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Aarati Krishnan

WITH Bank of India announcing its intention to exit the mutual fund business after the sale of its remaining two equity schemes to Taurus Mutual Fund, the number of bank-sponsored mutual funds continuing to operate in India has dwindled further.

In December 2001, Indian Bank exited the mutual fund business after deciding to hive off its three remaining funds — Ind Navratna, Ind Shelter and Ind Tax Shield to Tata Mutual Fund.

Out of a handful of public sector banks (Canara Bank, PNB, Bank of Baroda, BoI) which forayed into the mutual fund business starting with the State Bank of India in 1986, just two continue to actively promote their schemes today — Canbank Mutual Fund and SBI Mutual Fund.

Other bank-sponsored funds have maintained a low profile and have seen a dwindling of their net asset size. Between 1996 and 2002, as investors flocked to zippier private sector fund houses with a foreign tag, bank-sponsored funds have seen the assets under management dwindle from Rs 7,515 crore to Rs 4,190 crore, with their overall market share sliding from 10 to 4 per cent.

A couple of factors appear to have contributed to the slow demise of bank-sponsored mutual funds.

Given that bank-sponsored funds started out in an era of high interest rates, their debut in the Indian market was marked by much fanfare.

High decibel advertising and tall promises combined to pull investors into close-ended assured return funds which promised to double or even triple investor's money. Scheme names such as the BoI Double Square Plus, Festival Bonanza, Cantriple Plus and Magnum Triple Plus, hinted at vast fortunes, just waiting to be tapped by investors.

With few regulations governing fund advertising, grandiose names, big dividends and bonuses took precedence over the risks in mutual fund investments or the track record of a particular fund house.

The fact that most of the bank-sponsored funds made their debut in a nascent mutual fund market, when most investors failed to distinguish between owning a scheme in a bank-sponsored mutual fund and a deposit in a bank, compounded the problem.

That the branches of public sector banks served as the key distributing vehicles for new fund launches added to the confusion.

Given the initial hype and the profile of investors in these schemes, the disappointment, when it came, was painful. The difficulties faced by a few bank-sponsored funds in delivering the assured level of returns in a market-determined interest rate scenario (Canstar, Cantriple Plus and BoI Double Square Plus, for instance) and the subsequent controversy surrounding assured return schemes have done much damage to the reputation of bank-sponsored funds as a class.

The loss of the bank-sponsored funds, it appears, has been the gain of the private sector fund houses.

After starting out with minuscule asset bases and low credibility when investor confidence in mutual funds was at a nadir, these funds have gradually built their asset management businesses over the past five years to garner a sizeable share of the market today.

From just Rs 2,000 crore in 1996, the assets under management of private sector funds have swelled to over Rs 47,000 crore.

The recent accretions to the funds have also proved more stable, with investors going by performance rather than by glitzy advertising.

There are of course, a number of laggards even among the private sector fund houses. However, with the bulk of the funds managed under open-ended schemes, investors today have the right to vote with their feet.

It is also some comfort that the bulk of mutual fund investors today have a better understanding of the risks of investing in a mutual fund scheme than before.

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