In April this year, SEBI introduced a new ‘skin in the game’ rule to align the interest of the ‘Key employees’ of Asset Management Companies (AMCs) with the unitholders of the mutual fund schemes. As per the circular, a part of the compensation, i.e. a minimum 20% of the salary/ perks/ bonus/ non-cash compensation of gross annual CTC, net of income tax, and any statutory contributions such as PF and NPS of the Key Employees of the AMCs will be paid in the form of units of Mutual Fund schemes in which they have a role/ oversight. Read more about the provisions of the circular here.
SEBI expects that getting key employees to invest in the schemes they manage can lead to better accountability on the part of the fund management team, paving the way for better quality of securities and improved performance. Moreover, investors, in general, will have a more confidence in a scheme if the fund manager’s interest is aligned with their own.
The new norm also permits the ‘Clawback’ provision, under which, if the key employees are found violating the code of conduct, or in the event of fraud, or gross negligence by them, the units of the employee will be redeemed and credited back to the scheme. With this, the move aims to curb instances of insider trading as well as to discourage fund managers from assuming higher risk than necessary.
The norm was supposed to be implemented from July 01, 2021. However, the mutual fund industry has sought more time since this move will involve rejigging the salaries and pay structure of the key employees. Subsequently, the implementation has been postponed to October.
Meanwhile, SEBI has approved a new rule during its recent board meeting to further ensure that fund houses have their skin in the game.
Mutual fund houses will now have to invest a minimum amount in the mutual fund schemes launched by the AMCs based on the risk associated with the scheme. Meaning, the higher the risk associated with scheme being launched, the higher the minimum contribution the fund house will have to make. However, the SEBI has not yet provided specific details of the minimum contribution that fund houses will have to make for various levels of risk.
At present, AMCs are required to provide investment of 1% of the amount raised in New Fund Offer (NFO) or Rs 50 lakh, whichever is less.
What does it mean for mutual fund investors?
SEBI’s move is well intended and can prevent fund houses from launching risky investment schemes, but only to an extent, mainly those with smaller asset size. Hefty investments by fund houses and/or its employees in its schemes does/will not guarantee improved performance of the scheme, neither does it make riskier categories suitable for conservative and moderate risk investors.
Remember that the final responsibility of choosing suitable schemes lies with you, the investor. Investing is an individualistic exercise that depends on your income and expenses, financial goals, risk appetite, investment horizon, and asset allocation plan. So, it should never be done as per your friend, family, colleague, or neighbour.
Know the various risks involved before taking any investment decision. Avoid riskier categories such as small-cap fund, sector/thematic fund, and/or credit risk fund (in case of debt investment), if you are uncomfortable with very high risk.
This article first appeared on PersonalFN here