According to the Wall Street Journal, the US mutual fund industry is headed for another "explosive scandal" as the Securities and Exchange Commission (SEC) investigates 27 mutual funds for allegedly accepting hundreds of million dollars in kickbacks from contractors.

The latest scandal was triggered by a $21.4 million settlement with the SEC in September by Bisys Fund Services, which provides administrative services to small funds and those promoted by some banks. Wall Street Journal quotes the SEC as saying, "As a direct result of Bisys's misconduct, mutual fund investors unknowingly paid millions of dollars for marketing their funds." This was done through secret side agreements.

The scandal shows that even in a mature mutual fund industry, the regulator and a seemingly better informed class of investors usually lag behind money managers' tricks to hijack investors' rightful returns. India's mutual fund industry is riding the crest of a powerful three-year bull run. Consequently, most investors are happy with their mutual fund returns, because they are higher than what they would have earned by investing money in safe fixed deposits.

Fortunately, the proliferation of Asset Management Companies (AMCs) is slowly creating a distinction between better-managed funds and others.

The challenge is to choose your fund correctly. For instance, contrary to the Finance Minister's view that market intermediaries must set up Self Regulatory Organisations (SROs), the Association of Mutual Funds of India (AMFI) has emerged as a strong lobby that protects members and liaises effectively with the Securities and Exchange Board of India (Sebi). But it does not venture to self-regulate or check its members. In fact, AMFI does not even keep track of the industry's evolution. Neither AMFI nor Sebi (which clears every new fund offering, as well as mergers, acquisitions and closures) has a complete record of all mutual funds and schemes that existed in India.

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