SBI letter sparks MF surprise, meeting

Friday conference to discuss issue of bank seeking compensation policy

Mutual fund houses are expected to meet on Friday to discuss steps to protect investors in case of an Amtek Auto-like default. The move follows State Bank of India (SBI)’s query to mutual fund houses, seeking a ‘compensation policy’ in case of a default.

SBI, the country’s largest bank, is one of the biggest investors in the debt schemes, especially short-term and liquid funds, offered by the mutual fund sector.

Friday’s meeting will be organised by the Association of Mutual Funds in India (Amfi).

Other entities, too, have taken up the matter with fund houses, following a Rs 190-crore default by Amtek Auto, which hit about 1,000 investors in two JP Morgan Asset Management Company schemes.

Those in the sector say all types of mutual fund investments are subject to risks, adding these should be borne by investors. “There are no assured returns in mutual funds. We are only a pass-through vehicle. Investors are given this disclaimer before investing in the scheme documents,” says C V R Rajendran, chief executive of Amfi. He adds the issue will be debated at Friday’s meeting.

Most senior officials have expressed surprise over SBI’s unexpected query on ‘compensation policy’, terming it “impractical”.

“In the event of a default, losses have to be borne by investors; there is little doubt over it,” said Rajendran, former chairman of Andhra Bank.

SBI’s seven-point questionnaire to fund houses seeks details on exposure to commercial papers and measures to deal with suspension of ratings. It has also sought to know the highest exposure fund houses have to a single group or scrip, as well as exposure to brokerage-promoted non-banking financial company papers.

The questionnaire was sent to select fund houses, including the lender’s subsidiary, SBI Mutual Fund.

“The regulatory framework doesn’t allow us to provide a return guarantee or capital protection. Therefore, there can’t be a compensation policy. We are just money managers, not banks to provide assured returns,” said a senior official of a fund house that received the SBI questionnaire.

SBI invests about Rs 10,000 crore in short-term and liquid mutual funds. Of this, about Rs 6,200 crore is invested in its own fund house, SBI Mutual Fund.

As of September 30, assets under management in the liquid & money and market segment stood at Rs 1.78 lakh crore, about 15 per cent of sector’s overall size of Rs 11.87 lakh crore.