To control costs and reduce mis-selling of mutual funds, the Securities and Exchange Board of India’s Mutual Fund Advisory Committee (MFAC) has recommended several measures. The recommendations, if implemented, would lead to further transparency in the functioning of fund houses.

To reduce mis-selling by touting returns of a scheme for just one specific period, fund houses may also have to present the entire picture of the scheme’s performance. “In advertisements, fund houses only mention the period in which the scheme has outperformed. They never say when it has underperformed. They should give both,” said a person familiar with the development. The MFAC members, which include industry representatives and independent experts, met yesterday.

The committee has proposed to cap the exposure of any scheme to derivatives at 100 per cent of its actual holding in stocks. That is, fund houses will not be able to play excessively in the futures and options market. The requirement of only margin money in derivatives allows them to have a much higher exposure than in the case of actually buying and selling of stocks. The move will reduce risk for the investor.

Instead of the current slab-based expense ratio, which typically varies between 2-6 per cent, the committee has sought to make a flat rate for equity and debt schemes. The flat rate will be different for both equity and debt schemes. The mutual fund industry will get back with its suggestions to Sebi to implement this new move.

Since the profile of an investor in equity or debt scheme is different from one investing in the portfolio management services (PMS), MFAC has recommended that there be a Chinese wall between the two operations of a fund house. The reasoning here is since the retail investor participates by investing a very low amount whereas the PMS investor needs to invest at least Rs 5 lakh, the investing strategy has to be different. Further, fund houses tend to use the same fund managers, along with research and other facilities, to cater to both kinds of clientele. The committee prefers a separate system for each kind of investor.

To prevent mis-selling, the committee has proposed to set up a sub-committee that will come up with a mechanism to monitor the way mutual fund products are sold to investors.

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