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Suresh Krishnamurthy

THE Indian mutual fund industry is hardly a decade old. While it does not account for a significant portion of the Indian savings, especially household savings, it is undergoing substantial changes with the prospect of a few large players making their way out of the industry.

The ownership of Pioneer ITI has already changed hands. Now, Alliance and Zurich India appear to be on the block too.

Zurich India has, till the other day, denied that it will exit the Indian scene. If it does, it could turn out to be the biggest setback for the Indian mutual fund investor in the near term. Zurich India manages Zurich Prudence, one of the three balanced funds in the country with a reasonable track record. Of the three, Zurich alone has a consistent track record. Its differentiated investment strategy may change under a new fund-house.

Styles lost: In fact, it is the possible change in investment style that makes the turn of events unfortunate. In contrast to established markets, active investing plays a vital role in the Indian equity market. The skills of the fund manager and the investment strategy adopted by the fund-house are still relevant in the Indian context. Importantly, funds that are, or may become, part of the restructuring are established funds with an enviable record as well as a clearly defined, unique positioning.

For example, Alliance, as a fund house, adopts an aggressive strategy for its premier equity scheme — Alliance Equity. It is still bullish on technology stocks. This aggressive strategy with a technology focus is the character of the scheme. Buying and holding on to stocks with long-term potential is another feature. Stocks such as HDFC Bank and Vesuvius India come readily to mind.

However, if Birla Mutual Fund were to acquire Alliance, it may not believe in the same strategy. In fact, Birla Mutual Fund has, since mid-2001, adopted a more diversified strategy for its equity fund because of its views on Indian technology stocks. Technology has since acquired a lower profile in the case of Birla's diversified equity funds.

Only lip service: Acquirers are sure to pay lip service to the concerns of investors and say that the styles would be maintained. However, it is highly likely that a deviation from the original style will occur. Take, for example, the case of Pioneer ITI Bluechip now Franklin India Bluechip. Bluechip has in the past been an aggressive equity fund investing in large-cap growth stocks. Now though, with Franklin India, it is being advertised as suitable for an over-cautious investor.

Indeed, the fund manager has not changed after the acquisition by Templeton. In addition, Templeton has stated that the investing style will not change. Still, the new advertising tag line cannot be dismissed as gimmickry. It counts for something. It indicates that the aggressive orientation of Bluechip will change. In the normal scheme of things, Bluechip may itself have evolved into such a fund even under Pioneer ITI. However, one never knows, and that is the sad part.

New entrants: When investors look at Indian equity schemes there is the danger that they may soon not find anything that distinguishes one scheme from the other. With the acquisition of Pioneer ITI by Templeton and the possible exit of Alliance and Zurich, that could be the writing on the wall in the short term. There may still be hope over the long term. The existing players, such as Templeton, Prudential, Principal, Birla, Sundaram, UTI and HDFC, may still turn out to offer worthy substitutes. In addition, HSBC has entered India recently. A few other large international funds, such as Fidelity, are still to enter the Indian scene.

Hopefully, these entrants too will come out with products that will establish themselves in the market with a reasonable record and unique strategy and offer investors a choice to diversify across a few investment styles. Still, the growth pangs striking the Indian mutual fund industry will remain a cause for concern in the near term.

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