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Mutual funds see life beyond UTI crisis

A sudden crisis in its biggest mutual fund hangs like a threatening cloud over India's mutual fund industry.

But every cloud has a silver lining, and many fund managers are optimistic that the troubles dogging Unit Trust of India will turn out to be a boon not a bane -- at least for some parts of the industry.

Because returns elsewhere are unattractive, these fund managers say Indian investors are unlikely to flee from mutual funds. But they do expect savers to shift money to fixed-income funds and to equity funds with proven track records.

"There will be an increasing tendency to put money into debt schemes run by private sector mutual funds," said Girish Nadkarni, director at Taib Securities. "Smarter money seeks safer returns."

Another fund manager, who declined to be identified, added: "Investors will shift money to better names who run more transparent funds, which have delivered in the past."

The mutual fund industry has been in turmoil since state-run UTI rattled markets on Monday (July 2) by suspending redemptions from its main fund, Unit Scheme-64 (US-64), until the end of the year.

UTI manages Rs 600 billion ($12.7 billion), about two-thirds of the mutual fund industry's total assets, of which a quarter is invested in US-64.

But initial concern about a rush by irate investors to redeem units in UTI's other 86 funds have largely abated, easing fears of distress selling by the industry giant to raise cash.

"There won't be across-the-board selling on UTI's remaining funds. Maybe just precautionary redemptions," one manager said.

NO BAD THING

Another manager felt UTI's monthly income funds could come under redemption pressure and Dhirendra Kumar, managing director of Value Research, a fund tracking firm, acknowledged that many investors would be apprehensive.

UTI manages money for 41 million people. About 20 million have money invested in US-64, whose reserves, UTI has said, might now be "negative".

But Kumar said it would be no bad thing if investors are forced to take a hard look at where they put their money.

"They have to become discerning, and this is the right time," Kumar said. Overall, he added, "the industry will benefit as investors have a wide variety to choose from now".

US-64's freeze on withdrawals followed a surge in redemptions prompted by declining performance. The Bombay Exchange benchmark index fell 13.6 per cent in the first half of 2001, making it the second-worst performer in Asia after Hong Kong.

Investors had also been pulling out their money in anticipation of a dividend cut -- duly announced last month -- and plans to reduce the fund's redemption price by linking it to its net asset value.

US-64 had been redeeming its units way above its NAV, which is estimated at less than Rs 10 a unit. The fund's repurchase price in May was Rs 14.25.

In the 12 months to June, US-64 redeemed units worth Rs 59.62 billion, including 41.51 billion in April and May alone, against annual sales of just 26.61 billion.

NO FLIGHT FROM MUTUAL FUNDS

Nevertheless, many managers said investors were unlikely to shift money from the mutual fund industry as returns on competing investments were lower side and tax-unfriendly.

"Investment opportunities are rather limited," said Nadkarni of Taib Securities. "The longer-term money should actually be moving into equities as the market is a stock-pickers' delight these days."

Ministers have responded to the crisis by promising to safeguard the interests of US-64's legion of small investors.

A senior fund official told Reuters on Thursday that the government had given UTI two weeks to come up with a solution to let small savers withdraw their cash.

But some analysts said the best thing the government could do would be to privatise the fund manager. UTI is governed by a special charter and, unlike other funds, does not come under the supervision of the market watchdog.

"The government should exit lock, stock and barrel from UTI. It's role is over," said R. Balakrishnan, chief executive officer of First India Asset Management.

Set up in 1964 to provide better returns for small savers and mobilise money to speed up India's industrial growth, UTI sells its funds door to door through 67,000 agents.

"All said and done, UTI still has got a fantastic brand and immense reach. Any global investment bank would pay a wonderful premium to the government," Balakrishnan said.

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