MFs divided on capital protected schemes

Mutual funds have come out with a mixed reaction to Securities and Exchange Borad of India's (Sebi) decision to launch 'capital protected' schemes with the umbrella organisation welcoming the move and industry participants expressing dissatisfaction.

After investors faced the recent global equity downturn which dragged down the value of their investments, the market regulator's schemes have opened up a new way for the funds to bring back investors to their fold.

"We are happy with the guidelines and are waiting to be notified," said AP Kurian, chairman of the Association of Mutual Funds of India.

AMFI has been lobbying with the government to launch the certified protected schemes for the past few months. "The guidelines are more or less in line with our demands," he added.

The guidelines allow 'structurally protected' schemes to be certified by registered rating agencies on fulfillment of conditions like investment in rated securities and others.

However, certain asset management companies, especially those with a bank-parentage, had been looking beyond structurally protected schemes.

They demand the 'capital guarantee' as practised by a few other countries.

"This is nothing but existing schemes under a new label," said an executive with a mutual fund firm which was banking on 'externally guaranteed schemes.'

Under the external guaranteed schemes funds can secure the guarantee from banks and insurance companies. This is currently prohibited under the Mutual Funds' Act.

"We already have schemes in which the downside is limited since the investments are debt instruments. The only difference is that now you can certify them," the executive added.

However, Sandesh Kirkire, CEO of Kotak Mahindra AMC, said: "The external guarantee always comes with a price which would have limited the possible returns from schemes. It is still possible to have an exposure of 100 per cent of capital to equity market movement using leverage instruments like index options as some of our schemes are already doing."

Regarding the prohibition on external guarantees to fund-assets. Kurian, said: "Bringing in banks and other financial institutions as guarantors would have involved clearances from regulators, including the RBI."