Mutual funds in the aftermath of October bloodbath

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: And the industry need not be blamed for mismanagement. Sebi chairman CB Bhave, while speaking to the media on Thursday, remarked, “We have not yet seen any signs of bad investments by mutual funds. The October phenomenon has given us a good opportunity to take a relook at debt funds and the rules that govern them and to what extent that we need to make improvements in these rules.”

There is, however, a strong case to protect retail investor’s interests. Many who had saved for encashing their savings in October would have been shattered. The importance gets magnified given the fact that mutual funds are now reaching out to rural India and trying to be a part of the ‘financial inclusion’ movement.

There are rumours that the regulator is looking at having separate schemes for corporates and retail investors. Then there are theories that the minimum capital structure for funds will be changed and that there would be emphasis given to close-ended funds or having a lock-in period.

Observers point out that having a separate fund for corporates and retail investors might be a good idea as these were the ones who pulled out of the funds when their own liquidity issues arose. However, this is already being done, albeit in a different manner. Corporates mostly participate in liquid and debt-based funds, while retail participation is extremely low.

There are high net worth individuals, but they too operate under expert advice.

Having a close-ended mechanism coming back technically sounds a great idea, say experts. The fund manager can breathe easy as he does not have to change the fund portfolio make-up each time there is redemption pressure.

A close-ended fund is finite and has a investing time frame, say, six to ten years, and is made available to initial investors through the new fund offer route. When the offer is closed, the fund gets listed on the exchange and investors can move in and out of the fund through the secondary market.

The asset under management does not change on account of redemption, unless there is a special redemption window offered by the management. Such schemes were extremely popular in the nineties.

However, the catch is that the traded price of the scheme is often at a steep discount to the net asset value. So the investor might not be able to exit at a great price.