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Mutual Funds

What To Do About The In-Fidelity?


Fidelity Mutual Fund has decided to exit ops in India, presumably on six years of no profits. They manage assets of 8,800 cr. and there were a lot of posts talking about how this is a huge negative for India and how this is because of SEBI’s regulations etc.

Total. Horse. Shit.

First, if they have been losing money for six years, it’s not because of SEBI’s regulations. SEBI allowed funds to charge investors entry loads till 2009; there were other onerous charges like “NFO marketing costs” that funds were allowed to charge even earlier. If they couldn’t make profits then, chances are SEBI isn’t the one to blame.

Second, other mutual funds have been making money. The most profitable are HDFC and Reliance, but even the tiny Quantum is making profits. There’s no reason to think the industry is in doldrums. It’s in flux, yes. It’s in play, to consolidate, to realign, yes. But not in the pits.

Third, what rules has SEBI changed recently? Mostly the entry load and commissions. Srikanth Meenakshi of reminds me (on the quora board) that Fidelity has most of its money in the US in no-load funds (more than 93% of assets). Management fees are just 0.85% in the US (India’s limit is 1.25%, which applied even before Fidelity got in)

Lastly, there are many fund houses that keep wanting to exit. When Merrill went crying to the arms of BoA, DSP-ML became DSP-Blackrock. Lotus exited its funds to Religare. Benchmark sold to Goldman. The point is that getting out is normal – there should be nothing more to read into it other than that Fidelity didn’t have the stomach for the fight anymore, which is fair in the world of business.

I don’t know why they allow such a rumour to spread that they are leaving due to low profitability. Who the heck will pay big money for their funds? Anyhow, people are going to be willing to buy. Typical deals are 3-4% of assets, but we’ve recently seen many with over 6%.

What should you do if you own a Fidelity fund? Well, stay put, there’s nothing wrong with the fund. Would you sell your Infosys shares if Narayan Murthy sold his? All that’s happening is that the owner of a fund is changing. The employees, the fund managers etc. are likely to continue. What you should care about though is that if enough people exit your funds – to take the assets of the fund to less than 100 cr, for instance – you might consider leaving as well.

Update: You might want to consider exiting if the fund management team is leaving as well. More in this post.

And don’t go by the hullah in the press. There’s nothing spectacular about Fidelity leaving.


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