In 1982, I decided to enter the financial services industry because this industry seemed like a straightforward place to be, unlike the “corrupt” manufacturing sector ruined by licence raj. So, there I was in 1994 all set to lead a “correct” life with the launch of the Birla Mercury Funds under the tutelage of the late Ashok Birla. But the “straightforwardness” aspect was a bad assumption, as highlighted by MONEY TODAY (3 May 2007).

The mutual fund industry is a great example of how a good idea can go wrong. Instead of acting as asset managers, many in the industry have occupied the role of asset gatherers. Assets under management (AUM), has now been twisted to spell Aggressive, Useless, Mindless growth. Rather than being a vehicle that can build a corpus over time, many mutual funds are sold as another speculative avenue where monthly performance is used by distributors to “churn” the portfolios of investors, earning neat commissions along the way.

Fund managers have to worry about buying stocks that will go up in price in a few months instead of those with long-term value! It is against that backdrop that Quantum Mutual Fund was launched in 2006. The model was simple. We are investment managers, not asset gatherers. We have no objection if a distributor recommends our fund to his client(s) but we will not pay the distributor any money. We are happy to give the distributor (and investor) educational material that will help him better advise his client(s), but we will not “buy” assets.

These bought assets surge the “success” of a new fund launch and, within 12 months, 50% of the money is out of the door leaving the investor who is still in to bear a disproportionately higher cost of all the tamasha typically associated with these new fund offerings. Investors will hear about us over the years, as we perform and shatter age-old myths (like only a fund with a large corpus can perform well).

They will realise that every time they see an advertisement on TV and sign a form with a distributor’s stamp on it, they are potentially signing away one car for every Rs 1 lakh that they invest.

Selecting an investment manager to invest your hard-earned capital is not an easy task. And investors must spend as much time on this as they do in selecting careers, spouses and homes. The distribution system inherent in our country has a built-in bias against the investor. The assetgathering focus of many mutual funds has made a mockery of the long-term investment thesis that is so advantageous for the investor.

Performance rankings guide investors to chase yesterday’s beauty queens and kings when what you need is a wholesome, reliable partner—everyone can have a bad day, or quarter or year but you want a stable process and some predictability of outcome. While the regulators have started taking some action to rectify the situation, there is a lot more to be done.

Ajit Dayal, Director, Quantum Asset Management Company