DSP Investment Managers Pvt. Ltd recently made it mandatory for its employees to make any incremental investments only in the schemes of DSP Mutual Fund (read more here). Certain other asset management companies also encourage their employees to invest in their own schemes. The aim of such initiatives, typically, is to demonstrate “skin in the game”. The assumption here is that a fund will be managed better if the employees have their own money invested in it. Neil Borate experts if this is indeed true and whether or not such programmes are legally tenable
It’s not prudent to restrict or bind investors in any way
Swarup Mohanty, CEO, Mirae Asset Mutual Fund
Investing is personal and caters to individual financial plans. Such plans are specific to an individual’s risk profile. It is a process of asset allocation and diversification. It is best achieved when the investor is allowed to invest in instruments which suit his or her own plan. It is not prudent to bind investors or restrict their investment universe in any way.
A fund has an investment objective and the portfolios are formed to cater to it. That can’t change based on who is invested in that fund. For a good investment experience, it is important for an investor to match his or her investment objective to that of the fund. I don’t think that if employees invest, the performance or scheme objectives of the fund will get altered in any way. There is in fact no correlation. Any employee is just another investor in the fund and should be treated that way both by the fund as well as any other investor. Investing is a process of discipline and has no scope of emotion. To view employees investing as a criteria is an emotional way of looking at the process.
Compulsory investment may be viewed as coercive
Darshan Upadhyay, Partner, Economic Laws Practice
As a matter of principle, any investment decision of an employee’s personal wealth is a matter of his or her personal choice. If an employee is forced to invest only in the products of its employer, there could be many personal and legal questions.
What if the employees appetite for risk is different than those of the products offered by his employer? What if the products offered by the competitors are genuinely better and are more in sync with the investment philosophy of the employee? What happens after the employee joins a competitor—one would have to re-evaluate the entire investment strategy based on his or her job?
In T.M. Dinesh Kumar v Malabar Cancer Centre Society, the Kerala high court had said that an employee cannot be forced to open a salary account with any official bank of an organisation. Similarly, in case of mutual funds, the choice of investment should be left with the individual employee and insistence on compulsory investment may be viewed as coercive; the possibility of challenge can’t be ruled out.
Concept can be used to choose between two similar funds
Ankur Chowdhary, Co-founder and CIO, Goalwise
Some AMCs have made it mandatory for employees to have some investment in the schemes they manage so that their interests are aligned with those of investors—a concept known as putting the “skin in the game”. Intuitively, it makes sense that a fund manager who is confident of his skills and commits his own money to his fund will earn higher returns.
A couple of studies done for the US mutual fund industry suggest a positive relationship between manager ownership and fund performance. A Morningstar study in 2014 found that funds where fund managers had invested more than $1 million had a success rate of 48% versus 32% for funds where the managers had no investments. Success was defined as the fund having outperformed its peer group over a five-year period and survived (not shut down or merged with another fund).
Although we still need more years of data to establish the same correlation for Indian funds, it seems like “skin in the game” can at least be used to pick between two otherwise similar funds.
It can assure investors but can’t guarantee performance
Aashish P. Somaiyaa, MD and CEO, Motilal Oswal Asset Management Co. Ltd
Iread very early in my sales career that never be a salesman for a product which you wouldn’t sell to your grandmother. The act of “requiring” employees to invest in their own AMC funds defeats the very intention of “requiring” them to do so in the first place. It is meant to convey that we eat what we serve. I would like to see what proportion of their net worth would promoters, sponsors, employees, fund managers and the AMC invest in their own funds, of their own volition and without any regulations. That would show alignment of interest.
As far as decision criteria for investing is concerned, investors should be happy to see such data. Such participation would go a long way in conveying to all investors that actions are taken in good faith with their best interests in mind, but at the same time this is not a guarantee or leading indicator of good performance. At best it says that the managers and promoters would sink or sail along with the rest of the investors and they would equally bear the brunt or enjoy the fruits of their actions as all investors would.