The Hindu Business Line : Confidence building measures are need of the hour

For the record, these are news headlines, randomly chosen but connected to each other, originating from the `switching scam' that is currently rocking the world of asset management. The point is that these are awfully scary for investors who come to mutual funds with a lot of hope. And the thought that these have come about courtesy Prudential ICICI MF - that high-spending, high-profile and till recently the No. 2 player - is disturbing indeed.

The sudden development can be easily traced to the race that fund houses seem to run perpetually. The never-ending quest for assets leads some of them to please large clients in more ways than one. As it is evident from some of the practices that are followed, such large investors are well placed to negotiate better deals. There are schemes expressly tailored for them. The institutional set, given the sheer size of resources at their disposal, can and do command huge clout. Funds too pay them a lot of attention and spend considerable energy to service them.

So where does this leave the average investor — the ordinary man who happens to put in small amounts of his savings in mutual funds with a view to earn superior returns? Consider his precarious state, especially the fact that options for him are getting narrower with every passing year. Think, for instance, about declining interest rates and the risks associated with the equity market.

Don't blame him if these factors turn him towards the safe havens of post-office schemes and government bonds or, worse still, to bank deposits. Fixed returns do have a unique appeal.

As a well-known fund tracking agency in the US put it recently, investors will be in a better position to make sound decisions if "manager compensation, fund boards and cost disclosures" are monitored effectively. The Pru ICICI story will probably throw new light on these words.

One hopes that the authorities, including those who supervise the way provident funds invest in the market, have noticed and are contemplating preventive measures.

What are needed at the moment are confidence-building measures. These could be initiated by the regulatory agencies and, most certainly, the association that represents the asset management industry. The latter, for whatever reason, is not an SRO (self-regulatory organisation). And despite noises that are made on occasions, it could well remain so for some more time. However, that should not prevent it from telling members yet again to restrain themselves. In fact, the faster this restraint becomes evident, the better it is for the industry.

Some critical changes have been recently implemented on other fronts and the spirit of reforms needs to continue here as well. One is specifically referring to norms pertaining to uniform cut-off time for transactions and use of PAN by investors. Both will go a long way in restricting systemic deficiencies that had run for a long time.

Feedback may be sent to bleditor@thehindu.co.in

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