Mutual funds hedge their bets, but not their customers

By C. R. L. Narasimhan

After the crash, it is the season for explaining. The stock market meltdown has in a sense affected mutual funds even more than individual investors. When the MF bubble burst a few of them have nothing to show but their explanations. Whatever happened to the earlier hype, not just over the technology sector but over the mutual funds industry itself? Remember that the Government too has given extraordinary fiscal concessions to the predominantly equity based MFs. On more than one occasion there have been official exhortations to equity investors to route their investments through MFs and not invest directly.

And in November last, the Reserve Bank of India asked those banks not comfortable with share market nuances to route their (substantially enhanced discretionary quota of) funds through MFs.

There was no way the MF industry could complain: they had government largesse, investor confidence and - most important - financial magazines ever willing to hype and inflate the bubble. Senior MF functionaries (again a generalisation is not correct) consciously overplayed the MF card, appearing in the media all the time with their famous quotes and sold themselves as well as their schemes. It is noteworthy that the most `media savvy' among the private mutual fund personnel have earned a promotion and moved to their international headquarters. It is a different matter that the schemes they launched with so much of glitz have landed their investors in a mess.

Out of the obvious mistakes of the recent past, of course, some welcome developments are emerging. For instance, their communication strategy is so much more refined and bears out their chastening experience. Above all, there is an admission that things have gone really wrong and that even they (possessing specialised skills) could not anticipate the extent of the crash.

A common weakness of their investment strategy has been the heavy betting on technology stocks. Even balanced funds did not live up to their names. As against the golden rule of spreading risks, they committed the folly of investing a disproportionately large share of their funds in tech and related stocks. The results have been disastrous for the investors. Even monthly income schemes which invest predominantly in debt and fixed income securities and only a small percentage in equities had placed a large portion of the latter in the tech sector. The meltdown has been so severe that some of them have skipped their monthly dividends.

Were they - the specialists - not better placed than ordinary investors to read the market? The Kothari Pioneer Mutual Fund (one of the less hyped funds) puts it this way: ``As fund managers we are in position to assess fundamentals of companies and the relation of stock prices to a company's intrinsic worth. However, we cannot anticipate sentiments and irrational stock market movements during bouts of euphoria and panic''. Further, ``sentiments have now totally flipped around (compared to a year ago) from boundless optimism to rank pessimism, something that is difficult to foresee''.

All mutual funds therefore urge investors to stay invested, meaning not to get out. In a practical sense there are few options for ordinary investors. The funds' strategy has uniformly inflicted losses on most investors. Besides, with NBFCs (non- banking finance companies) in a shambles and banks offering low rates where can anyone go?

Equally serious is the credibility loss suffered by the mutual funds as a whole. Along with UTI's recurring problems, the general perception of the mutual funds cannot be good. From now on they face an uphill task of correcting their image and performing too.

The time horizon is important in any investment decision but it is poor strategy to recommend a long timeframe for the disappointed mutual fund investors of today. Taking the industry as a whole, there can be no presumption that the funds have called correctly even over the relatively long period most of them have existed.

Inanities such as the following one from the Prudential ICICI newsletter do not help even in clarifying: ``It is our belief that patience and a long term view of investing is essential in these markets''. No comfort at all for those who invested in a technology fund of Prudential ICICI launched even as the boom was petering out. In less than three months investors lost more than half their capital. Its NAV is around Rs. 3.45, a more than 65 per cent erosion in the investor's capital.

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