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THE RECENT ATTEMPTS by the Securities and Exchange Board of India to force mutual fund schemes to broaden their investor base are welcome. However, the two guidelines it has proposed may not really curb the growing clout of institutional investors in mutual fund schemes. The mutual fund industry has been morphing into a default treasury management vehicle for big investors and corporates, rather than a channel for retail investment in equity and debt.

The SEBI stipulation that each mutual fund scheme must have at least 20 investors is easily met. It should not be too difficult for fund houses to make up the numbers, either in their existing schemes or in their initial public offerings. In contrast, the second guideline — that no one investor shall hold over 25 per cent of a scheme's assets — will hit several equity and plain-vanilla debt funds, and may even force funds to refund IPO proceeds, if the retail response is lukewarm. But the liberal limit of 25 per cent for a single investor's holding in a fund may significantly dilute the efficacy of this rule. No doubt, small investor interests will be seriously impacted if big-ticket investors holding a chunk of a fund's assets move in and out at their whim; even an investor owning 5-10 per cent of a fund's assets can create upheavals in investment returns if he decides to invest or pull out at an inopportune time. In this respect, it may be better to require mutual funds to disclose all investor holdings in excess of 5 per cent of the net assets of a scheme, in line with the disclosures stipulated for companies.

On the other hand, requiring funds to wind up their schemes and refund proceeds to their investors, if they fail to meet these two conditions at the end of every quarter, may be a remedy worse than the disease. This will unnecessarily bring an element of uncertainty to mutual fund investing. Not only will fund managers have to be on guard all the time in case they are called upon to redeem the fund at short notice, investors may also find themselves forced out of a fund, due to factors beyond their control. Either way, premature redemption can have a serious impact on investment returns. A better approach would have been one based on regular disclosure of the unit-holding patterns of mutual funds to their investors, much like what is stipulated for companies. Funds can be required to make public disclosures every time an investor's holding crosses 5 per cent of their net assets. The Web site of SEBI or of the Association of Mutual Funds of India can serve as the reference points for such disclosures.

But what may serve small investor interests best would be regulations requiring fund houses to manage distinct, well-defined products for retail and wholesale as also long- and short-term investors. This will ensure that the interests of one set of investors are not compromised for others, as frequently happens when investors with diverse preferences are all bundled together under one single mutual fund scheme.

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