Chapter 15. Business Ethics for Mutual Funds

  • The term refers to route of acceptable and good conduct in business
  • All those persons who are engaged in business should comply with rules of good conduct
  • Those who own and manage the business may set the business ethics
  • These may also be made and imposed by agencies that regulate the business
  • Many countries have made laws for protection of consumers and investors
  • However, laws cannot help in eliminating the potential malpractices in businesses
  • Therefore, it is desirable, probably required that the business ethics be made and adopted by those who are engaged in and involved with the business themselves
  • Business ethics are self imposed and adopted, whereas laws are enforced
  • Need of business ethics:
    • These are required to have honest and fair business practices
    • These are required to insure that the business is not done dishonesty and false promises are not made to the investors
    • From social angle, business ethics are required to protect the consumers
    • From the angle of business itself, good ethics mean good business. Honest and fair practices will insure that the customer remains satisfied, will not feel cheated and loyalty will increase.
  • They are also required to have transparency in business dealings and insuring that both the existing as well as potential clients and, or consumers are treated at par.
  • Mutual funds are vehicles of collective investments, which are managed by asset-management companies. AMC manages this money to earn a fee. In this process the AMC takes the help of many other entities including distributors and individual financial advisors. All these need to abide by the rules of good conduct.
  • In this process, the following points are important:
  • The rules of conduct for distributors and employees are set by trustees, and directors of Asset Management Companies
  • AMFI has also set rules of good conduct for AMC’s, its employees and distributors
  • Objectives of business ethics:
    • The major objective is to have honest and transparent dealing with existing and potential consumers
    • Another objective is protection of consumers or clients from being cheated or exploited
  • We also require business ethics to ensure level playing filed among all business participants
  • Business ethics also help in ensuring healthy competition for the benefit of all consumers. Government of India and SEBI both are concerned with the protection of investor interests.
  • SEBI has incorporated the rules of good conduct in MF regulations
  • It has also issued guidelines to AMFI and mutual funds to develop codes of conduct for fund distributors, fund managers and all employees and associates of AMC and Trustee Company.
  • Insider Trading: Fund Managers should not collude with insiders of various companies and use information for their own benefit
  • Mutual funds being vehicles of collective investment, all investors should be treated equally.
  • The regulators keep check to see that no discrimination is in favor of any investor.
  • Regulations of personal trading: AMC is required to file a quarterly statement of dealing in securities by key personal of AMC
  • Compliance Officer:
    • SEBI has made it mandatory for every AMC to have a compliance office who would be responsible for implementation of all laws, guidelines and voluntary codes of conduct
    • Compliance officer not only reviews but can also give approval to personal trading and investment transactions
  • All the distributors and agents have to follow the code of conduct laid down in the fifth schedule of the SEBI MF regulations (1996) as well as AGNI.
  • AMFI has put detail version of code of conduct called AGNI. (AMFI guidelines & Norms for Intermediaries)
  • SEBI watches out for any unethical or unfair business practices, by AMC for example.
    • Insider Trading: Insider trading means buying or selling securities on the basis of privileged information available to the funds by persons who are seems as insiders to the company.
    • Preferential treatment to selected investors: Fund managers are not insiders but they can collude with to other insiders to gain access to private information and use that information to trade on their personal account
    • Personal trading by fund managers and employees: Normally funds ban personal trading by fund manager. However, even when personal trading is permitted funds place many restrictions
  • SEBI has taken the view that fund employees at all levels should not be barred from trading or investing
  • However, they should disclose their holdings and transactions made during a given period
  • It would be clearly an unethical practice if the fund manager buy and sells securities and doing the same transactions for the fund. This practice is called as front running. Front running is banned by market regulators the world over.
  • Regulations on Personal Trading: The directors of a trustee company also have to file the details of transactions in securities with the mutual fund, where they exceed the value of Rs. 1 Lakh.


  1. Thnaks for the papers it really helps,thanks a lot.

  2. thank u . you did a good job.

  3. thanks a ton!!!!!!!!!!!!

  4. thank you ..thank you...thank you


  5. There are very few moments when even huge sentence like thank you seems small, still THANK YOU.


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