pressed onto the accelerator.

"You know us", said a senior person in the distribution industry, "We will find a way to make money."

So, there you have it.
The red light is a suggestion.
Lane cutting is a national birthright.

Meanwhile, Quantum Mutual Funds will stop at all the red lights - and avoid cutting the lanes.
Though, I must confess, we have Raju: driving around in South India.

No, he is not related to the Satyam family, but given his desire to cut lanes and break lights....CLICK HERE TO READ THE PATH TO PROFIT BLOG...

Disclaimer : Past performance may or may not be sustained in the future. Mutual Fund investments are subject to market risks, fluctuation in NAV's and uncertainty of dividend distributions. Please read offer documents of the relevant schemes carefully before making any investments. Click here for the detailed risk factors and statutory information"

Ajit Dayal, the author is a Director in Quantum Information Services Private Limited and Quantum Asset Management Company Private Limited. Views expressed in this article are entirely those of the author and may not be regarded as views of the Quantum Mutual Fund or Quantum Asset Management Company Private Limited or Quantum Information Services Private Limited.

Mutual Fund Investments are subject to market risks. Please read the offer documents of the respective schemes before making any investments

Note: This article was first carried on www.equitymaster.com

Above article is authored by Quantum.

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