The Rs 5,800-crore toe

Small investors are testing market waters, as the Reliance fund8217;s performance shows

The Indian investor prefers to stay in the shallow side of the pool. Household assets in the stock market fell by over 14 per cent in 2004-05 compared to the past year, at a time when over all household financial assets grew by 27 per cent. However, occasionally the investor looks at the party on the deep end and makes a leap from zero risk to high risk. Sinks. Writes letters of distress to the PM, FM, Sebi chief and the media, and runs back to the shallow, swearing never to return. Till the next raucous party.

The stock market has seen this absurd cycle repeated many times. The fixed deposit investor enters the stock market at the fag end of a bull run, picks the riskiest stocks. Loses and pulls out the angsty stationary. It happened during the 1991-92, 1994, and 2000-01 booms. Before the years of systematic fraud, the stock market was run as a broker8217;s club with little transparency, efficiency or governance. The current bull-run has enough people predicting a scam and a bubble. But though the risk of the market remains, the risk of systematic fraud has been largely overcome. The market is clean, efficient and low-cost. The wealth management industry is growing at 17 per cent a year. Low-risk, government-assured returns have been falling and are at 8 per cent currently. The economy is in a boom phase, and corporate profits keep pace with the increasing valuations of companies on the stock market. Just the right ingredients for the loss-averse Indian retail investor to step in.

And he has. Equity funds have collected almost Rs 16,000 crore in new fund offers in just three months, more than the total assets in equity funds just three years ago. The total assets of equity funds are today 36 per cent of total mutual fund assets 8212; up from 15 per cent three years ago. Just two days ago, the top performing fund house 8212; Reliance Asset Management Company AMC 8212; created history by collecting Rs 5,800 crore through its new equity fund offer. Last month, another top performer 8212; SBI AMC 8212; collected Rs 2,850 crore through its Blue Chip Fund. These collections are triggering unease amongst some. Those with their glasses always half empty look at these recent collections with cynical disdain: the sky will fall tomorrow, the bubble with burst, the hard-earned money will be lost.

But a careful look shows that this time the investor has not jumped into the deep end, but wet a toe in the middle of the pool, by taking the lower risk mutual fund way to stock investing. The pool is also different this time round. The sharks have been mostly muzzled and confined to the deep end of direct stock investing. Not totally safe, but not wholly dangerous either. The downside risk in an equity mutual fund, unlike an individual stock, is not of the investment going to zero, but of losing some value.

Apart from the waters being safer, there are also lifeguards around the pool and the pool manager runs a right ship. The stock market is state of the art and the mutual fund regulations are fairly tight. There has not been a single instance of a fund house collecting money and disappearing. India has chosen the Trust structure in a mutual fund to prevent fraud with the small investor8217;s money. So, the mutual fund in India is a Trust and not a company with limited liability. Not many know that the personal assets of mutual fund trustees can be attached in case of a fraud.

Given this structure, the worst that a fund house can do is to manage the money badly, not decamp with it. All the investor has to do, in a badly managed fund, is to exit the fund and deploy the money in a better performing fund. Or then, choose the no-brainer, the zero-risk in the long term equity route of investing in an index exchange traded fund.

Best practices in the industry also have reduced transaction costs substantially. Remember the time that the UTI dividend cheques spawned a generation of corrupt postmasters who stole them in bulk? Technology has removed all irritants of unmatched signatures, lost or stolen certificates. Competition is pushing fund houses to make it increasingly painless for investors to buy, sell, switch and access their money. Many liquid funds have a cheque book facility. In December 2005, Reliance launched a fund with an ATM withdrawal facility.

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One danger still lurks: sharks who are inducing the safe swimmers to take more risk than they can in the form of distributors who misrepresent products. The credentials and intentions of the distribution industry are in doubt as they are commission-seeking and put their own interest above that of the investor. There are stories of SBI8217;s Blue Chip Fund being sold by bank managers with targets and incentives, like an SBI bond. There are stories of investors in small towns believing smart-sellers that the Reliance Equity Fund was really an IPO of Reliance at Rs 10. There is a case for a distributor regulator to stop the mis-selling of all financial products and not just of mutual funds. This is the last missing link that will bring the rest of the investor8217;s body into the water.

The toe is wet. Here is hoping that the rest of the Rs 4 lakh crore body follows.