The Securities and Exchange Board of India Chairman M Damodaran has expressed concerns over asset management companies relying heavily on liquid fund investments.

"The industry is patting itself prematurely for its growth numbers," Damodaran said in his inaugural speech at the CII-organised mutual fund summit on Wednesday.

Highlighting that much of this growth has come from investments in liquid and short-term debt plans, Damodaran said the inflows are not sustainable and also the reliance on large corporate houses for funds in such schemes.

Pointing out that liquid funds were not the only way to grow, he said large funds invested by corporate houses into mutual funds could generate a possible conflict of interest.

"Something more needs to be done to get different types of money into mutual funds," he said.

The statement assumes significance in the wake of recent instances where fund houses have received huge inflows from their sponsor companies. This results in volatile movements as such money tends to flow out within a short span of time.

As on May 31, mutual funds had Rs 1.15 trillion under cash plans. This is nearly 30 per cent of the industry's total assets of Rs 4.14 trillion.

The SEBI head said mutual funds must move away from targeting only big-ticket investors and instead broad-base the investor profile. He warned that if mutual funds do not shift focus, they could start to lose investors.

"Something more needs to be done to get more types of money into mutual funds. If the mutual fund industry would look at issues by itself, it should be able to find answers to such questions in time before investors move away in large numbers," he said.

Reacting to the statement, UTI Mutual Fund chief investment officer A K Sridhar said, "We have been playing an active role in companies in which we have investments. For instance, we have forced the management of an MNC's Indian arm to alter its investor-unfriendly decisions. The SEBI chief is right in saying that we should be more pro-active." 

U K Sinha, chairman and managing director of UTI mutual fund, said, "No one can reject the point that liquid funds have largely contributed to the growth of mutual fund industry. If retail players were participating in fixed income schemes, there was no concern. But, it's corporate money which is coming in for tax arbitrage. This is worrying,"

"If any fund's AUM is growing merely because of money coming from its sponsor company or certain institutional investors, then it's a short-cut route and we don't think such business practices succeed in the long term," said Sinha. This is hurting many fund houses, he added.

A P Kurian, chairman of Association of Mutual Funds in India said, "I don't think any mutual fund has asked the companies where they invest in, to change any decisions which were unfriendly to investors. This kind of 'institutional activism' has not developed in India, though it is followed in other developed economies."