Caveat emptor applies everywhere but more so when it comes to investing. It’s all too common — stock brokers encouraging churn to the detriment of clients, investment bankers relentlessly dressing up bad apples in pursuit of high fees, insurance agents mis-selling policies regardless of customer needs and requirements and so on. Mis-selling of financial instruments is largely a moral issue and regulations hardly resolve them effectively.
That’s why the move by Kotak Mahindra Asset Management Company asking employees to invest in its own fund schemes is laudable. This ensures the interests of investors are aligned with that of the asset managers. Late stock broker turned mutual fund manager Parag Parikh was the first to put this – the concept of eating one’s own cooking — into practice in India. Not only did he and his employees invest in their fund, he also embraced the idea of having just one single equity fund, unlike other mutual funds that have a whole range of funds to cater to so-called differing risk profiles.
The reality is these thematic or sector funds are launched to capitalise on the flavour of the season and the goal is to shore up assets under management than to create a product with a different risk profile. The other advantage for mutual fund companies is, if you have a dozen schemes in your portfolio, you’ll always have some or the other scheme getting a better rating and that can becomes a selling point for that time period. Parikh’s idea of sticking to just one fund offering makes great sense because if the ultimate objective is to produce the best return, then all the fund manager has to do is to buy the best ideas in the market and bundle it in one fund that will beat the market. Risk can only be mitigated by doing a thorough job of buying what you understand.
If Kotak Mahindra AMC truly wants to position itself based on strong ethics, then it should certainly look at pruning or consolidating its various schemes. If all its schemes are exceptional performers, then employees would invest in those funds by choice than diktat. The only concern in putting this to practice is that employees or the investment managers may argue that they have to pay a 2.5% management fee which they can avoid if they invest directly. One solution to this is to exempt employees or key investing personnel from the annual investment management fee. No one should object to that. After all, would a surgeon charge his own children for performing a surgery or would a teacher charge tuition for teaching his own children? Investors will have to incur an additional management fee but they can rest assured that all investment decisions will be made in their best interest.