September 21, 2016

The Challenge in being an Educated Investor

This post was triggered by an email that I received from an investor last week. 

According to him, he was considering making an investment in ICICI Prudential Flexible Income Plan.  Before making a final decision, he decided to check the latest expense ratio (he was planning to invest in the Direct option).  He looked on Value Research but there was no information.  He then checked the factsheet and was surprised to find that there was no information about the scheme itself, let alone its expense ratio.  He then called up his advisor who told him that the latest expense ratio was 0.20%.  Around the same time, he managed to get the current expense ratio statement from the fund house’s website but he couldn’t make any sense of what was mentioned there.  In the absence of anything else, he could only assume that what the advisor had told him was correct.  But the whole exercise left him feeling frustrated.

In case you are wondering, I verified everything that he said.

Firstly, not just Value Research, none of the major mutual fund analysis websites carried information regarding the scheme’s latest expense ratio.  Morningstar carried the expense ratio for the last financial year while some others carried the expense ratio for the month of May 2016. 

Secondly, making sense of the expense ratio statement on the fund house’s website was indeed a nightmare.  After much flipping through, the only thing that I could conclude was that the expense ratio was not more than 0.27%.  The next day, however, a new statement appeared on the website and the number had changed. 

Lastly, as regards the fact sheet, the less said the better.  Typically, one would expect it to carry an exclusive page dedicated to each key scheme (with the details of portfolio, returns, expense ratios and other information).  Despite running into 131 pages, there was no exclusive page for this scheme in the latest fact sheet.  In fact, nowhere on it was there any information on the scheme’s portfolio or the expense ratio.  When I checked, it turned out that this was the third month in a row that this had happened.  This is all the more surprising given the fact that the AUM of the scheme in question is over 20,000 crore (as on 31 Aug).  It is the second largest scheme (by AUM) managed by the fund house and the seventh largest scheme (by AUM) in the entire industry.

Nevertheless, I sent an email to the fund house, requesting information on the scheme’s expense ratio.  When I didn’t receive any acknowledgement, I sent a second email.  It has been three days since then but I am yet to receive an acknowledgement or a response.

So what should one make of this?

Let me first offer the thoughts of that investor.  I reproduce below his comments as he reflected on his experience:

But one thought in my mind lingers on- why has the fund house made it so complicated to access such a basic piece of information? What is the rationale behind this all? Do they have something to hide or is it that they simply don’t bother about being transparent in their functioning? One can only wonder but yes, this episode has flummoxed me: if this what the industry leader does, I can only imagine as to what the others are doing.

Clearly, ICICI Prudential does not deserve his business.  Equally a fact is that for all the pretence made about the need for investor education, most fund houses thrive on the ignorance of investors.  They want suckers who can be lured by the marketing hype and by the false promises of distributors.  They don’t want investors who analyze things in detail and ask uncomfortable questions. 

There is no evidence to show that the assets managed by a fund house are, in any way, a reflection of its ethical or moral standards.  Even so, I admire the wisdom and courage shown by this investor in not being dazzled by the fact that ICICI Prudential manages more money than any other fund house.  I applaud his persistence in probing in such detail, and am thankful that he reached out and shared his experience.  One of the objectives of this blog is to spotlight questionable practices and hold errant fund houses to account.  In partnership with such investors, I hope to continue to do so.  It is, no doubt, a challenge, given the clout that some of these fund houses wield.  But considering what is at stake, it is necessary.  As I see it, its David vs Goliath all over again.

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