Retail Investors and Mutual Funds: A Case for Assured Return

Gupta Ramesh

No WP1998-12-05, IIMA Working Papers from Indian Institute of Management Ahmedabad, Research and Publication Department

Abstract: This paper presents a case for assured return in mutual fund industry. The retail investor is willing to take the market risk but would like to limit their losses due to intermediation risk which arises because of poor institutional accountability and lack of complete faith in the integrity of people managing their funds. This risk which is almost non-existent in the developed countries is very high in India. Assured returns promised in the past must be honoured. Failure of equity markets cannot be an excuse. Fund managers were paid astronomical pay packages for their abilities to plan right debt: equity investment mix and select promising scrips in the portfolios managed by them. Nothing in the offer documents restricted managers’ freedom to manage funds and the investors did not interfere in their functioning. Investors were assured of minimum returns in the offer document and that’s why probably they invested their precious savings. Now SEBI’s role should be limited to see that contractual obligations are fulfilled. If SEBI has to get involved in product design and its pricing, then why was CCI abolished? Market based regulatory system requires that industry evolves its own mechanism to design and market the right product.

Date: 1998-12-05
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