Opinion Mutually amicable

Can we please decide on the direction we want the mutual fund industry to take? An industry that,till a mere year ago...

February 10, 2010 02:07 AM IST First published on: Feb 10, 2010 at 02:07 AM IST

Can we please decide on the direction we want the mutual fund industry to take? An industry that,till a mere year ago,was considered the entry vehicle into the stock markets is,in the year 2010,just not in a position to serve investors at all. Very recently Sebi chairman C.B. Bhave made it clear to The Financial Express why it was not serving small investors needs. He has data to support his point. Just 30 per cent of the assets under management of the industry are in equity-based plans. Since retail investors are not too keen on debt portfolios in a mutual fund,this means that funds survive only on subscriptions from companies in a variety of debt instruments.

That Sebi came down hard last week on debt instruments is therefore not surprising. That is what Bhave wants. But is it necessary for the regulator to do this level of micro-managing? Sebi has basically drastically reduced the attractiveness of the popular liquid-plus schemes.

From now all their investments will be valued every day; their freedom to decide on which particular component they will put up for such valuation has been removed. It is also quite possible that,in the budget,the finance minister will remove the tax arbitrage that some such funds provide to companies in parking their cash reserves.

Sebi will obviously point to the massive redemption pressures that debt funds face whenever companies run short of money such as in October 2009 as a reason to regulate the funds more strictly. But a meltdown in the industry is not necessarily a bad thing at all. Badly-run funds must be allowed to close shop. How much more trouble does a fund create than a rogue co-operative bank? Yet the latter are allowed to close without a run on the banking industry. Also,the corporate treasuries that invest in the liquid-plus schemes appreciate the risks they run and must be allowed to take the impact. If the risks of the funds are to be calibrated so closely,their investment patterns could also be equally monitored.

This is quite different from the set of game-changing decisions Sebi took last year. It banned entry load on retail investors for subscriptions to mutual funds; replaced commission charges that used to be paid to distributors by fund with upfront fees to be earned from investors; and allowed stockbroker terminals to be used,also,to transact in mutual funds. For small investors these are wonderful pieces of news. Equally welcome will be a possible removal of the arbitrage-allowing tax loophole that currently favours liquid-plus funds.

There is no doubt that these new regulations will hit an already hard-pressed industry awfully. (The attached graph details figures released recently on industry performance.) The choice for the regulators must therefore be based on the direction they feel it must take beyond the immediate troubles it will face. If their answer is that the industry must cease its reliance on surplus corporate funds as the primary justification for its existence,then that answer must be followed up to its logical end.

This will require work at two ends. Just as Sebi must continue its clean-up act to take care of the pernicious practices that are apparently so much a part of the mutual fund industry,the finance ministry must provide new sources of financing for funds.

Enough is known and has been written about the bad things within the mutual fund industry. But the list of things the ministry has not done for the industry is something that,unfortunately. no company CEO will take the risk of pointing out. If the banking or corporate sector is not to be allowed access to mutual funds as short-term cash multiplier vessels then,as an alternative,the avenues for resource-tapping from the public by funds should be made broader than now. In fact there should be no restrictions on that score.

The first reform should be to allow mutual funds to tap into the pension market. Currently,no pension or provident fund is allowed to invest in mutual funds. If the government is serious about making retail drive the mutual fund industry,then the investment made by the workforce in pension funds must flow into the industry too.

The logic could be extended. Every state government,for instance,runs organisations to encourage thrift and credit. But the reserves and surplus of these are parked only in government securities. The Delhi Co-operative Housing Finance Corporation has a surplus of Rs 232 crore. How about allowing such sums to be parked in mutual funds,as the corpus has been built through the deposits from myriad such thrift organisations? On the same principles,insurance companies too should be permitted to invest in mutual funds.

Also there should be a higher threshold level to join the industry,more than the current Rs 10 crore. None of the other segments of the financial sector that are allowed to raise deposits from the public have such low-level entry requirements.

But that I suppose will require laying out a mutual fund policy,something that UTI chairman U.K. Sinha suggested last month. Yes,a policy for a financial sector sounds an oxymoron in the current period but there has to be a laundry list somewhere in North Block or Sebi Bhawan,even if it is not made public.

The writer is Executive Editor (News),The Financial Express