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Suresh Krishnamurthy

COMPARISONS are odious. This is especially true of comparison of the Indian mutual fund market with that of the US. The last few years have proved that US institutions are not paragons of virtue. On the other hand, the Indian mutual fund industry has delivered value to investors.

Still, most Indian mutual funds may have a few things to learn from mutual funds in the US, such as Vanguard or Fidelity. That would go a long way in making mutual fund investing a more rewarding experience for Indian investors.

Turning away investors: In the last week, Vanguard, one of the premier mutual funds in the US, closed its Junk Bond Fund for fresh investments.

Vanguard did that to protect long-term shareholders from the higher trading costs and potential losses that may result from increased transaction activity caused by investors solely focussing on past performance and high yields.

Vanguard's prospectuses for stock funds also explicitly state that they do not encourage market timing and that market-timers should not invest with Vanguard.

In India, however, funds actively encourage market timing. Entry loads and exit loads are removed by equity funds now to encourage short-term flows. Dividend declarations in the earlier years encouraging dividend stripping by short-term inflows were normal events. Bonus declarations now are not uncommon.

In debt funds, inflows in April and May were about a couple of billion dollars. However, the question of whether they are in the interest of long-term investors has been left unanswered. If interest rates change direction and these funds are redeemed, the harm that this can do long-term investors could be substantial.

Importantly, performance-chasing is actively encouraged by mutual funds. If gilts are doing well, asset management companies launch gilt funds. If a particular sector is doing well, a sector fund is launched.

If the sentiment leans towards risk aversion because of down markets, index funds are actively marketed. It does not matter if it is the wrong time for entry into such market segments.

In 1999, Fidelity of US refused to launch an Internet fund because it was not confident of the long-term prospects of that sector. However, Indian mutual funds competed with each other to launch sector funds in 1999-2000. Most of them are languishing now.

Revel in transparency: In a way, the US mutual fund industry also revels in transparency. Sample a prospectus of an equity fund from the Web site of either Vanguard or Fidelity or Franklin Templeton.

It details the investment universe, investment strategy, and the risks and expenses associated with the fund in a comprehensive and understandable manner.

In contrast, the prospectus of an Indian equity fund, especially a diversified equity fund, couches the investment strategy in general terms.

Meaningful discussions regarding mutual fund practices are also common in the US. The Web site of ICI, which is similar to the Association of Mutual Funds of India, is evidence of the quality and level of disclosures. In India, discussions by asset management companies within AMFI and discussions by AMFI with SEBI are seldom made public. Lack of transparency is the norm.

Regulation in the US is also becoming more stringent by the day.

For example, a Bill has been introduced in the US Congress aimed at giving investors a clearer view of complex and hidden mutual fund fees and costs.

These moves are happening at a time when costs for managing bond funds are as low as 0.3 per cent of average net assets.

In India, costs for managing bond funds are about 1.5 per cent of average net assets. Still, SEBI and Indian mutual funds do not appear to be addressing this issue meaningfully.

Indian mutual funds do have a few feathers in their caps. For example, when US mutual funds are resisting quarterly portfolio disclosures, Indian mutual funds are already making monthly disclosures.

In addition, excepting for investors in sector funds and investments made in equity funds in 2000, mutual fund investing has been fruitful in India.

Still, investors would benefit considerably if Indian mutual funds adopted a few investor-friendly practices. Emulating the Vanguards of the world will not be harmful at all.

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