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Sunday, Jun 23, 2002

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Constructive developments

THE introduction of the various indices by the Association of Mutual Funds of India augurs well for mutual fund investors. AMFI has introduced different indices that may become the benchmark for the many income, monthly income and balanced fund schemes. It is hoped that these benchmarks are effective in assessing the performance of mutual funds.

It is also hoped that this will bring in uniformity in the use of benchmarks by the various asset management companies. There are, however, still several unresolved issues. The assessment of the performance of income, monthly income and balanced fund schemes are complicated matters.

Mere comparisons with the indices are in most cases likely to be misleading. This is because of the large scope for active investing in India. The orientation of a scheme towards risk and return may be materially different from that of the benchmark.

In this context, without proper explanations from the management, the difference between the benchmark performance and that of the scheme will be difficult for the investor to understand. Unfortunately, asset management companies have still not been mandated to provide explanations along with their performance disclosures. That still remains in the realm of voluntary disclosures.

If the regulators are worried about the spin that fund managers may put on their explanations, alternative routes need to be explored. For example, trustees can be asked to present a report on the performance of the schemes vis--vis their benchmarks as well as give risk-adjusted indications of investment returns.

Making their report public will not only help investors get an idea of the fund managers' assessment but also the assessment of an independent third-party. Importantly, asking the Trustees to present a report will merely lead to making public the review they are mandated to do according to regulations.

In addition, as Trustees function on behalf of investors, such a move would also lead to greater scrutiny of their fiduciary duties. That would again be a constructive development. It is hoped SEBI will act on these issues as early as possible.

Suresh Krishnamurthy

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