More than trust

RECENT DEVELOPMENTS IN the country's oldest and largest mutual fund, the UTI, leading to the abrupt exit of its Chairman, Mr. P. S. Subramanyam, are disquieting. The UTI's decision on Monday to temporarily suspend sales and repurchase of units under its flagship US 64 scheme appears drastic and will have a major impact not only on the mutual fund sector but on the savings and investment habits in the country. In a parallel move, the Trust has slashed the dividend to 10 per cent, which is the lowest in its almost-three-decade history. Numerous critics of the UTI say that through those unprecedented actions the Trust is merely confirming the existence of a deep-seated malaise, which even a corrective action actively underwritten by the Government in 1999 has failed to resolve.

Given the pivotal role the Trust plays in the Indian financial system, there are bound to be other accusations of incompetence, perhaps even of delinquency. The Finance Minister has already announced an enquiry. The Joint Parliamentary Committee now looking into the stock market crisis will definitely have a say. But not all the charges that the UTI, its top management and fund managers will have to answer should deter them from taking the US 64 towards a market-based scheme. Only when the scheme starts announcing its net asset values (navs) - the market price of its holding minus its liabilities - periodically, will there be transparency. That will also be the time when the country's largest scheme can be benchmarked against the industry parameters. As of now, the US 64 which has preceded other mutual funds by more than two decades is being judged partly by its own rules and partly by the rules of the rest of the industry. Either way the messages are not always flattering and in times like this they can be highly damaging.

For instance, there has been a basic confusion in the US 64's objectives. Positioned as an income fund and meant to channel small savings into the stock market, the Scheme promised and - so far - delivered a steady and regular return. That objective ought to have forced its fund managers to invest predominantly in debt and other fixed income instruments. However, partly because of a belief in the faster appreciating equities and partly because of the absence of debt instruments in sizeable quantities, the US 64 has come to resemble a balanced fund with a substantial bias towards equities in its portfolio. It is this dichotomy between its investment patterns and its objective that has been at the root of all its problems. Most of the other charges levelled against the US 64 are less significant. Even the charge of riding the technology bubble, only to loose heavily in the end, can be explained, though obviously not justified: after all, there were not many experts whether from the mutual funds or outside who predicted such an early and abrupt end to the technology stock boom.

Now that the decision to suspend sales and repurchases of units for six months has been taken, the Trust ought to use the interregnum to put its house in order. Small investors have reasons to feel let down. Deprived of an exit route, they will have to, in all probability, reckon with much lower repurchase prices, when the Trust reopens the window in December. For now, retail investors will have to be convinced that the decisions taken last Monday are ultimately for their benefit. As the UTI has claimed, large corporate withdrawals forming part of a huge Rs. 4,100- crore outflow during April-May have literally overwhelmed the retail investors' interests and landed the US 64 in a mess. Much more than sectarian interests, however, are at stake even as the Government and the UTI get down to address the problems.

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Section  : Opinion
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