Sunday, September 1, 2002		Books

A fund of information indeed
Kamlesh Khosla

How Good Are Mutual Funds
edited by L. C. Gupta and Utpal K. Choudhury. Society for Capital Market Research and Development, Delhi. Pages 105. Rs 270.

THE book under review attempts to analyse the perception and attitude of investors towards mutual funds. Hence the title, How Good Are Mutual Funds, is quite relevant. It is a high-quality research-based book, which contains a study that gives valuable insight into the functioning of mutual funds in India. It brings out how the investors perceive mutual funds both inter se and in relation to various type of investments.

The study, which was undertaken by the Society for Capital Market Research and Development and later published in book form, brings out the fact that competition in the mutual fund industry has grown and become vibrant in India. There are more than three-dozen mutual fund organisations operating in India. But the growth that was short-lived had been only in qualitative terms.

The study exposes the myth of investors' loyalty and malpractices of mutual funds. The mutual fund industries' low and declining share in mobilisation of saving is indicative of lower image of its products. Finally, they failed to create real value for investors.

These insights have been obtained by carrying out research. Different devices in the form of exercises including questionnaires, which were addressed to a cross-section of middle-class household heads on an all-India basis, were used.

After analysing the data, the study reveals how the mutual fund industry has undergone a transformation. It delves into investors' attitude and identifies current problems and finally suggests ways to improve the industrial performance.

One of the valuable findings of the research indicates that the Indian mutual fund industry has changed from monolithic to an extremely competitive structure, where many players are involved. Despite the entry of three-dozen new mutual fund organisations, the UTI has been named the best.

The next in popularity among the investors is Kothari Pioneer Mutual Fund, according to the book. Nearly 80 per cent of the UTI respondents regarded the scheme as reasonably safe. However, in future, whether it will continue to be so, is not certain.

Joint venture mutual funds currently account for bulk of industry's net mobilisation of funds, while diversification of investment among several mutual funds has become a norm.

Income schemes account for approximately one-half of the assets, while the place of equity schemes in mutual fund industries is low at present.

The growth of mutual funds and net mobilisation of savings rose steeply in the early nineties but soon the industry started facing a slowdown. The prolonged market depression since 1995 meant losses for investors in mutual fund equity schemes so the interest of investors waned.

The study highlights the crisis, which UTI, the oldest financial institution, experienced due to substantial net outflows i.e. redemption and repurchases exceeded sales.

The failure of US-64 and the manner in which the government plugged the leakage have been dealt with in detail. There is a revelation of some unhealthy tendencies in the book.

These include using mutual fund products as a vehicle for speculation rather than for genuine investment purposes. This trend can be dangerous and may prove harmful to the mutual fund industry's health.

A remarkable finding of the study is the analysis of the investors' reactions to the US-64 crisis. The bulk of the investors have been the strong-holders of US-64. Only 20 per cent of the US-64 holders sold out their holdings after the news of the crisis. This pattern of behaviour suggests that either the investors believed the crisis would blow over with the government's help or they had faith in the inherent strength of the scheme.

The author points out that instead of relying on tax concessions and incentives, which the government gave to the mutual fund industry, value for investors should be created through services.