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Sinha urges mutual funds to be more transparent

Finance Minister Yashwant Sinha called upon the mutual funds to focus on product innovation, equity research, risk management and market reach, and endeavour to instil greater confidence among investors.

He was addressing the sixth annual seminar of the mutual fund industry in Bombay on Thursday.

Citing RBI data and the SEBI NCAER survey, Sinha said out that less than 8 per cent of households channelise their savings into capital markets and that just 1 per cent of household investment is in equity markets.

Sinha felt that higher transparency and good corporate governance by mutual funds could attract greater quantity of household savings, which they could cost effectively deploy in the capital markets.

Sinha said that inadequate institutional mechanisms may be the reason for households shying away from the market. He said all that the retail investor looked for was to maximise return on investments, while the market volatility had placed some constraints. He opined that mutual funds should spread their findings of equity research, educate the investors and raise their level of awareness. This would have an impact and then capital market investment can become a reasonable proposition for retail investors.

Referring to the stock market, Sinha said that the popular perception of bulls and bears impacting the market has undergone a sea change. He felt that a better way to correct short-term volatility is to place more emphasis on investments that could be governed by medium- and long-term views based on scientific research. He asserted these developments will enable mutual funds to create greater confidence in the mind of investors.

The finance minister stressed that market manipulation can be ended and excess volatility arrested if there is more market depth. Mutual funds have to increase their market reach to rural areas as Life Insurance Corporation has done and bring such money into the market and create that depth.

Sinha looked forward to receiving specific proposals from RBI and SEBI on the need to create a level-playing field for the mutual funds vis-à-vis foreign institutional investors.

This would not only strengthen the mutual fund industry but also help the domestic savings to be channelled into the capital markets through mutual funds. Mutual funds have a primary responsibility of creating investor awareness and offer a sustainable return over a medium to long-term period.

Finally, the finance minister recalled that the prime minister had set forth an objective to double the per capita income which would translate into achieving a growth rate of 9 per cent. On this basis, the savings rate of 25 per cent of GDP is inadequate as seen against the stiff GDP growth target of 9 per cent.

The only way to meet the growth target is to broadbase the investor segment by taking it retail and by bringing more household savings into capital markets, Sinha indicated.

Bimal Jalan, RBI Governor, pointed out that mutual funds can provide financial and macro-economic stability. Towards this end, he urged mutual funds to offer products which cover the entire spectrum of risk-return profile in order to meet wide-ranging saving habits among Indians.

Expressing unease with assured return schemes, he said: "We have to build risk-management systems which are able to create a good asset-liability match in portfolio taking into account the time profile of the scheme."

D R Mehta, chairman, SEBI, while sketching the growth of the mutual fund industry, pointed out that the participation of the households in the mutual fund industry is still low, considering the size of savings flow and offers scope for growth.

He said that the competition, regulatory initiatives and product choice in the mutual fund industry should result in greater amounts of investor funds being intermediated through the mutual fund industry, rather than being directly invested in the capital markets.

He indicated that investor confidence in the industry will go up only when operational freedom of mutual funds and levels of compliance of the players go up.

He also outlined the initiatives SEBI is taking, through the various committees.

Among the issues under active consideration are:

• Reduction in the processing of investor applications in the initial offer period to 42 days from 90 days;
• Use of unclaimed funds lying with mutual funds for investor education;
• Creation of level playing field between mutual funds and FIIs in the context of international investing
• Formulation a code of conduct and development of best practices in the industry;
• Standardisation of portfolio disclosures;
• Modification in the structure of mutual funds to company form of organisation; and
• Publication of the annual reports of asset management companies.

He said that the Indian markets are very safe, despite the growing volatility that has been seen in the recent period.

UTI chairman, P S Subramanyam said that the quality of investor services in the industry has grown over the years. He said there is a scope to increase the penetration and volumes in the mutual fund industry by reaching out to more investors. He noted that technology has significantly altered the manner in which mutual funds conduct their business.

In the context of globalisation of capital markets, he pointed out that risk management has become critical for mutual funds. He also indicated that corporations will have to adopt best practices in information disclosure and dissemination.

He said that as stakeholders in companies in which they invest, mutual funds have the responsibility to ensure acceptable standards of disclosures. They have a constructive role to play in creating an environment that help in adoption of best practices and good governance. This will go a long way in enhancing shareholder value leading to enhancement of unit-holder value.

A P Kurien, chairman, Association of Mutual Funds of India, mentioned that it is for the first time that the finance minister, the RBI governor and the SEBI chairman came together on a common platform to address mutual funds. This is indicative of high growth prospects, he opined. He suggested that the pension fund segment be opened to the mutual fund industry.

The mutual fund industry gets together every year to take stock of the past and future strategies, keeping the investor's preferences in sharp focus. UTI, the industry leader, the UTI Institute of Capital Markets and AMFI have taken the initiative to create the right forum for meaningful discussions on the issue.

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