The Indian Mutual fund industry is Rs.508,000 cr big. The mutual fund route is the preferred route for the expanding middle class to enter the stock market. The Industry offers several products and is emerging as the primary investment vehicle of the salaried class. Individual fund managers enjoy tremendous financial clout with Rs 89,000 crore invested in equity schemes alone as on 28 February 2009 (AMFI data). Individual fund managers manage several equity - centric schemes aggregating Rs.10,000 crore.

Safe havens for manipulative trading...
In a country where every person standing for a public office like the post of an MP has to disclose his assets periodically, these fund managers barely tell the public anything about themselves. In fact, a poll of investors in mutual fund schemes would reveal that most investors don’t even know who their fund manager is. The antecedents, educational background, career history and credentials of fund managers are a well - kept secret. The personal wealth of a fund manager is known only to his employer and the actions of related parties is barely scrutinised. SEBI, the regulator of the stock markets, makes no disclosure on the assets and liabilities of Indian fund managers. Not even a single case of or mismanagement by a mutual fund has been detected during the terms of two SEBI chairmen. Regulators have been ignoring the role played by mutual fund managers in market manipulations and mutual funds have become safe havens for manipulative trading.

Opaque rules…
Indian investors have never questioned any fund manager’s investment decisions and the mutual fund Industry operates under the cover of a trustee board. Their opaque rules, which are known only to the insiders in mutual funds, make it impossible for any objective and transparent public scrutiny of their working. The investing public is left to rely on faith and hope when it comes to the accountability and probity of his fund manager. Even the fund manager’s names are hidden in obscure print in the literature distributed to investors and many funds even avoid telling the investor who their fund manager is.
Public scrutiny of Indian mutual fund is virtually absent as there is no mechanism for investors to scrutinize the working of mutual funds. The only scrutiny is done by appointees of the asset management company (AMC) who act as Trustees and are remunerated by the AMC for holding the position. It is really worth debating the efficacy of a person conducting a fair and objective assessment of an AMC while being a recipient of its remuneration. After auditors and rating firms, the trustees of mutual funds are the most important entities discharging their role in gross conflict of interest. Imagine a trustee raising his voice against the working of the fund managed by the very AMC which appointed him and paid him!

Little scope for long-term investing...
The operating style of the funds leaves little scope for sensible long term investing. Money is rarely conserved for the bigger market moves and funds are always left gasping without money when markets fall steeply. This is because the funds do not mandate fund managers to be in high levels of cash in their funds. Fund managers are constantly under pressure to be fully invested and their performance is evaluated on a weekly basis. This evaluation is normally done by benchmarking against the Index and the best performing funds. It is really puzzling to see how a week to week performance evaluation would enhance the long term returns to an investor.
If market operators manage to rig the indices up for four consecutive sessions, the fund manager is left with no option but to deploy his cash and buy on the third or fourth day. By doing so, he hopes that his returns will at least be closer to market returns if the market moves up on the fifth day too. The worry of facing his investment committee over the weekend dominates the mindset of the fund manager and he has no time to worry about long term consequences. All he does is invest and trade on a week to week basis. If he thinks long term and makes decisions which will not show results over a few weeks when the market goes up, the fund manager will end up getting pilloried by his investment committee which is only interested in the short term marketability of their schemes to investors.

Imprudent, adventurous strategies…
This working model has forced several fund managers to embark on imprudent and adventurous strategies to generate returns on their managed funds. These include colluding with operators, accumulating stocks of illiquid companies, investing disproportio-nate sums of money into a few stocks, trading frequently in very liquid blue chips, encouraging front running of stocks intended to be purchased by their fund and NAV- management through several more deceitful methods.
The tragedy is that the investor in an Indian mutual fund does not even know the intensity of the risk which a fund manager is subjecting his capital to. There is no mechanism to measure and objectively rate the risk management strategy of the fund manager. Public scrutiny of the working of the fund is done by chosen trustees who are clearly in conflict with public interest. And, the managed corpus of capital under each fund manager is growing at a rapid pace as India’s investor base expands and more Indians seek better returns than what fixed return instruments generate.
The Indian investor is clearly ready to take on the risk of investing in equity as an asset class. But, it is time his fund manager’s idiosyncratic and imprudent investment strategies are scrutinized and acted upon.