Why should mutual funds shift to performance-based fees?

As India's mutual fund industry continues to grow, investors have become increasingly aware of the risks associated with investing in mutual funds. The Securities and Exchange Board of India (SEBI) has already made some changes to mutual fund regulations, including a new framework for categorizing funds based on their investment objectives and risk profiles. However, some experts argue that more needs to be done. One issue that has been raised is the lack of transparency in mutual fund fees. Currently, mutual fund houses are allowed to charge a variety of fees, including management fees, exit loads, and expense ratios. However, investors often find it difficult to understand the true cost of investing in a particular fund. To address this issue, some experts have suggested that mutual fund houses should be required to disclose all fees in a standardized format, making it easier for investors to compare funds and make informed investment decisions. Another issue that has been raised is the conflict of interest that can arise when mutual fund houses also have their asset management businesses. In these cases, the mutual fund house may prioritize its funds over others, potentially leading to biased investment recommendations. To address this conflict of interest, some experts have suggested that mutual fund houses should be required to separate their mutual fund and asset management businesses. Additionally, some experts have called for greater transparency in mutual fund portfolio disclosures. Currently, mutual fund houses are only required to disclose their top 10 holdings. However, investors may want more detailed information about the securities in which their funds are invested. To address this issue, some experts have suggested that mutual fund houses should be required to disclose their entire portfolio quarterly, in addition to their top 10 holdings. Furthermore, some experts have called for the implementation of a fiduciary standard for mutual fund managers. This would require managers to act in the best interests of their clients, rather than their interests or those of their firm. To ensure compliance with this standard, some experts have suggested that mutual fund houses should be required to establish independent boards of directors or trustees to oversee their operations and protect the interests of investors. Despite these potential changes, some experts argue that the mutual fund industry in India is still in its infancy and that it may be premature to implement sweeping reforms. However, many agree that greater transparency and accountability are needed to ensure that investors are protected and that the industry continues to grow sustainably. In conclusion, while the mutual fund industry in India has seen significant growth in recent years, there is still room for improvement. By implementing changes to improve transparency, minimize conflicts of interest, and protect the interests of investors, the industry can continue to grow and evolve responsibly.