The elephant and the ant

If one were to exclude the market boom of the last 12 months, the last five years have been traumatic for mutual fund investors. First, there was the US-64 crisis, then the gradual winding down of several schemes that offered assured returns.

After that came the tech meltdown, as a result of which the mutual fund industry lost several million customers. Some may never return. Others are stuck now between the devil of uncertain fund performance and the deep sea of low interest rates.

While fund corpuses are growing again, the trickle of retail investors will not grow into a flood unless fund houses make things safer for them. A key issue they need to address is the segregation of retail savings from hot corporate flows.

Big money and small money shouldn't sleep together because of the negative impact huge inflows or redemptions have on a fund's performance.

If asked to redeem something like a quarter of the corpus by a corporate or high net worth investor, most fund managers have to dump securities (including shares) in a hurry. This may not matter much in short-term schemes that invest primarily in liquid government paper, but in regular return schemes and equity funds the impact can be negative on retail investors.

Fund managers seeking to redeem large investments may have to dump shares that are liquid, leaving retail investors with a larger share of illiquid securities and impaired asset values.

Many funds even allowed large investors to invest and redeem units on favourable terms, till Sebi put an end to this practice. But this still doesn't mean that the field is level for retail investors.

Despite what the law may say, a big investor is someone special for all fund managers, and they can be favoured in ways that may not be verifiable by the regulator. Recent figures compiled by Business Standard show that the clout of big investors may not be receding.

Between September 2003 and March 2004, large investors in 114 select MF schemes actually increased their investments by a third. They accounted for as much as 55 per cent of the corpus of Rs 7,550 crore.

Common sense dictates that it is not a great idea for an elephant to sleep in the same bed as an ant; the pachyderm just needs to turn over in its sleep to crush the latter.

While Sebi has been asking funds to reduce the weightage of big investors in various schemes, this hasn't happened because it makes sense for the asset management companies to manage bigger corpuses and spread costs over a larger base. It's time that fund managers considered hiving off investors crossing a 5 per cent corpus limit, into separate schemes.

This would effectively convert corporate investment into a portfolio management exercise. It is worth recalling that one reason why small investors lost out so badly in US-64 was precisely because UTI did not separate stable long-term retail investments from volatile corporate funds.

It is time to formally separate the two to restore the faith of ordinary investors in the fairness of the system. Sebi should nudge funds in this direction.