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'US-64 crisis may have positive impact on private MFs'

Analysts opine that the UTI crisis may actually boost India's private mutual fund industry. The figures released by the Association of Mutual Funds in India show that while the UTI faces a huge run on US-64 in the April-June period of 2001, other mutual funds consolidated their position.

Whereas UTI had a net outflow of Rs 26.30 billion from its corpus, private mutual funds added a whopping Rs 80.54 billion, the figures show.

In the backdrop of the UTI fiasco, Kothari Pioneer AMC Ltd chief executive Vivek Reddy talks about his thoughts on the crisis and India's mutual fund industry. Kothari Pioneer was one of the first players to enter the mutual funds arena.

Reddy spoke with Shobha Warrier about what lies ahead for India's mutual funds.

What impact will the UTI crisis have on the Indian mutual fund industry as a whole?

Over the years, UTI and US-64 have not been very closely associated with the mutual funds sector.

A couple of years after 1993, private sector mutual funds began to fare quite well. During that time, UTI was performing excellently, too. Over the next three -- between 1995 and 1998 -- US-64 put up a stellar show, while private mutuals languished far behind.

But since the last three years, US-64 has by and large been stagnant and the private sector has surged ahead dramatically.

There may be some pattern to it, but in my opinion there is no correlation between how UTI and US-64 are performing, and how the private sector mutual funds are doing.

By the dint of its sheer size, US-64 did impact the market. Do you still feel that it will have no effect on the mutual fund industry?

It undoubtedly is big, but I think it will not have any direct impact on the mutual fund industry. Primarily, because US-64 had always been given separate treatment.

But, over a period of time, it might even impact the private mutual fund industry positively.

Why do you feel it will have a positive impact?

For one, people who have gone to UTI only for the government label will start looking at other mutual funds more closely now. They will first scrutinise the funds' performance and then invest.

When they compare the performance, service and liquidity of other mutual funds with that of UTI, they will understand that our show has been equally good. Thus, some more money may flow into the private sector.

I think this crisis will certainly act as an eye-opener, making investors seem other options. Earlier, this was not the case. Now, there are bright chances that other institutions too would figure in their list before these people invest.

How did your clients react to the UTI development? Were any panic buttons pressed?

No, not at all. We had Rs 29 billion when this happened, and now we have Rs 30 billion. Yes, some enquiries did come in, but we were able to convince our investors that we are very, very liquid.

UTI was hit by various problems: it didn't have net asset value-based pricing; then its sheer size - Rs 220 billion - made it less liquid than smaller private mutual funds. The number of investors (20 million) it caters to also creates its own problems.

Our biggest equity scheme is only for Rs 500 million and we have only about 600,000 investors: we are in very liquid securities.

What do you think needs to be done by the UTI to win back the investors' confidence?

The finance ministry is doing whatever it can. I think the finance ministry should probably give more investment avenues to UTI and other mutual funds: like permission to invest in overseas securities, etcetera.

As overseas markets are quite liquid, they may accord a little bit more liquidity to UTI. The Reserve Bank and the finance ministry were planning to do this a couple of years ago, but then nothing came of it.

Right now, UTI has no exit route. It simply cannot sell. For example, if it wants to sell Reliance shares, it can't. If it has 1 million Reliance shares - going by today's trade volumes about 10,000 shares are traded daily -- it will take 10 days just to sell off the whole lot.

Another thing is that all the Deepak Parekh Committee recommendations should be implemented.

Would you say not implementing Parekh panel recommendations led to this scenario?

Probably. The fact is that everybody knows the answers to their problems. What UTI needs to do is to tell its investors, 'Relax, just give us little time and there is nothing to panic about'.

Do you think if UTI has such a positive approach, it will have a positive impact on the market as a whole too?

It is a good thing that they are taking some time to restructure the scheme. Otherwise, they might have been forced to sell at a distress price.

From the market point of view, undeniably sentiment has been affected.

In what way was the sentiment hit?

The feeling that something went wrong created a loss of confidence in the market. Though this will have a short-term impact, I stress that this will not have much of an impact in the mutual fund industry. I am sure its impact on the market will wear off in a month or two.

The Parekh Committee also criticised the lack of transparency in US-64's investment strategy. How transparent are private mutual funds?

We are extremely transparent, the most transparent in the world. I will confidently say that even in Europe and the US, no one comes quite close to us. For example, by the 5th of every month, we disclose the entire portfolio of the previous month to investors.

We send out copies to distributors and investors every month. In the US, this is done only once in every six months. So, as far as disclosures are concerned, Indian mutual funds are fantastic. Mind you, we do it voluntarily.

So, investors know what is happening to their money. It also puts a little bit of responsibility on the investors. If you are not transparent, you are putting a lot of burden on yourself. And, suddenly, if something goes wrong, people won't say, 'You never told us anything'.

The government bailed out US-64 in 1999. The same scenario looms today. What is your opinion on such bailouts every time there's some trouble?

Bailing out any institution is not a very good idea. What should actually be done is to calm down the investors. That is what we do when the market is down.

How far do you feel is the hype on IT scrips responsible for the negative sentiment in the market?

The hype was worldwide and not limited to India. Everybody got caught in it.

You too?

Yes, we too. Our firm - and even I as an individual -- got caught in the hype and took some beating.

You mean nobody saw the IT crash coming?

No, no. I don't think anybody anticipated this. People felt that some IT stocks were over-valued and that there would be a correction, but nobody expected the sector to plunge the way it did.

Consider the overall capital markets: IT stocks, in general, were dependent on the US markets and the global economy, whereas pharma, FMCG, cement, steel, are sectors which depend on the local economy. But our economy has, by and large, been average and dull over the last few months.

The reform process has stalled. The government has been ineffective in building infrastructure, or making the right policy moves. It has backtracked on some of its decisions.. All in all, the measures that the government has taken have been disorganized, slow and ineffective. That is why the local economy has not picked up.

Look at China, for instance. They have made tremendous progress in the last 15-20 years; and their pace of growth is till highly impressive.

Which sector do you think will do well in the coming months?

I hope the finance minister takes some bolder steps to boost infrastructure and help accelerate the GDP growth rate. I think he is already trying to make that happen.

If he succeeds, all our sectors -- FMCG, pharma, cement, services, steel, hotels -- all will start doing well.

Meanwhile, if the US economy looks up, even the IT sector will bloom.

The finance minister recently talked about the economy doing well on the back of a good monsoon this year. Are you too optimistic?

We have had good monsoon for the last seven years, but we have not seen our economy growing really fast. We did not see much happening.

But, I am still optimist. I have a hunch that this year onwards, we will start doing well.

See, we have good governance in some places. For example, the success that Chandrababu Naidu is enjoying in Andhra Pradesh may inspire others to do something. Nobody can sit idle for too long, I feel.

The BJP government has been sitting idle for some time now. I think Yashwant Sinha has realised that. Unless he makes something happen, he will get into bigger problems. He needs to be more action-oriented guy, if what he says is to carry more weight.

Our economy is poised at such a stage that a few smart moves, a push in the right direction can really take us places.

So, there's light at the end the tunnel…

Yes, yes. I think by the next year we should see above-average growth.

Recently, K B Chandrasekhar opined that Indian firms can exploit the slowdown in the US and emerge winners. Do you subscribe to this view?

In theory, it sounds good. But I think if Indian companies step up their marketing activity and utilise the advantages they have in providing low-cost services, they can sail through this recession. So, to that extent I agree with Mr Chandrasekhar.

When the economy is booming, nobody is worried about cost, but when there's a slowdown, every company will think of slashing costs.

Yes, we do have an advantage there, but we have to market aggressively and make our services and competitive costs known to the world.

I think we are slowing learning the art of marketing. So far, IT companies didn't have to market. But things have changed, now they must. The bigger Indian IT companies are doing that, but even the smaller ones must follow suit.

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