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Friendless Funds

It is now an established pattern that whenever new rules and regulations come out, their formulation shows an alarming lack of awareness of how the industry is structured

Indifference in a marriage is a far bigger predictor of divorce than active discord, according to an article I read in a magazine some days back. By that count, the mandarins at the finance ministry are just about ready to break-up with us mutual fund investors. It is now an established pattern that whenever new rules and regulations come out, their formulation shows an alarming lack of awareness of how the industry is structured, how and what kind of funds investors invest in, and sometimes, even of the existence of mutual funds.

Take the recent matter of ELSS funds. In the budget that he presented nine months ago, Finance Minister P. Chidambaram announced a truly wonderful change to the way tax-payers were able to plan and apportion their savings under the various avenues that qualified for Section 80CC tax-breaks. The best part of the changes was that they enabled ELSS funds-which to my mind are the most appropriate savings vehicle for gradual, long-term investments-to truly live up to their potential.

Investment cheerleaders like me went to town shouting from rooftops about how the best way to invest was to invest gradually through the year in ELSS funds instead of waiting for the last week of the financial year. During the year, there was a distinct ELSS boom as savers figured out how well suited these funds were to the new way of investing.

And now, nine months later, the government came out with a ruling that not only invalidated the tax-breaks on all ELSS investments made so far in the year, but also appeared to mandate that ELSS funds should be closed-end. A few days later, the ruling was partly repaired, but the fact is that the way it was drafted initially and the way it has been repaired shows a complete innocence of any awareness that closed-end fund are now ancient history and the reason that they are history is that they are against investors' interest. It is apparent that whoever drafts these things is completely up-to-date on what funds were like around the year 1995 but hasn't thought mutual fund investors to be important enough to find out how they have been investing in the decade that has passed since then.

Remarkably, this is actually a repeat of something I first noticed in the Kelkar report on direct taxes. That document too, while being completely on the ball in every other aspect, discusses mutual funds in a way that is applicable only to closed-end funds. It clearly implies that investors invest in a fund at one go and at some later point in time, all investors exit a fund simultaneously. That closed-end funds are a tiny part of the industry will probably take another decade to sink in.

Yet another example of this syndrome was the Securities Transaction Tax. In the shape it was announced initially, it completely ignored mutual funds and would have been disastrous for fund investors. This fact was realised only later and then a repair job done.

It's great that the government is responsive enough to reverse (at least some of) the ill-effects of the regulations as they are originally announced, but I find the kind of things that are done initially alarming.

What we see here isn't any kind of deliberate anti-fund investor attitude, but a simple indifference towards what should be the normal way for Indians to invest.