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MUTUAL funds in India are patronised more by corporate and large investors than by retail investors. But the latter need to be wary of investing in funds that are parking grounds for the former.

Investments and pullouts by large investors can make a big impact on the fund management decisions and the performance of mutual funds.

Large investors may like to switch between mutual fund products at frequent intervals, depending on their view of the debt and equity markets. Redemption by a large investor may force the fund to liquidate a big chunk of its portfolio at an inopportune time, impacting returns.

The very existence of large investors may force the fund manager to retain a larger portion of his portfolio in readily saleable assets, which may, again, dilute returns.

But how does a lay investor gauge if large investors do have exposures in a mutual fund scheme? The information is tucked away in the notes to the annual financial statements published by mutual fund houses in the newspapers.

Under SEBI Regulations, a fund is required to list all the large holdings (amounting to over 25 per cent of the NAV) in each of its schemes in the notes to its financial statements.

The crop of disclosures for 2002-03 contains quite a few revelations. That quite a few short-term plans, gilt plans and fixed maturity plans from mutual fund houses are concentrated in the hands of just one or two investors may not cause much surprise.

But there are a few instances of concentrated holdings in equity funds as well.

For instance, a single investor holds 25 per cent of the newly floated Deutsche Alpha Equity Fund. A single investor holds 73 per cent in IDBI Principal Index Fund and 68 per cent in IDBI Principal Balanced Fund. And just two investors hold 68 per cent of SBI Magnum Contra Fund.

In many of these cases, it is possible that the large investor may turn out to be a sponsor, or a company associated with the sponsor, of the fund. In such cases, it is quite possible that the large investor would stay with the fund for the long term.

But given that pullouts by such investors have great potential to wreak havoc on fund performance, it is caveat emptor. It is up to investors in such schemes to seek the identity of the large investor, and the nature of his investment, from the distributor (or the fund house) before deciding to invest in a scheme.

Aarati Krishnan

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