Mutual Funds-The more we know the less we want!!

A magician’s wand brings out a rabbit from a hat and makes it disappear. The spectator knows for sure something appeared in front of him but knows not where it came from and where it went to. This was a description of not a magic show, but the grand Mutual Fund show in India.

The hayloft of knowledge on mutual funds are that, “it is subject to market risk”. Everything else is known by the fund manager and believed by the investor.

Till 1963, when Mutual Funds were launched in India, investment in India was personal expertise since savings, the source of it, stemmed from therein. An attempt to try a concept launched in USA a good four decades back. A mimic as befitting as a tiger stripe on a cat.

Unit Trust of India floated as an Act of Parliament had a monopolistic rule for about two and half decades till players such as SBI joined the game in 1987. The rich amasses by then under the management was Rs. 6700 crores. I hear the grumble, not even 10% of what Mr. Brewery owes to the country.

Come 1993 and in marched the private players. By then RBI had begun distancing itself and sooner than later Murphy’s law had to be seen around the corner.

The argument for Mutual Funds were almost the same each time and was always “in the long run it is beneficial”.

Irresistible being John Keynes’ rant “in the long run we are all dead”. Now you know why Mr. Murphy had a role to play here.

Ever since the turn of the new millennia, the CEO in the Mutual Fund business, the fund manager, has been under some sort of a duress to venture into unchartered areas and hob knob with grey personalities. A stark example being an ever-increasing presence in Investment Banking.

Now, apart from subject to market risk slogan did we know that MFs are not investment options per se but investment vehicle only. One man’s ignorance is another man’s room for vice. The euphemistic vehicle has been exploited fully to square deals between companies and huge investors at the expense of the gullible middleclass investor.

Take this example- A, with surplus money and not so surplus of a knowhow, invests his money with a fund manager. This manager gets a quirky deal to float money at his disposal to smoothen a syndicate project and in return is able to return a good yield to A. All that A knows of is, he invested in something and it got him something good. What transpired in between did not strike his dreams even.

His compeer B gets inspired and treads the same path but to his misfortune the fund manager’s tryst with luck is well past behind. The result being B gets a sub-prime yield and he is told “in the long run….”. Keynes turns in his grave. A’s success story reaches the media and B either waits for turn of fortune or writes a blog!!! Sorry, this is no confession statement!!

Remember all this is under the garb of transparency, effective regulations and fair play.

MFs have been seen grappling with commodity market and forex market oblivious to the unwarranted risk coefficient and driven by the race to increase the yield, now and here.

Nothing covers up the crevices in the system like good times. Success has many commentaries and failures have no soothsayers. To believe global depression is the villain is plain imbecile.

Global depression did not demand MFs to fund the real estate mafia in India, whose character is unbeknownst to none. Regulators, with all due respect, are only half awake to the misappropriation of assets complimented by violation of related party guidelines.

Before we know, MFs are reducing themselves to a mere vehicle for corporate money laundering. Come a panic situation such as this, the same corporate money exits at the best possible NAV and the retail investor is left high and dry.

Think of this, what are banks doing in MF business? Were they not meant to accept deposits and give credit? In numerous such cases there will be a private label route taken

Franklin Templeton was probably the last in the tribe which has also closed quite a few schemes.

Following suit to this was RBI’s move of opening a liquidity tap of Rs.50000 crore for MFs to alleviate redemption pressure on fund houses.

That this happened within 2 months of the COVID crisis speaks volumes of how the MFs were being managed, if at all they were. Caveat emptor never sounded more relevant isn’t it?

It finally boils down to the point that beyond the tax arbitrage between MFs and Fixed Deposit interests what did the retail investor gain and at what risk? Remember a collapsing giant does not collapse alone and no prizes to guess where the next crash is going to be. Certainly, a price to pay if the guess was not correct.