Why don't mutual funds face investors annually?

10 APRIL 2010

One of the things that makes free markets succeed is feedback. By not buying products, customers give feedback to the manufacturer that he is not producing what they want. By switching service providers, they give feedback to them about poor customer care. Corporate management faces shareholder once a year, at the AGM, at which shareholders can ask just about any question relating to the running of the company. Local bodies and Governments face their electorate periodically. One wonders why, therefore, nobody has thought about asking management and trustees of mutual fund to face their investors once a year. Is the feedback loop complete without it? And, since the fund industry now manages more assets than the banking industry, at least in USA, is it not a good idea to pursue?

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This is further necessitated by two facets of the fund industry. One is the over concentration on short term returns; a large chunk of the fund manager's bonus is based on that. And, since the institutional holding of corporate equity is around 70%, this short termism translates into pressure on corporate management for improved quarterly performance. The second is the assumption, by the fund industry, that they do not need to exit from equity holdings until their investors do so, since the asset-allocation decision is theirs.

It would thus seem logical that fund managers, and the trustees, are asked to annually meet with their investors and answer questions. Consider, for example, recent cases of ethical investing by Church of England in selling their holding in Vedanta for its treatment of tribals in Orissa. That stake, alongwith other ethical investors, was picked up by other mutual funds, for the good investment returns expected from Vedanta. Managers of such buying funds would not face any pressure from such of their investors who are ethical and who's only option would be to sell their units in the buying funds. An incomplete feedback loop; perhaps the dynamic new head of AMFI, Mr Sinor, may address.

Another huge chunk of money goes into bank deposits and here, too, the depositors do not have any forum to express themselves to the management. Shareholders of banks, however, do, which is curious because banks are highly leveraged, and, given a capital adequacy ratio of 12%, shareholders contribute 1/7th what depositors contribute. Now banks were the main reason for the global financial crisis; in their quest for short term returns they forgot the basic tenets of safe lending and went on a sub prime lending binge to boost short term profits. Depositors were saved, due to unprecedented Government action; but now the thinking is that no bank should be called too big to fail. Depositors, who contribute more than 7 times the funds of the bank, do not get a chance to quiz management though shareholders do.

Such inverted priorities are seen in many areas. Consider that we are cheering the successful commencement of auction of 3G spectrum, expected to raise some Rs 45,000 crores for the Government. Have we forgotten that it was thanks to the vacation of the spectrum by the army; the same army on which such little is being spent that the 75 jawans killed last week in an ambush by Maoists, had shortage of food, drinking water, medicines and ammunition!

Consider the suggestion by CBDT that tax offenders be jailed, even when it winks at the vulgar display of a garland made of notes for a politician. Nor is the CBDT concerned about the finding, by CAG (Comptroller and Auditor General) that faulty allocation of telecom 2G licenses by Minister Raja, led to a loss of Rs 26,000 crores to the exchequer.

In corporate news of interest, Reliance Industries has made an interesting deal with Atlas Energy of USA to acquire a 40% stake in its shale oil deposits. RIL will pay $ 340 m. upfront, plus spend $ 1.36b over 5 years to develop the field. With crude oil prices at $ 85/barrel, and with the fact of rapidly depleting reserves of fossil fuels, alternatives such as shale oil become attractive and the oil pricing makes their exploitation possible.

In the petroleum sector too, we see inverted priorities. Raising of petrol prices, in line with hikes in crude oil prices, becomes a tortuous decision. Yet, backed by the sugar lobby, Minister Sharad Pawar found it easy to raise, last week, ethanol prices to Rs 27/litre. The subsidy for petroleum products is resulting in an unsustainable fiscal hole; yet the decision to hike petrol/diesel prices is avoided.

Besides RIL, other companies are growing through acquisitions. Godrej Consumer Products acquired, for Rs 1200 crores, an Indonesian company with several products such as HIT insecticides, Stella air freshner and different food items. Coal India has a warchest of $ 2b. to acquire mining assets in US and in Indonesia.

Two states, viz. Andhra Pradesh and Tamil Nadu, were found to have more BPL (below poverty line) claimants on their rolls, claiming benefits, than the population of the states! Obviously there is a lot of siphoning off. Would anyone recommend jail terms for such rascals, or are there two sets of rules?

The good news is that part of the distribution of payments to BPL families has now been outsourced to organisations like FINO (financial information network and operation) and they are doing a good job of it, using smart cards and disbursing money promptly and efficiently.

In other corporate news of interest, the promoters, Malvinder and Shivinder Singh, of Religare, have relinquished their management position, despite a 57% holding, in favour of a professional manager, thus divorcing ownership from management. This is a signal of their intent to be a serious global financial services firm. Kudos to them!

Government of India has cleared the way for a follow on public offer by SAIL, expected to be Rs 16,000 crores.

The market shows no signs of tiredness, fed by the FII glucose. Last week the BSE-Sensex rose 241 points to end at 17933 and the NSE-Nifty rose 71 to close at 5361. Only 5 of the 30 sensex stocks are below their 200 day exponential moving average; Bharti, DLF, HUL, ONGC and RCom. Investors will look forward to the guidance by Infosys on 13th. The global crisis is the worry at this point.

J Mulraj is a stock market columnist and observer of long standing. His weekly column on stock markets has run for over 27 years. An MBA from IIM Calcutta, he has been a member of the BSE. He is Conference Head - India, for Euromoney. A keen observer of events and trends, he writes in a lucid yet readable style and takes up issues on behalf of the individual investor. Nothing pleases him more than a reader who confesses having no interest in stock markets yet being a reader of his columns. His other interests include reading, both fiction and non-fiction, bridge, snooker and chess.

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9 Responses to "Why don't mutual funds face investors annually?"


Apr 12, 2010

i want invest in 3 to 5 years,stock market which stock best to invest



Apr 12, 2010

Mutual funds change the holdings from one scheme to another , a predominant fund which merges schemes is UTI aMC, They merge schemes and the reason is not known.Not that the new fund does any better. Who pull them up. SEBI has not pulled up any fund for not performing. The main subject is registration & control. Where is the investor............ no regulator see his interest



Apr 12, 2010


"Two states, viz. Andhra Pradesh and Tamil Nadu, were found to have more BPL (below poverty line) claimants on their rolls, claiming benefits, than the population of the states! "

This reminds me the recent movie well done abba..Corruption is the root cause of many issues society is facing


J Mulraj

Apr 11, 2010

Anupam you read it wrong. Globally, mutual funds own 70% of corporate equity. I did not say that companies own 70% of mutual fund units. Institutional investors, by virtue of this holding, can pressurise corporate management in their decisions.



Apr 10, 2010

Mutual Fund managements, in general, organize customer meets only when they launch a new product. Many among them skip this too. As rightly pointed out in the wrapup, there is absolute need for the MF managements to organize annual meets of the kind systematically organised by listed companies. Feed-back from the customers will alone ensure mutually satisfactory functioning of the MFs. The suggestion made is a very good one.



Apr 10, 2010

I read articles of Shri Mulraj with interest, even when he was writing in the past in the Business India. Mostly I subscribe to his views on various issues dealt with by him in his articles.However, his comments on the percrievrd inactivity of CBDT on the findings of C & A G with regard to loss to the exchequer of staggering amount of Rs. 26000 crores, appers to me as case of barking at the wrong tree. On the findings of the C&A G, it is now for the Central Government to take appropriate action by initiating investigation through the CBI and CVC and book the culprits. Further, nothing stops an alert citizen/NGO in filing a Public Interest Litigation praying to issue appropriate direction to the Govt for carrying out investigations through the investigating agencies.However at this juncture, the Income tax Department has no role to play, since there is no finding by the C&AG that certain specific persons are the beneficiaries as quid-pro-quo in allotting 2G spectrum.Since the I T Department can take action on a person if there is any evidence of concealment of income by that person,in my opinion there does not appear to be any case at this stage for them to swing into action till some evidence of involvement of specific persons come to light.Therefore in my opinion it may not be correct to blame CBDT.for inaction on this issue at this juncture. If my views as indicated above are not correct,I would be too happy to stand corrected.

Regarding the garlanding issue,if my memory srerves me right,I remember to have read in the Newspapesr that IT Department has initiated enquiries on that matter.


Anupam Garg

Apr 10, 2010

Unfortunately, feedback has been a 1 way process in every sphere, leave alone MF industry. A 2 way process is the need of the moment.

The very fact that corporates hold 70% holding signifies that MFs do not have retail investors' views in mind.

I wonder if ethics based selling or buying is has ever been the mandate.

So, bank deposit rates have also been screwed up so far in favor of corporates?

If only CAG was given more powers...thanks 4 appreciating the defense role in the 3g auction & i feel gr8ful 2 govt. 4 restricting prices of petrol etc. I also feel glad that firms like RIL, godrej, coal etc are picking up pace 2 gather more resources.

Each state of our country is bound b its cultural pride and therefore the concept of BPL can be differed 4 all states. When states like Punjab and Andhra are incomparable, how can we have a uniform BPL in the country?

kudos 2 the kings. India can be a very well self sufficient country...bhaad me jaaye global crisis



Apr 10, 2010

I dont agree with your thoughts on oil prices and why they should be raised. In India, more than half of the oil prices are a result of the various taxes, duties, cess applied by the Governments. Hence, whatever be the retail price, half or more of it is going into the Government coffers. Its sad that the OMCs are bearing the brunt but thats almost like clever accounting by the Government. While the prices remain high, these companies still bleed. Look at what Pranab da did in the budget - raised oil prices by INR 4 per liter but the benefit accrues almost entirely to the Government and not to the OMCs.


Govind Gadiyar

Apr 10, 2010

Dear Sir,

They refuse to have a face to face meeting with customer. They are commiting a huge scam. Just go give some ref:
ICICIPRU FMCG fund lost 16% from 4th Jan 08 to 12th Nov 09.
During this time all FMCG stocks went up average by 30%.
The gambled on futures of ITC and HUL and lost heavily.
Biggest scam and daylight robbery.

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