The Hindu Business Line : `MF retail investor at the receiving end'

THE retail investor in mutual funds is very much at the receiving end in India if you believe Cadogan Financial, a UK-based consultant who has recently conducted a study for the Ministry of Finance and the Asian Development Bank.

An interim report prepared by Cadogan dwells extensively on reforms in the country's asset management industry.

To begin with, mutual funds' offerings are often "confusing", and particularly so for the average retail participant. The incomprehension stems from the plethora of terms used by fund houses - schemes, plans, options. Added to this is the fact that at the scheme level, reference is often made to such terms as `fixed income' or `income' and `growth'. Also, `growth' and `dividend' options are offered.

Cadogan, which worked out the report in association with A.F. Ferguson & Co, has further noted that retail investors cannot ascertain what their investments will actually cost them. Some practices leave ordinary investors uncertain about annual costs and charges they will be required to bear in future. "While expense ratios that are actually lower than the maximum permitted may be good for customers, the way in which potential costs are disclosed may be misleading," it is stated. A few other practices may well provide a false picture about returns.

The report has maintained that certain longer-term investors are disadvantaged because of the ability of larger investors to get in and out quickly and cheaply at the expense of their smaller counterparts. Such dilution occurs when ongoing investors' interests are diminished as a result of incoming investors paying too little and outgoing investors receiving too much.

"As returns on mutual funds, particularly income funds, fall from the high levels that falling interest rates have permitted, the impact of charges on future returns will become a greater issue and particularly the charging of ongoing marketing commissions to the fund," it is stated. Many regulatory authorities are no longer satisfied with a simple statement - "the maximum permitted charge is x (amount)" - and are increasingly demanding a portrayal of their impact.

Case for capital guaranteed funds

CADOGAN has underlined the relevance of capital or principal guaranteed products, a category it says has become popular in many countries in the last few years.

These work by being close-ended with a limited life and without obligation to redeem on demand. The idea here is to invest a part of the assets in bonds with durations that approximate to the life of the fund.

When redeemed, such a fund supplies a sum (with interest rolled up and reinvested) equal to the amount originally invested. The balance invested in equities either at spot or using futures. This provides the growth.

"It has the advantage of lengthening investor horizons, and is attractive to AMCs since they know they will have the assets to manage for the life of the fund and will not have to run on the treadmill of continuously to replace redemptions with new sales," it is observed.

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