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MFs for fund to cover capital loss

Janaki Krishnan

A section of the mutual funds industry is planning to create a separate fund for the protection of investors and charge this expense to the scheme.

The protection fund will be used in extreme cases of net asset value erosion. In other words, this will act a sort of insurance and investors' money will be used for their own protection.

However, other funds are against this proposal while Securities and Exchange Board of India is non-committal over the entire issue.

According to industry sources, some of the mutual funds -- mostly from the private sector and foreign funds -- have made a representation to Sebi seeking necessary changes to the regulations. Expenses for the creation of such a fund is not included in the annual recurring expenses which is capped at 2.5 per cent.

Those in favour of the move say that the fund will be used only as a contingent measure in times of extreme bearishness in the markets when schemes valuations show a steep erosion. ``Loyal investors who stay for a long time should be rewarded, we feel,'' said the senior official of a prominent private sector fund. He pointed out that it would an insurance against capital erosion.

The expenses would be factored in the overall ceiling of 2.5 per cent, which requires Sebi approval. The expenses for the creation of the fund could vary between 1 to 10 basis points depending on the other expense components.

The chairman of the Association of Mutual Funds of India (Amfi), A P Kurian, said he has no knowledge about the move and that Amfi was not behind the suggestion.

"I am not in favour of it,'' he said, pointing out it was unfair to charge the investors' money or income to build up a capital protection fund for them. No mutual fund is assuring any returns on their schemes now, so where is the sense in creating this fund?"' he asked.

Similar views were echoed by SBI Mutual Fund's managing director Niamatullah and Kotak Mahindra Mutual Fund's chief executive Shekhar Sathe. "Investors enter and exit schemes all the time. Should a short-term investor be charged for something which is not going to benefit him?"' queried Sathe.

"The 2.5 per cent is just a ceiling -- the aim is to keep expenses as low as possible,'' said Niamatullah, "so that returns to investors is maximised.''

UTI's Development Reserve Fund is created out of investors' money. It is the only fund which still assures returns on some of its schemes - albeit only for a year.

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