In the last couple of months, there has been a flurry of activity in mutual funds -- corpuses are increasing manifold, mergers are happening, schemes are being bought over by other funds, scores of new schemes are being launched and a number of new players are making their foray in this industry. While admittedly, it is the tax sops that have propelled the mutual fund industry into the limelight, it is amply clear that mutual funds arefast becoming the `preferred' investment instrument.

So what does the future hold for the mutual fund industry in India? One thing is amply clear: There is no dearth of expertise in this industry. Even prior to the euphoric wave, expert committees have been constituted and recommendations have been made to enhance the credibility of the industry. The two crucial committee reports: "The committee to recommend the manner of discharging responsibilities of the trustees" under the chairmanship of PK Kaul, whose recommendations have recently been accepted by the Sebi board, and "The committee to frame guidelines for mutual funds to invest in overseas securities markets" under the convenorship of Pratip Kar, if implemented swiftly could be invaluable for the mutual fund industry.

With the number of new mutual funds emerging and as more people start pumping their money into mutual funds, the role of the trustees will mandatorily need to change. The thrust of the PK Kaul committee report is the lack ofinfrastructure support available with the trustees and its inconsistency with the nature of performance expected under the present mutual fund regulations. The role of the trustee is not merely to lend credibility to the mutual fund, but to act as the internal watchdog in protecting the interests of the unit holders.

The monitoring role of the trustees using the "hands off, eyes on" approach cannot be effectively implemented under the current regulations. For instance, due diligence requires that the trustees apprise themselves of the activities of the fund and take timely action. The regulations, however, do not stipulate the frequency of meetings that the trustees should have to apprise themselves of the activities of the fund. Granted that if the trustee is a company, the Companies Act requires it to meet at least four times a year. The Kaul Committee has rightly recommended that such meetings must be increased to at least once in two months. The committee further states that the quorum should not beregarded as constituted unless there be present at least one independent trustee/director.

If corporate governance is to be accorded top priority, then the issue of independence of trustees is a chicken and egg problem. The selection of the trustees is done by the sponsor who in turn is the major shareholder of the trustee company, so the question of independence is often overshadowed. While such conflicts are admittedly unavoidable, the mutual fund regulations should be amended to incorporate specific responsibilities for independent directors. The Kaul Committee further recommends that a separate office infrastructure, staff and resources should be provided to the trustees to enable them to effectively supervise the activities of the asset management company. This recommendation could possibly be met with a great deal of resistance as it would increase the recurring expenses of the fund.

The most pertinent issue highlighted by the Kaul Committee is the need to have in place, an appropriate legalstructure for mutual funds. The committee rightly called for an independent statute for mutual funds. The Indian Trusts Act, 1882 was not enacted to accommodate mutual funds. With a separate Mutual Funds Act, mutual funds would not be dependent on the provisions of other acts.

Besides, a single Mutual Fund Act will provide a uniform regulatory framework for all mutual funds, including UTI. With Sebi's inclination towards bringing all of UTI's schemes under its purview, the committee suggested that the UTI Act could be repealed through the Mutual Fund Act. As mutual funds are slotted to play a critical role in the capital markets, the time is apposite for the authorities to consider enactment of a separate comprehensive act to govern the management, responsibilities and functioning of mutual funds in India.

The other crucial committee report that must see the light of day is the "Committee to frame guidelines for mutual funds to invest in overseas securities markets". The Reserve Bank of India (RBI) had inOctober 1997 announced that mutual funds would be permitted to invest in overseas markets, initially with an overall limit of $500 million and a ceiling of $50 million for an individual mutual fund.

If the mutual fund industry in India is to develop in a healthy manner and take advantage of a diversified investment portfolio, there has to be a move away from the single country, single market and single currency approach. If the world over, funds have the advantage of investing in other markets, it remains inexplicable why Indian funds should not have this facility. In India, the financial world has a strong affinity for setting up committees. Perhaps the authorities would be doing a great service to the mutual fund industry if they set up a committee for the enactment of a separate Mutual Fund Act. Then again, in India we also have a history of adopting the "if you do not want to commit yourself, committee yourself" approach.

The author works for HDFC and the views expressed here are her own