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Skin in the game – Indian Mutual Funds industry

Skin in the game is an interesting book written by Nassim Nicholas Taleb, as per the author the fund managers must bear a cost when they fail the public. A fund manager that gets a percentage on wins, but no penalty for losing is incentivized to gamble with his client’s funds. Bearing no downside for one’s actions means that one has no “Skin In The Game”, which is the source of many evils. [source]

Earlier this month this termed was is wide discussion in the mutual fund industry when Sebi announced that a part of the compensation (20%) for key employees must be paid in the form of units of the scheme which they manage directly or are under their purview. The above unit-based compensation will have a lock-in period of a minimum of three years or tenure of the scheme. If there is any code of conduct violation by the employee, it will be subject to clawback. The new rule is applicable with effect from July 1.

And on this news the whole industry was upset. Why will they want to risk their own money?

But if we think from an investor’s point of view this is a piece of positive news as the fund managers would be more careful. Sebi has come up with this after a few mishaps in the Indian mutual fund industry the worst one being the pathetic Franklin Tempelton saga.

Here is an interesting statistic that I came across – 57% of large-cap funds fail to beat their benchmarks over 20 years.  (source) So this means one should invest in Index funds over other funds? Yes, logically low-cost index funds will tend to give better returns.

However, this initiative by Sebi will bring out more accountability and discipline among fund managers.

I remember I read this on the PPFAS mutual fund website a long time ago, they invest in their own funds. I have always been a fan of this AMC. This is no recommendation.

Here is a grab from their website

What do you think of this initiative by Sebi? Comment and let us know.

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