Lure of assured high returns in a short period of time often attracts investors to schemes floated by unregulated entities. However, there is a serious lack of transparency in such schemes in terms of information and regulatory adherence.
Market regulator Securities and Exchange Board of India (Sebi) spells out some of the most important advantages of investing in a scheme which is regulated:
> Investors’ money is managed by regulated entities
> Mutual funds permit small investment amounts, giving retail investors the advantage of professional fund management
> Entire money is invested in accordance with the fund’s investment objective, while in most of the unregulated schemes, the agent takes away a substantial part of the investment as commission
> Commission and other expenses are charged within the permitted expense limits
> The portfolio usually has high liquidity and asset diversification, an important attribute for financial products
> Money is used to buy assets as per investment objective of the scheme and the portfolio is then disclosed to the investors on a monthly basis on mutual funds websites
> Mutual funds follow a three-tier structure: Sponsor, Trustee, Asset Management Company which ensures a system of checks and balances
> MFs are under independent trustees and have custodians for their assets, thus ensuring that the assets are ring-fenced from unauthorized use
> Change in viability position of the AMC does not per se impact the interest of mutual fund unit holders, as the assets of every mutual fund is separately held in a Trust
> There is proof of flow of investors’ money
> Value of mutual fund scheme units (Net Asset Value) is computed on daily basis (marked to market)
> Offer documents provide details of the scheme assisting to understand risk involved, enabling investors to take informed investment decisions
> Norms exist to ensure that redemption amount/dividend is paid back to investors within a stipulated timelines, and if not, amount has to be returned along with interest
> To make asset managers responsible, they are also required to invest certain amount of their own money in the scheme
> Mis-selling of mutual fund schemes is a punishable offence