Comprehension

Direction for the questions: Read the passage carefully and answer the given questions accordingly.

The end of mutual funds, when it came, was sudden but not unexpected. For over 10 years mutual fund has been scripting its own growth demise, embarking on a reckless course of high risk, unhealthy pastimes, and unchecked maladies. Ironically but fittingly too, the very hand that had supported and sustained it through the turbulent early period of its existence was the one that, finally wielded the euthanasian syringe. The individual investor it was who had made the mutual fund post-liberalisation India’s most vibrant vehicle for individual investment. The individual investor it was who brought the curtain down on an act that had started with a virtuoso performance, only to putrefy into a show of ineptitude, imprudence, and irresponsibility.

The mutual fund, as we know it, may be dead. It died of many things. But primarily, of a cancer that ate away at its innards. A cancer that destroyed the value of he investments the mutual funds had made to service the Rs. 85,000 crore that India’s investors had entrusted them with ever since they began life way back in 1964 as the Unit Trust of India (UTI) now-disgraced Unit Scheme 64 (US64). A cancer that grew from the refusal of the men and women to manage the mutual fund to exercise a mixture of caution and aggression, but to adopt, instead, and indisciplined, unplanned, fire-from the hip approach to investment. A cancer that, ultimately, robbed the mutual funds of the resources they would have to use to pay back their investors, leaving them on Death Row.

Indeed, the scandal that US-64 had been brewing for years, was only one, but not the first, of the warning-bells that pointed to the near emptiness of many a mutual funds’ coffers. In quick succession have emerged reports of more and more fund-schemes that have been laid bare, their corpuses empty, their ability to meet their promises of assured returns-to investors demolished. At least 37% of the 235 fund schemes in operation in the country have promised investors assured returns of over 15% for 5 years, and repurchaseprices well above their Net Asset Values (NAVs).

According to a study conducted by the Delhi based Value Research, at least 18 big schemes due for redemption over the next 3 years will be unable to service their investors, or even return their money at the time of redemption. The shortfall? Rs 4,685.10 crore, Or, 75.87% of the amount handed over by trusting investors to fund managers. Worries Ajai Kaul, 38 President, Alliance Capital Asset Management. “When an assured-returns scheme runs into problems, investors view it as one more let-down by the mutual funds.”

Had they but known of the actual practices seen in the offices and hallways of the mutual funds, which have translated into these results, investors would have shown their disgust long ago. Take the case of a mutual fund company that manages more than a dozen schemes. According to an unwritten, but formalised, principle each scheme takes it in turn to sell some of its holdings to its sisterschemes, booking fat notional gains and posting NAVs. While investors responded by pouring in even more of their savings, the profits were, clearly, only on paper, In the offices of another asset management company half way across Mumbai, the demand for cellular phone peaked 6 months ago.

Its employees had, suddenly, realized that making their personal deals, using information gathered in the course of their professional work, was best done over cell phones so that the company’s records wouldn’t show the cell being made. Obviously, the hot tips went to fatten their - and not investors’-pockets. Earlier, quite a few merchant bankers entered the mutual funds industry to use the corpus to subscribe to the issues they were lead managing. It took a crash in the primary market-not ethics or investigation-for this practice to stop.

Filled with fear and loathing -and righteous anger- the investor has, therefore, decided to adjure the mutual fund. According to marketing and Development Research Associates (MDRA) opinion poll of 342 investors conducted last fortnight in the 5 metros of Bangalore, Calcutta, Chennai, Delhi, and Mumbai, mutual funds as an investment instrument now rank a lowly fourth on safety-after bank deposits, gold and real estate-and fifth on returns-ahead only of bank deposits and gold. And only 14.20% of the sample will even consider investing in a mutual fund in the future.

Still, it is the species that has died, not its every member. The ones that have survived are the bright performers who beat the market benchmark- the 100-scrip Bombay stock Exchange (BSE) National index- by the widest margins within their 3 genres, growth income and balance. However even their star turns have not been able to stave off the stench of death over the business. In fact, an autopsy of the late -- and, at the moment not particularly lamented -- mutual fund reveals a sordid saga of callousness and calumny.

Sheer disaster stares the mutual funds in the face, and a cataclysm could destroy the savings of lakhs of investors too. A Value Research estimate of probable shortfall that 18 assured-returns schemes will face at the time of their scheduled redemptions over the next 3 year adds up to a sense-numbing Rs. 4,685 crore. An independent audit of the 60 assured-returns schemes managed by the public sector mutual funds. Conducted by Price Waterhouse Coopers at the behest of the Securities and Exchange Board of India (SEB), estimated a shortfall of between Rs.2,500 crore and Rs.3,000 crore. In 1999 alone, judging from their present NAVs, the four schemes due for redemption-Canbank Asset Management Company’s Cantriple, IndBank Asset Management Company’s Ind Prakash, SBI Funds Managements’s Magnum Triple Plus, and BOI Mutual Funds’s (BOIMF) Double Square Plus---are heading for a collective shortfall of Rs. 1,639.55 crore.

As of June 30, 1998 the country’s 252 fund-schemes managed assets with a market value of Rs.69,599 crore, with the UTI alone controlling the fate of Rs. 50.000 crore. That is Rs. 11,000 crore less than the money invested in these schemes as of June 30, 1997 which means that the mutual funds have wiped out Rs.11,000 crore from the investors’ hard earned money in the intervening 12 months. Of course, every fund is paying for the sins of the black sheep. For, the villain of peace was the UTI and the 95 funds managed by the public sector banks and institutions, the value of whose corpuses fell from Rs. 66,748 crore to Rs. 57,350 crore in the past year. In fact these funds contributed 85.405 of the overall values-loss ,with the private sector funds boosting their corpuses form Rs. 4000 crore to lower the extent of the erosion.

For investors, that has translated into an option of either exiting at a loss- or holding on in vain hope. On Nov. 20,1998, a depressing 77% of the 58 listed fund schemes were quoting at discounts of between 5% and 40% to their NAVS. And what of the NAVs themselves? The units of a shoulder-slumping 15% of the schemes were worth less than their par values. And US-64 of course continued to languish, with an estimated NAV of Rs.9.68. Even if there are schemes that have performed individually well, that the mutual funds have collectively failed to deliver couldn’t be more obvious. So investors’ murderous mood can hardly be debated.

Their genesis and growth reveals just what blinded the mutual funds to the possibility of failure. 40 % of the banks-and - insurance companies promoted funds in operation were launched between 1987 and 1993, when the stock markets were bull-dominated. In a period that saw only one bear phase, the BSE Sensitivity index (a.k.a the Sensex) climbed by 346%. Being successful with equity investments required no skills; only investable funds. Nor was fund-raising a problem, as investors desperately sought ways to grab a piece of equity boom. Between 1984 and 1989, the mutual funds collected Rs. 13,455 crore as subscriptions, but in the next 5 years, they picked up Rs.45,573 crore.

In January, 1994, the UTI’s Mastergain mopped up a stunning Rs. 4,700 crore while the most awaited Morgan Stanley Growth-a showcase for the fabled fund-management metier of the foreign mutual funds-took in Rs. 1000 crore in just 3 days. Low entry barriers - a so called sound track record, a general reputation of fairness and integrity, an application-fee of Rs. 25,000 a registration fee of Rs. 25 lakh and an annual fee of Rs. 2.50 lakh-made entering the business a snap. Explains Ajay Srinivasan, 34 CEO, Prudential ICICI Mutual fund: “Mutual funds were misunderstood by investors. Everyone thought they were a one way ticket to a jackpot.”

Intoxicated fund-managers poured in more and more of their corpuses into equity, ignoring the down sides, confident that the boom would last forever. In the process, they ignored the very concept of risk-management. Blithely ignoring the safety net of fixed income instruments, and accusing those who advised caution of being cowards. In 1995, for instance, ABN estimated 70% of the money being managed by the mutual funds had been funneled into equity. Whether they knew it or not, they were breaking away from the trend set by the mutual funds in the US, where the industry began by investing primarily in the money market, with only 25% of their corpus set aside for stocks. Only in the past 15 years, after operating for more than 7 decades, have those funds ventured into equity.

Unfortunately, their success blinded the fund-mangers to the fact that they were riding a wave-not navigating the treacherous seas. As Vivek Reddy, 36, CEO, Kothari-Pioneer Mutual Fund, puts it: “It was the stock market conditions that helped the mutual funds deliver returns- not superior investment skills.” Then, the stock markets collapsed and never quite recovered. Between July, 1997 and October, 1998, the sensex free fell from 4306 to 2812 finally nullifying the theory that if you wait long enough, share-prices are always bound to rise. And the mutual fund, unused to a diet of falling equity indices, collapsed too.

The quantum of money mopped by the mutual fund may suggest that the reports of its extinction have been greatly exaggerated. In 1997-98, Indians entrusted Rs. 18,701 crore to the mutual funds, with new schemes alone mopping up Rs. 12,279 crore. Questions R G Sharma, 58, CEO LIC Mutual fund : “ How do you explain that Dhanvarsha 12 and Dhanvarsha 13, floated in April and September, 1998 managed to mop Rs.335 crore ?’ Not quite a loss of faith, would you say? Think again. In those 12 months, those very investors also took away Rs. 16,227 crore in the form of repurchases and redemptions, leaving only Rs. 2,474 crore more in the hands of fundmanagers. What’s more, since none of the withdrawals could have been made from the new schemes, the old schemes, obviously, gave it all up, effectively yielding Rs. 9,0805 crore to angry investors who took away their money. It is same story this year. In the first quarter of 1998-99, old schemes collected Rs. 2,340 crore, compared to the new schemes’ Rs. 1,735 crore but they gave up Rs. 2, 749 crore ending up Rs. 409 crore poorer.

Sure some people are still putting money into he mutual funds. The real reason : money is flowing in from two genres of investors-neither of whom is the quintessential urban. The first comprises people in the semi-urban and rural areas. For whom makes like LIC and GIC still represent safety and assured schemes of income importantly, this category investor isn’t clued into the financial markets, and is not, accordingly aware of the problems that confront the mutual funds. Confirms Nikhil Khatau, 38 Managing director, Sun F&C Asset Management: “That market is fairly stable.” However as soon as the fundamental problems hit their dividend paying ability, even the die hard mutual fund investor from India’s villages and small towns-who don’t forget, has already been singed by the disappearance of thousands of Non Banking Finance Companies-will swear off their favorite investment vehicle.

The second genre of investor explains why the private sector funds have been successful in soaking up large sums: 31.10% of the total takings in 1997-98, and 10.70% in the first quarter of 1998-99. They are the so called high net worth players-corporate and individuals who in Khatau’s terms,” While their fastidiousness has forced them to pick the private sector mutual funds., whose disclosures and performance have both been ahead of their public sector cousins, their interest does not represent every investor’s disillusionment.

CAT/1998

Question . 255

According to the passage, the flaws of the mutual funds lay in their