Skin in the game: Fund managers to invest a part of their salary in the funds they manage

Vimal Joshi
Updated: 27 Dec 2021, 11:11 AM IST
TL;DR.

When mutual fund managers and the key employees of asset management companies are mandated to invest 20 percent of their salaries in the funds they manage, how will it impact the investors? Let us try to decode.

The skin in the game policy will not apply to the index funds, ETFs and closed ended funds.

The skin in the game policy will not apply to the index funds, ETFs and closed ended funds.

The markets regulator Securities and Exchange Board of India (SEBI) in April 2021 announced that the key workers of mutual funds should be paid at least 20 percent of their net salary after deductions in the form of units of the mutual fund they manage. This was done in an attempt, and rightly so, to link the investors’ interest to that of the fund managers.

This rule will be applicable not only to the fund managers, but also to the key employees such as CEO, COO, CIOs and others of asset management companies (AMCs).

The fund units that these key workers will invest into will be locked in for a minimum of three years. Touted as ‘Skin in the Game’ policy, it will not apply to the index funds, ETFs and closed ended funds.

The fund managers which are managing only one fund can invest half of their mandatory contribution in the fund they manage while the other half in any other fund they choose to invest into.

What will it change?

The fund houses manage huge amounts of money in a series of funds – the large AMCs have assets under management to the tune of more than 4 lakh crore. The returns on these schemes is a strong incentive for the prospective investors to join the bandwagon.

And when the returns on any of these funds lag behind their peers’, they would suffer in the medium and long term.

The reputations of AMCs invariably depend on the returns posted by the funds. So, ideally speaking, no fund manager or AMC would deliberately not want a fund to post low returns because eventually it would cause significant reputational damage to the fund house.

However, when the financial fate of the key employees of these companies is also inextricably linked to the funds they manage, the investors will get a substantive reason for the safety of their money.

Concerns relating to skin in the game

Although the new rule is mandatory, some fund houses have already been following some part of the rules in some form, voluntarily. For instance, Motiwal Oswal AMC’s equity schemes have the company’s promoters as the largest investors. Even ICICI Prudential AMC pays units of mutual funds as a bonus to its senior staff.

Some critics argue that the new policy would raise issues relating to regulatory compliance for the asset management companies. Aside from this, when a part of the salaries of fund managers are locked for three years in the fund units, the salary expectations of fund managers, especially the good ones, will likely increase, which will reflect in the cost of managing the fund.

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The key workers of mutual funds will be paid 20 percent of their salary in form of units of funds they manage. 

Following the requests from stakeholders, markets regulator SEBI postponed the implementation of this 20 percent rule from the earlier deadline of July to October 2021. Moreover, the employees below the age of 35 have been given another two years to adhere to this rule.

However, despite these concerns, SEBI's move is undoubtedly investor-friendly in letter as well as in spirit.

So, we can summarise that the key workers of mutual fund houses will soon have 20 percent of their salaries locked in the mutual fund units they manage.

After this, there is no doubt that the mutual fund companies will continue to air the disclaimer that reads ‘mutual fund investments are subject to market risk’, but it will now have an implicit message rolled into it as well — our salaries, too, are subject to market risk.

 

First Published: 27 Dec 2021, 11:11 AM IST
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