Mutual funds are being mis-sold, why isn't SEBI doing anything?

Indian investors have been pouring in thousands of crores of rupees into mutual funds, especially in the past two years.

In fact, they are now the backbone of India's stock market, with foreign investors turning net sellers of late. Yet, by all accounts the number of Indians investing in mutual funds, is only going to rise, and we haven't even scratched the surface.

Keeping in mind the enormous interest in mutual funds, a month ago, I began anchoring a mutual fund show on a TV channel. Needless to say, the response is overwhelming with more than a 100 people writing in with their queries every day.

The good news is that Indians are finally investing in stock markets. And increasingly picking the mutual fund route. An even better news is people are starting young and opting for the systematic investing through SIPs.

The bad news, however, is they are more often than not being mis-sold. I say this based on a sample size of over a thousand portfolios in just the past few weeks. It's important to highlight this, so we do not shoot ourselves in the foot yet again and break the trust of millions of retail investors who have finally begun investing.

1) What probably triggered this article is a viewer I spoke to earlier this week. He had 17 mutual fund schemes. As many as 15 of these were equity schemes. In fact, most portfolios that investors send to me, the average number of schemes is seven. And almost all of them are equity.

Moreover, the typical total amount is about Rs 7,000-10,000 per month. It is quite evident, schemes are being thrust on investors. The only reason can be more commissions. Now while there is no one-size-fits-all, if you are investing small amounts, you certainly do not need more than three equity schemes.

2) Debt schemes or bond schemes, are almost absent from most portfolios that came on the show. Now bond schemes pay lesser commissions and that could explain the anomaly. Just like you need equity in your portfolio, you need to balance it with a bit of debt too. So do make sure your adviser about debt schemes too.

3) Many investors have been sold schemes with a "1 per cent monthly guaranteed dividend". These have been lapped up by people who are in the 50-plusage bracket. You need to know, a mutual fund cannot guarantee you any return. And a dividend in mutual funds is simply your own money being returned to you ahead of its time.

4) Investors are being sold heavy doses of mid-cap and small-cap schemes as also sector specific funds. Many portfolios are heavily skewed towards these schemes, without investors comprehending the risks.

Needless to say, these schemes have delivered high returns in a rising market, but the tide could turn, and the fall sharper in a falling market. Do you need a mid-cap or small cap? Yes, you do if you are young and have a 15-20 year time-frame. But only in a proportion.

5) Most portfolios have a concentration of a certain category of schemes. For example, out of five schemes, four are large cap schemes. Investors are not being told why they are ending up buying the same stocks across multiple schemes. Most portfolios seen by me and the experts on the show, point to pretty much buying the entire stock market. Not a good recipe for beating the stock market.

India and its mutual fund industry has an opportunity of a lifetime. People are coming to it. Let's not send them right back to real estate and gold or the FD. The Securities and Exchange Board of India (SEBI), on its part, seems oblivious to all the wrongdoings. I am still waiting to see a distributor or adviser punished for mis-selling to a retail investor.

The signs are ominous. SEBI, please wake up.

Also read: How SEBI is killing financial inclusion