Professional trustees for mutual funds mulled

The government is mulling a proposal to appoint professional trustees in domestic mutual funds to drive up investor confidence and thus expand the retail base of the industry in India.

The proposal is part of a report on reforms in the mutual fund industry, which has been prepared by the Asian Development Bank.

The report will help the government decide on policy measures that will get small investors to tap the capital markets without the fear of burning their fingers.

Among other things, the report has recommended a model based on the one prevailing in markets like the UK, where professional trustee companies oversee the functioning of more than one mutual fund.

Typically, these companies comprise a lawyer, an auditor and other supervisory personnel, who are able to ensure that the interests of investors are kept paramount by fund managers.

As the interests of these trustees are not tied to that of a particular fund, they will be able to impartially probe and question the actions of fund managers.

Mutual funds in most countries have a three-tier structure, wherein a sponsoring institution forms an asset management company (AMC), which in turn runs the fund.

Trustees will ensure that there is a healthy distance between each tier, so that there is optimum utilisation of the funds mobilised from the public.

It is expected that such a structure, will ensure the interests of investors by keeping expenses down, offset the overarching power of AMCs, and thereby make mutual funds more popular with the public

The ADB report has, therefore, asked for more vigorous implementation of the existing provisions of the Mutual Fund Regulation Act, 1993.

While the Act provided for the formation of such professional trustee companies, it has been generally ignored by domestic players.

There is a strong need to ensure that trustees are separated from the apron strings of individual funds, according to Dhirendra Kumar, chief of Value Research, a think tank on the mutual fund industry.

He said the present method of publication of quarterly results of the fund does not lend adequate transparency to the sector.

At present, the mutual fund industry in the country has a low retail base, with most of the focus on a few high net worth individuals. The report said steps should be taken to take the funds to the rural populace to broadbase their appeal.

With the Centre trying to wean the public away from government-run small savings instruments, mutual funds have come to occupy the centrestage in the scheme of things. In this context, the Centre is keen to ensure that people are convinced about the investor-friendly role of such funds.

ADB report on MFs

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• Recommended a model based on the British format
• Professional trustees will help keep expenses down and allow more transparency
• Stricter implementation of provisions of the Mutual Fund Regulation Act sought