Why funds have not found favour with small investors yet.
Gautam Chikermane
Despite the higher returns they offer and the superior levels of transparency they practise, the penetration of mutual funds in India is a meagre 6 per cent compared to 76 per cent for banks. A Sebi-NCAER study says only 3 per cent of India’s household savings is invested in shares, debentures and the UTI; the rest is in FDs (44 per cent), government-backed instruments including PF and pensions (32 per cent), insurance (11 per cent), and idle cash (10 per cent). This is easily explained: having grown on a staple of government-backed, high-assured-returns schemes, made juicier by tax benefits, households are completely averse to risk.
Which was fine till yesterday. It’s a different, riskier world today. First, the returns on small savings have crashed by more than 4 percentage points in as many years. Second, tax benefits are disappearing. Third, sacred institutions, including state governments, are defaulting. Fourth, there’s inflation, invisible yet deadly. The real return (the difference between interest rate and inflation) on the 6.5 per cent tax-free RBI Relief Bond works out to 2.3 per cent today. It hurts–ask the retired.
An alternative is in place, in the shape of a relatively clean and regulated mutual funds industry. But to scale up, the industry needs to do three things:
Opinion in Outlook Money
Showing posts with label costs. Show all posts
Showing posts with label costs. Show all posts
Sunday, August 31, 2003
Wednesday, August 15, 2001
UTI is... UTI is not... UTI is...
More than bad management or low returns, the problem at UTI is a structure that encourages corruption.
Gautam Chikermane
DESPITE ALL claims and actions to the contrary, in its functioning, in its structure, in its very reason for existence, the Unit Trust of India (UTI) is, quite simply, a mutual fund–a medium not only for saving money but equally to create wealth and meet life’s major financial objectives. There are seven main characteristics that make a mutual fund. Had UTI adhered to them, the current crisis would have only been one of bad fund management or low returns–a problem not entirely restricted to UTI. These seven points are why mutual funds are the best investment vehicles, not only in India but across the world. In my opinion, in five of these, UTI scores ‘Poor’, in two it scores ‘Fair’. Overall score: Poor.
Professional management. When an asset management scheme (AMC) floats a scheme, it brings into the product a few of the top minds in the field of finance. These are experienced and skilled professionals whose job is to research companies, analyse industries, crunch numbers, evaluate the future, observe stock prices, interest rates, currency fluctuations and so on. They then match these analyses with the objective of the investors. Only after this rigorous exercise do these professionals buy stocks, bonds or gilts. So, for a small fee, you get the services of these professionals, services that would otherwise be impossible for you to avail of. UTI’s score: Poor. Due to its large holdings, the skills of fund managers have not been allowed to develop, as they are prisoners of inter-scheme transfers (a fund on which there is redemption pressure sells to one which new investors are buying). Besides, research took a backseat in the past few years, as investigations reveal.
Opinion in Outlook Money
Gautam Chikermane
DESPITE ALL claims and actions to the contrary, in its functioning, in its structure, in its very reason for existence, the Unit Trust of India (UTI) is, quite simply, a mutual fund–a medium not only for saving money but equally to create wealth and meet life’s major financial objectives. There are seven main characteristics that make a mutual fund. Had UTI adhered to them, the current crisis would have only been one of bad fund management or low returns–a problem not entirely restricted to UTI. These seven points are why mutual funds are the best investment vehicles, not only in India but across the world. In my opinion, in five of these, UTI scores ‘Poor’, in two it scores ‘Fair’. Overall score: Poor.
Professional management. When an asset management scheme (AMC) floats a scheme, it brings into the product a few of the top minds in the field of finance. These are experienced and skilled professionals whose job is to research companies, analyse industries, crunch numbers, evaluate the future, observe stock prices, interest rates, currency fluctuations and so on. They then match these analyses with the objective of the investors. Only after this rigorous exercise do these professionals buy stocks, bonds or gilts. So, for a small fee, you get the services of these professionals, services that would otherwise be impossible for you to avail of. UTI’s score: Poor. Due to its large holdings, the skills of fund managers have not been allowed to develop, as they are prisoners of inter-scheme transfers (a fund on which there is redemption pressure sells to one which new investors are buying). Besides, research took a backseat in the past few years, as investigations reveal.
Opinion in Outlook Money
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