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Suresh Krishnamurthy

The UTI Asset Management Company Chairman, Mr M. Damodaran, has the opportunity to turn the UTI into a truly mutual company.

THE idea of the UTI as a publicly listed company sounds exciting. The UTI's initial public offer UTI will, indeed, provide retail investors a chance to participate in the growth of the promising asset management industry.

However, Mr M. Damodaran, Chairman of UTI Asset Management Company; sponsors of the UTI; and the Government have an opportunity to look at an even better corporate structure — the UTI as a truly mutual company.

Mutualising the UTI Mutual Fund will mean that the asset management company is no longer run as a profit-making company.

A truly mutual company will be an asset-management firm run by the unit-holders for the unit-holders' benefit. The presence of such a fund will benefit the industry as a whole as the practices of such a mutual company will emerge as a benchmark.

Follow Vanguard's lead

In September 1974, John C. Bogle founded the Vanguard group of mutual funds in the US. The corporate structure of Vanguard was unique then and continues to be so. There was no separate profit-making asset management company to run the operations on behalf of the unit-holders. Funds look after their own operations through a non-profit company. The non-profit company, which Vanguard is, provides services to the funds on an "at cost basis".

Vanguard's organisation structure aligned the interests of those who managed the firm with that of the unit-holders. The impact of such an organisation structure was to reduce the costs charged to the funds.

Importantly, Vanguard's operational model has succeeded famously. It is now one of the largest mutual funds globally. Vanguard's mutual funds have also typically emerged as the lowest expense charging funds. For example, Vanguard's debt funds charge expenses of about 0.26 per cent each year compared to the industry average of about 0.80 per cent. Vanguard's funds are also predominantly no-load funds.

We need `mutuals'

With expected returns from debt and equity funds coming down sharply, costs charged to the funds are hurting returns. For instance, expected returns from debt funds, before costs are charged, are about 6 per cent. If an average of about 1.5 per cent of net assets were charged as costs, then the returns will decline to less than 4.5 per cent. Post-tax, the returns will be no more than 4 per cent.

Despite the emergence of such a scenario, mutual funds are in no hurry to reduce the costs.

Management and distribution expenses continue to remain high. Their reluctance is understandable. They have invested capital and want it to earn as much as it can.

Importantly, asset management companies can continue to charge as much as they can because there is no voice in the operational structure to argue in favour of retail investors.

The trustees are expected to represent investors. However, as investors are not privy to the reports of the trustees, and there is no public scrutiny of their actions, it is not known if they are doing a fair job.

The presence of a truly mutual company will, however, introduce a different force within the industry. When the other mutual funds are charging 1.5 per cent, it is possible that a truly mutual company will charge less than 0.75 per cent.

This will then emerge as the benchmark. Other asset management companies will be wary of charging higher expenses.

Importantly, if they do, they will be forced to produce performance that justifies such expenses. That will definitely be a welcome development.

Indeed, Indian investors will be better served by the presence of a truly mutual company. In fact, Indian investors need the UTI to transform itself into a truly mutual company.

Only UTI

Given the Indian mutual fund industry structure, only the UTI has the opportunity to transform itself into a truly mutual company. A truly mutual company should have the brand strength to market itself directly without depending on distributors. Only UTI has that kind of reach.

Importantly, UTI Mutual Fund's sponsors — banks and institutions such as LIC and SBI — can be persuaded to transfer their holdings to the various schemes of the UTI at cost.

When the Unit Trust of India faced problems honouring commitments made to investors, the sponsors were not willing to chip in. As such, why should they profit from their holdings now when UTI Mutual Fund has shed its burden.

The Government and the UTI management now have a chance to make a difference. The presence of a mutual company will be a powerful disciplining force for the industry.

Importantly, this is, perhaps, the only opportunity to introduce a truly mutual company in the midst of several profit-making asset management companies in India. Another opportunity may never arise.

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