Will more disclosures by MFs help investors? Find out

Other than commissions to distributors, additional disclosures don’t seem to serve investor interest.
Soon, your mutual fund investment will come with a slew of disclosures from your fund house. Among other things, your fund will be required to reveal how much commission it has paid to your distributor, the salary it has paid to its top executives, and the cost incurred by the investor under both regular and direct plan. While investors can look forward to higher transparency, most disclosures may not warrant your attention. Here's what to make of the additional disclosures.
Know the costs
If you have invested through a distributor, the fund company will now have to disclose, in the half yearly consolidated account statement ( CAS), the exact commission it has paid to the distributor, including payouts in the form of gifts and sponsored trips. Distributors typically fetch a trail commission of around 0.3-0.75% on the value of your investment for each year that your money remains invested with the fund company.

How should this concern you? Trailing commission is already factored into your scheme's expense ratio, but the exact sum is not explicitly stated. This amount is now likely to be reflected in your account statement as a standalone figure. For a 10-year SIP of Rs 5,000 every month in an equity scheme, your six-monthly account statements for 10 years are likely to reflect a total commission payout of roughly Rs 28,207 to your distributor. This works out to be 5% of your Rs 5.62 lakh gain, assuming a 12% annualised return (see graphic).

Additionally, the regulator has also asked fund houses to provide in the scheme document an illustration of the impact of expense ratio on the scheme's returns. This will bring out clearly how much the investor would stand to gain by cutting down on the expense ratio. "In effect, the regulator is telling investors to go with direct plans instead of buying through the distributor," says Manoj Nagpal, CEO, Outlook Asia Capital. Direct plans come with a lower expense ratio as they do not incur expenses towards distributors' commission. While opting for direct plans may appear to be the prudent option, investors should first make sure they can do without the services offered by the distributors. If you do not want to pay too much on commission but aren't comfortable investing on your own, you may seek the services of a Sebi-registered investment adviser. These advisers will handhold you through the investment process for an upfront fee.

Know what the executives earn
Mutual funds will also have to disclose on their website the annual salary of their employees earning Rs 60 lakh or more, and also the CEO's remuneration compared with the median employee salary as a ratio. Should this influence your investment decision in any way? Most analysts contend that this serves no purpose for the investor. "This is an overreach from the regulator and a pointless disclosure from the investor's perspective," says Nagpal. Some feel it will prompt some investors to make unwarranted comparison, potentially leading to misguided decisions. Dhirendra Kumar, CEO, Value Research, argues, "A smaller fund company may be giving a high salary package to retain its key managerial talent and ensure sustainability in performance. Should it be viewed unfavourably just because it is currently facing losses?"

Disclosures with little value
The scheme documents will also have to carry disclosures such as the fund manager's tenure and the ratio of the total purchase value and the cost of investment. Most experts insist that investors should avoid getting bogged down with too may details. Srikanth Meenakshi, Co-founder, FundsIndia, argues that such disclosures add little value to the investor. "At this point, mutual funds are already the most transparent product among other investments. The information available to the investor is sufficient for making an informed choice," he argues. We suggest investors monitor their fund's long-term performance and compare it to category peers on a half-yearly basis. As long as your fund is making money for you, there is no need to bother with the nitty-gritties.

Source : Et Wealth