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Personal Finance

Sebi Makes Mutual Funds Charge You More

The latest from the SEBI stable is:

The rapid fire manner in which the standard warning “Mutual Fund investments are subject to market risks, read the offer document carefully before investing” is recited in the audio visual and audio media renders it unintelligible to the viewer / listener.

In order to improve the manner in which the said message is conveyed to the investors it has been decided in consultation with AMFI that with effect from April 1, 2008:

  • the time for display and voice over of the standard warning be enhanced to five seconds in audio visual advertisements.
  • in case of audio advertisements the standard warning shall be read in an easily understandable manner over a period of five seconds.

The intentions are good. Fund ads used to say:

…fundu ad showing people doing great things with money…

then the disclaimer:

“Mutualfundsarsbjectomarketriskplisrdtheoffrdocmentcarfulybeforinvsting”.

Or it sounded like that. Why? Because, SEBI mandates that it is necessary to put this info on all ads. (There *is* a more legible sentence by the way) Because, like we read health warnings on cigarette packs and don’t smoke, we read MSG warnings on food labels and don’t eat them, we see “these stunts are performed by professionals, do not try to imitate them” and our children DON’T imitate them, we will read these warnings and behave similarly.

(If the other examples are any indication, people will simply buy more funds)

Anyhow, someone at SEBI was unhappy at the speed of the above sentence, since people will not understand it. So they have now mandated that this be mentioned in five seconds, so you get more time to ignore it.

What will this achieve? Only one thing. The cost to you and me is going to go up. These ads cost a bomb. And an extra five seconds will just increase ad costs, and the funds don’t care, they’ll just charge us anyhow! The other option is to not advertise, but that means fewer investors and therefore lesser other people to share their costs. Still means we are charged more. All SEBI has done is to ensure we, the retail investors, pay more to be warned that the products we are buying are unsafe.

Why not simply educate people directly instead? No-one benefits except the media companies. So take a 5 second slot and put a cost to it – say Rs.1 lakh. If a typical ad is 30 seconds, we are saying that the additional cost is about 20% (25 seconds ad, 5 seconds warning) Ask each fund house to reveal it’s tv/radio ad expenses and take about 10% of all ad expenses into an “education fund”, whose only goal is to educate investors about the risks involved in mutual funds. This is going to be a huge corpus.

Then, use that money to educate mutual fund owners. For every new mutual fund unit holder, send them a printed mailer with information on how their funds MAY LOSE MONEY. And put in statistics in there about how funds have lost money in the past. And tell them the ongoing costs of their fund (available with AMFI).

If you asked me I would say this is far more effective. And I wouldn’t mind pitching in to help SEBI implement this either, by way of creating data or working with investor groups locally. But asking mutual funds to spend more is NOT the answer.