The markets and investor watchdog, Sebi, is planning to question fund houses on the underperformance of some of their schemes. Many mutual fund schemes have underperformed benchmarks for a period of time and the regulator is unhappy about it and is going to investigate the reasons for their underperformance.
The regulator's intentions are noble but the fact is that it is not the regulator's job to question a fund manager why his investment philosophy failed. That job is the job of the investor and if the investor does not like the returns he is getting from his investments he should withdraw his investments.
Investors in mutual fund schemes go through distributors (or investment advisors) who earn commissions for selling them the scheme. The distributor has to earn his commission by monitoring the performance of the fund and recommending to the investor whether he should continue to stay invested or leave the scheme. More recently, of course, distributors have been moping about commissions, and are more or less out of the picture.
However, we are on the question of underperformance, and the world over underperforming schemes lose assets and get downsized. Fidelity's Magellan fund, once the largest single equity fund by assets in the world, which was once managed by the famous Peter Lynch, lost almost 90 percent of its assets over the last 10-plus years as the fund managers were not able to maintain the glory of the fund.
Fund managers underperform due to various reasons. Outdated investment philosophy and poor stock selection are some of the reasons for underperformance. The employer, the distributor and the investor should make sure that such fund managers do not stay and manage the fund.
Sebi's role is to make sure that the fund has stuck to its objectives, there is no regulatory deviation and that the fund is not used as a garbage bin for better performing funds. A fund that has a stated objective of being invested in large-cap stocks and has