What is the future of mutual funds?

THE CONTROVERSY over the procedures adopted for investing funds of the US-64 scheme of the Unit Trust of India (UTI) and a slump in net asset values (NAVs) of units of growth and balanced funds of other mutual funds, since the beginning of April last year, have shaken the morale of small investors. The slashing of the dividend to 10 per cent from 13.5 per cent and from 20 per cent gross in earlier years by UTI under the US-64 scheme also has had a jolting effect.

The loss sustained by the investing public is disturbing, as in 2000-01, the value of assets of growth funds declined by 49.93 per cent to Rs. 13,483 crores from Rs. 26,927 crores and that of balanced funds by 27.97 per cent to Rs. 19,273 crores from Rs. 26,757 crores.

The schemes pertaining to IT stocks, pharmaceuticals and others have involved heavy losses with a precipitate decline in the quotations of IT stocks particularly. The total assets of mutual funds were thus lower by Rs. 22,418 crores in 2000-01 at Rs. 90,587 crores against Rs. 113,005 crores earlier.

Growth funds lose heavily

The assets of balanced and growth funds bore the brunt of the losses, declining by Rs. 20,928 crores at Rs. 32,756 crores from Rs. 53,684 crores. The depletion of assets of these funds accounted for 93.35 per cent of the losses all funds. The depletion process has continued in April-July this year, as the bearish trend in bourses has persisted and many open-ended schemes have had to cope with redemption pressures.

While growth schemes were preferred when the stock markets were buoyant the slump in NAV of these funds has led to a shift to regular income schemes. Over 60 per cent of the assets of all mutual funds is now accounted for by income schemes.

Peculiar position of US-64

The US-64 Scheme especially has a peculiar disability as the earlier purchase prices were considerably above NAVs, which however were never published.

The fund gained when repurchases were much less than sales. When this position got reversed and large amounts had to be paid against repurchases, the Chairman of UTI decided to suspend sales and repurchases for six months. This decision led to a furore in Parliament and panic amongst the small investors.

With a view to safeguarding the interests of small investors, it was decided subsequently by the new management to limit repurchases to 3000 units at a minimum price of Rs. 10 per unit or its NAV, whichever was higher and the repurchase price will rise in stages to Rs. 12 per unit by May 2003.

Happily the redemption pressure has not been severe after repurchases commenced on the stipulated basis from August 1, 2001. Because of the acrimonious debate in Parliament over the functioning of UTI even in earlier regimes, it was finally agreed by the NDA Government that the operations of US-64 Scheme also should be critically examined by the Joint Parliamentary Committee which is enquiring into all aspects of the recent stock market scam.

The experience of investors in income schemes has not been disappointing, as the downtrend in interest rates helped the fund managers, who had invested their resources on a higher yield basis to realise capital gains with the appreciation in value of the fixed interest securities concerned.

Different experience in 1999-2000

In 1999-2000 on the other hand, substantial gains were realised under various schemes and investors received handsome dividends. All mutual funds were benefited by the hectic activity in the bourses and the continuing rise in prices for pivotal scrips. Thus, the assets of all mutual funds rose by Rs. 44,533 crores to Rs. 113,005 crores or by 65.04 per cent in a year.

The balanced and growth funds increased their assets by Rs. 37,153 crores with the share of balanced funds alone at Rs. 24,848 crores.

The pattern of net sales of mutual funds has significantly changed latterly with investors preferring mainly income funds. Here again, small investors are not active buyers due to a paucity of resources or a desire to await further developments.

The debacle in IT stocks and those under other designated schemes was responsible for the pronounced decline in net asset values of growth funds, as indicated earlier.

The experience of those investing in balanced funds, on the other hand, has not been so disastrous as the value of their assets has declined by only 27.97 per cent as against 49.93 per cent for growth funds.

The fund managers have had a difficult time readjusting their portfolios, as the bearish trend in bourses has persisted since March last year. From the peak of 6150.69 touched by the BSE index on February 14, 2000, there has been a drop of 2900 points or 47.16 per cent. In 1999-2000, on the other hand, there was a net rise of 33.73 per cent in the Index. There are as yet no signs of a reversal of the downtrend in equity values.

SEBI's changing approaches

Indeed, the experimentation by the Securities and Exchange Board of India (SEBI) with the introduction of various measures aimed at controlling volatility in the bourses has not yielded the desired results. On the other hand, the new rolling settlement system, with the complete abolition of the badla facilities, has only reduced volumes and accelerated the downtrend in equity values. A larger number of brokers of major stock exchanges refrained from trading for a day protesting the SEBI moves.

The procedures adopted now are in strong contrast with those followed earlier, when even stock badlis by UTI and the Stock Holding Corporation were permitted. These institutions indeed aided the nefarious activities of bear operators, as the latter could cover their open positions with the realisation of handsome gains in a declining market. In the process, the interests of UTI and others were seriously jeoparadised.

While the confused outlook for the economy and its even baffling behaviour in some segments have been responsible for the unchecked drop in values to some extent, it will be readily agreed that the quotations for several scrips having assured growth prospects are at ridiculously low levels. At no time in the recent past current yields of 10-20 per cent were available on select scrips.

On account of the miserable performance of the mutual funds and the losses suffered on earlier purchases of equities by individual investors, there is no disposition to take even a cautiously optimistic view of the prospects for bourses in the immediate future.

With gross domestic product (GDP) expected to grow by 6-6.5 per cent in 2001-02, thanks to the likelihood of bumper food and cash crops in 2001-02 and the fairly satisfactory functioning of software companies engaged in the preparation of their own software products, there is scope for staging a modest recovery in later months.

While it remains to be seen to what extent an improvement in the disposable incomes of the rural population gets reflected in larger sales of consumer durables and semi-durables, a defined growth in GDP can be ensured in the Tenth Plan Period, only if successful efforts can be made to step up investment in projects in the infrastructure sectors and the major industries in other segments were enabled to utilise their capacities created at heavy cost more effectively.

It is needless to point out that significant additions to investments in the desired directions can be ensured, only if the Indian entrepreneurs and foreign interests can mobilise the badly needed resources in rupees and foreign exchange.

A larger inflow of net assistance from the developed countries and international institutions, a significant rise in foreign direct investment and an increase in outlays by entrepreneurs in the private sector and the profitably functioning public sector enterprises can be feasible only if there is an improvement in the investment climate and buoyancy in the bourses.

Only then can the mutual funds hope to stage a recovery and regain some of the recent heavy losses with a reshuffling of portfolios and net appreciation in equity values.

P. A. SESHAN

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