How will you benefit from investing early in mutual funds?

Last week, markets regulator Securities and Exchange Board of India (SEBI) asked mutual fund houses to pay at least 20% of the gross salary of key employees in the form of the units of the scheme managed by them. The objective was to protect investor interest. The rule will activate the sense of responsibility and align the objective of managers with unitholders.

It is expected that the decision will bring accountability to the performance of the schemes that are dependent upon the key employees. It would also strengthen the trust of mutual fund investors in the various actively managed schemes. The rule covers all key employees who have been defined as heads of various functions and all employees who are involved in the fund management process. These categories include fund managers, research teams, and dealers, among others.

The market watchdog has excluded exchange-traded funds and index funds because they are passive in nature. From time to time, SEBI takes necessary steps to protect investors. In 2014, SEBI mandated AMCs to invest in all the schemes it manages. The latest SEBI rule comes on the back of the Franklin Templeton Mutual Fund debt fiasco. The forensic audit investigation had disclosed senior managers had taken out chunks of the money before schemes were closed – acts that have the potential of shaking the confidence of millions of investors in this market.

SEBI’s decision, therefore, is a move in the right direction. It also includes a lock-in period of three years. The decision might face some teething issues from MF houses since the circular applies not to just senior employees, but to junior research staff too, who don’t earn like senior executives. The move might have an adverse effect on the cash flow of employees who are earning Rs 10-15 lakh per annum.