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PROBLEMSOFMUTUALFUNDSININDIA.[Dr.K.D.Mehru(MBA,FCS,CFA)Director,MBAInstitute,Visnagar(N.Guj.)]Introduction:Aninstitutionalsetupoffinancialintermediariesisrequiredtomobilizethesavingsofthesocietyandinvestingrationallyforeconomicdevelopment.UnitTrustofIndiawasset-upbytheCentralGovt.undertheUTIAct,1963withanobjectiveofmobilizingsavingsofmiddleandlowerincomegroupsandprovidingthemopportunitiestoacquirepropertyintheformofshares.ThegrowthofUTItookplaceduringtheperiodwhentheeconomywasunderacontrolregimeandsecuritiesmarketswereirrelevanttoindustrialgrowthasthefinancialintuitionswerethemajorpurveyorsoflong-termfinance.Theeconomicliberalizationandglobalizationcreatedaferventenvironmentinourcountryandseveralsmallinvestorsparticipatedintheequityofthecorporatesector.Theinvestorswhosubscribedtoequitysharesissuedathighpremia,afterabolitionoftheofficeoftheControlleroftheCapitalIssues,havelosttheirinvestmentsasthemarketpricesofsuchsharesareprevailingatverylowratesornotquotedatall.SEBIhasraisedtheamountofminimumsubscriptioninpublicissuesandshiftedtocompulsorytradingofsecuritiesindematerializedformthroughdepositories.Theprivatesectormutualfundshavebenefitedtheinvestorsbyprovidingthemmoreoptionsandbetterservices.Thereare35mutualfundsoperatingwithawidebranchnetworkinourcountry.Thepresentstateofmutualfunds,theirperformance,profitabilityanddeclineofNAVsbelowissuepriceshavebeencausingconcerntotheinvestors.Themainobjectiveofthestudyistoexamineandstudytheproblemsofmutualfundsinourcountry.AnextensivefieldworkwasundertakenbyvisitingUTI,PrudentialICICIMutualfund,JMMutualfund,IDBIMutualfund,SEBI,AMFIetctostudytheproblemsofmutualfunds.TherelevantprovisionsoftheCompaniesAct,1956,IndianTrustsAct,1882,theSEBI(MutualFunds)Regulations,1996andtheUTIAct,1963havebeenstudiedindetailtoexaminetheproblemsofmutualfunds.Thestudyisbasedonthefollowinghypothesis.”Themutualfundshavefailedtoprovidesafety,liquidityandreturnsoninvestmentstothesmallinvestors,whicharefacingseveralproblemsinourcountry.”Thestudybeginswiththefirstchapterofintroduction,whichdealswiththebroadframeworkofthestudy.Itcoverstheproblemsandneedsofthestudy,objectives,majorissuesandquestionsdealtwithinthestudy.Thesecondchapterdealswithgenesesandgrowth,rationale,chronologicalaccountandregulatoryframeworkofmutualfunds.ThechapterincludesasectiononSEBI(MutualFunds)Regulations1996andneedfortheMutualfundsAct.TheorganizationandmanagementoftheUTIandSEBIregulatedmutualfundsformthesubjectmatterofthethirdchapter.ItincludesrecentchangesintheorganizationandmanagementofUTIhavingmechanisticmodel,anditscomparisonwithSEBIregulatedmutualfunds,whichhavefollowedorganicmodeloforganizationstructure.ThefourthchapterdealswithoperationsofmutualfundscoveringdetailedstudyofUTI,publicsectorandprivatesectormutualfundswithrespecttotheirgroups,netassets,numberofschemes,growthrates,income&expenses,percentagescomposition&assetsallocationinequityshares&fixedincomesecuritiesand
 
futureofmutualfunds.Theperformanceevaluationhasbeendealtwithinthefifthchapteranditcoversanalysisofoperations,netassetvalues,returnperunitofriskandnetselectivityofthePrudentialICICIMutualFundschemes.Thesixthchapterofthestudyisthecorechapteranditcoverstheproblemsandperspectivesofmutualfundsrelatedtostructure,investmentpolicies,performanceandinvestors.Thestudyendswithabriefresumeofissues/problems,summaryandconclusionsinordertoimproveorganizationaleffectivenessandoperationalefficiencyofmutualfunds.TheUTIActgovernsUTIandtheSEBIregulationsarenotapplicabletoUTI.Asetofcommonrulesandregulationsarerequiredforthesamebusinesstoprovidelevelplayingfield.Intheabsenceofasinglecomprehensivelegislationformutualfunds,thereareseveralActsapplicabletothebusinessofmutualfunds.UTIhasfollowed‘trustapproach’whileSEBI-regulatedmutualfundshavecombinedbothtrustandcorporateapproaches.TheIndianTrustsAct,1882doesnotcontainadequateprovisionstodealwithatrustwherethereisalarge-scalemobilizationofpublicfunds/savingsforexpertfundmanagementtomaximizethereturnstotheinvestors.ThemanagementoffundshasbeenentrustedtotheassetsmanagementcompaniesincorporatedundertheCompaniesAct,1956toseparatemanagementfromownership,controlandsupervision.Thereareseveralpartiestomutualfundssuchassponsor,thetrustees,theAMC,thecustodiansandtheinvestorsasbeneficiaries.Therights,dutiesandobligationsofallthepartiesneedtobefocusedunderaspecificstatuteorActratherthanenforcingpartlyunderSEBIAct,TheCompaniesActandtheIndianTrustsAct.Alltheproblemsofmutualfundindustryhavebeenclassifiedinthefollowingcategories:1. ProblemsrelatedtostructureTheproblemsrelatedtostructureunderSEBI(MutualFunds)Regulations,1996arepertainingtoregulations2(q),7,16(5),24(3),21(b),24(2),32,33,43,&44.AMFIhastakenalead&maderepresentationstotheSEBI&theCentralGovt.toamendtheregulations.TheproblemsrelatedtotheIndianTrustsAct,1882arepertainingtoindividual/collectiveliability.Thepost–SEBImutualfundshaveoptedfortrusteecompanystructure.Theliabilityofthetrusteesismoreonerousundertheboardoftrusteesstructureascomparedtothetrusteecompanystructure.TheIndianTrustsActdoesnotpermitperpetualsuccession.ThecompaniesAct,1956permitsperpetualsuccessionbutitcan’tprotecttheinterestoftheinvestorsduetotheprivilegeoflimitedliability.TheGovt.ofIndiashouldconsiderenactingaseparatecomprehensiveMutualFundsActandclearlyspelloutrights,dutiesandobligationsofthevariousconstituentsofmutualfundtoprovideauniformregulatoryframeworkandtocreatealevelplayingfieldforallthemutualfundsintheindustryincludingUTI.2. ProblemsrelatedtotheinvestorsThesuccessofamutualfunddependsupontheconfidenceoftheinvestors.UTIhasestablishedamarketingnetworkofbranches,chiefrepresentatives,collectioncentersandfranchiseofficesthroughoutthecountry.ThemarketingnetworkofUTIisitsuniquestrengthascomparedtoothermutualfunds.UTIcouldmobilizeRs.75159Cr.ofinvestiblefundsthroughits87schemesduetoitswellestablishedmarketingnetwork.Allothermutualfundscouldnotestablishsuchamarketingnetworkandcan’tcompetewithUTIinmobilizingpublicsavingsfromruralandsemi-urbanareas.Alltheproblemsrelatedtotheinvestorsare,lackofawarenessandpooraftersalesservicetotheinvestors.Theinvestorsbelieved,
 
sofar,thatthemutualfundspromotedbyUTI,LIC,andnationalizedbanksareguaranteedbytheCentralGovt.Themajorityofthenewinvestorsdon’tunderstandtheconcept,operationsandadvantagesofinvestmentinmutualfundsbeforeinvesting.TheresearcherhadundertakensurveysofindividualinvestorsandmembersofAhmedabadStockExchangetoanalysetheawarenessofinvestorsaboutthemutualfundschemes.Itwasobservedthatsmallbusinessmen,farmersandpersonsbelongingtoruralandsemi-urbanareasinlowincomegrouphadnoawarenessaboutthemutualfunds.Thequeriesreceivedfromtheinvestorsarepromptlyattendedbyalltheprivatesectormutualfunds.TherearedelaysinattendingqueriesbythetransferagentsincaseofUTIduetolargenumberofqueriesreceivedbythem.3. ProblemsrelatedtoworkingTheinventiblefundsofthemutualfundsincreasewhensalesaremorethantheredemptionsanddecreasewhentheredemptionsaremorethansalescreatingtheproblemsofmaintainingliquidityTheinvestorsprefertoinvestinequityfundsduringboomperiodandshifttheirinvestmentstodebtfundsduringtherecessionperiod.Themostprofitableandhighincome&appreciationpotentialstocksduringtheboomperiodoratthetimeofinvestingfundsinsuchstocksmaybecomeilliquidoveraperiodoftime.Theinvestorscan’ttakedecisionsofinvestmentduetounavailabilityoftrackrecordsofworking.HDFCandStandardCharteredMutualFundsstartedtheiroperationsin2000,allothermutualfundsexceptUTIhavethetrackrecordof3to5years.Unlessthetrackrecordsofworkingofmutualfundsisavailablecoveringtheseveralstockmarketboomsandcrashes,theinvestorscan’tjudgewhichschemesormutualfundsarebetteralternativesforinvestments.ThereareseveralproblemsrelatedtoUTIsuchasnon-disclosureofportfolio,interschemetransferoffunds,lackofprofessionalfundmanagers,sale&repurchaseofunitsofUS-64atpricesnotrelatedtoitsNAV,bureaucraticworking,etc.AMFIhasconstitutedcommitteesonvaluation,bestpracticesandcreditpolicyandworkinggroupsonvaluationofgilt-securities,standardizationofdisclosure,pensions,etc.toensureuniformworkinganddisclosurepractices.4. ProblemsrelatedtoperformanceTheinvestorpreferssafetyoftheprincipalamount,regularreturns,long-termgrowth,incometaxbenefits,etc.Themutualfundschemeshavebeendesignedbasedonthepreferencesoftheinvestors,changesinstock/capitalmarket,returnsonvariousinstrumentsandchangingprofileoftheinvestors.Theschemesareframedandconceptualizedbythetopmanagementofthemutualfundsandmarketedbytheirbranchesandthroughtheagents.Theagentsandthesalesexecutivesofthemutualfundsassurehigherreturnstotheinvestorsandpaintarosypictureaboutthemutualfundswhilemarketingschemes.Themutualfundsinourcountryhavebeenquitewronglypromotedasanalternativetoequityinvestingandcreatedveryhighexpectationsinthemindsoftheinvestors.Theignoranceoftheinvestorsaboutmutualfundscoupledwithaggressivesellingbypromisinghigherreturnstotheinvestorshaveresultedintolossofinvestors’confidenceduetoinabilitytoprovidehigherreturns.Allmutualfundssetahighertargetformobilizationofsavingsfromtheinvestorbylaunchingnewschemesandexpandinginvestorbase.Theagentsordistributorofmutualfundsaremoregovernedbycommissionsandincentivestheygetforsellingtheschemesandnotbytherequirementsoftheinvestorsandqualityoftheproducts.Theysharecommissionswiththeinvestorsanddon’texplaintheriskfactorstothem.Theinvestorswhoinvestingrowthorequityschemesconsideritasanalternativetostockmarketinvestingandtheinvestorswhoinvestindebtschemesexpect

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