China's Mutual Fund Boom: A Tale of Misaligned Incentives

Growth in China’s mutual fund industry signals misaligned incentives

China’s mutual fund (MF) market has seen rapid growth in the past few years.

One of the reasons behind this burgeoning market, is a renewed push from MF distributors to get retail investors to invest as they collect fees when people buy, sell or simply hold their funds.

According to a report on China's fund investments published in October 2022, fees collected by MF distributors who are mainly banks reached 191-billion-yuan v/s 102-billion-yuan earned by fund managers, the people who actually manage the money.

Given the distributors have more firepower, the focus shifts to building new products and selling them to investors, instead of maximizing investor returns. This continuous rejig of investors’ portfolios forces the investor to pay more fees and focus on short-term market movements instead of selecting an investment based on fundamentals and letting it grow over a long period.

What could have been an entry vehicle for people to invest in the stock market is being mis-sold. Perhaps a combination of regulation, competition and investor education could align the incentives and level the playing field.

What do you think?