Every time there is disturbing information emanating from a company, investors worry about how the stock markets will react.
Fortunately, mutual funds investors are spared these concerns. That is because, with mutual funds, the asset management company-trustee-sponsor relationship works in the investor's favour.
To understand better why mutual funds are insulated from the controversies plaguing the promoter company (or sponsor), let us look at how mutual funds work in the Indian context.
Mutual funds in India function under a 3-tier structure. The promoter or sponsor sets up the mutual fund, but does not exercise direct control over it. The sponsor must first appoint trustees.
The trustees have a critical role to play as they are directly responsible to the investors/unit holders in the mutual fund. The trustees in turn appoint the asset management company (AMC). The AMC conducts the business of managing the day-to-day administration and fund management activities as also marketing and sales.
The Trinity that guards the investors
It is apparent from the above 3-tier structure that the sponsor has little or no role to play in direct fund management. From the investor's perspective his mutual fund schemes are managed by the AMC, which is run professionally and has a Board of Trustee to report to.
This is quite unlike a corporate structure where the promoter -- in most cases -- is directly involved and responsible for the day-to-day functioning of the company. Therefore the stock price is directly related to the events affecting the promoter.
'News' that flows thick and fast can sometimes cause above-average volatility in stock prices at least in the short-term. Stock investors who find mutual funds dull and boring, might want to consider this little detail.
The working of the mutual fund assumes significance and acts as a comforting factor to investors when they are confronted by 'news' that they can't interpret easily. They should ask themselves a simple question: does this news impact the AMC or the sponsor.
If it impacts the sponsor then that should put their concerns at rest given the rather loose relationship between the sponsor and the AMC. If it impacts the AMC then that is a matter of concern depending on the 'news.'
For instance, in the past we have witnessed Tata Finance (sponsor of Tata Mutual Fund) plagued by financial irregularities. But that had no impact on the working of Tata AMC or Tata Mutual Fund schemes.
Likewise, over the last fortnight, disturbing news from the Reliance Group has investors in Reliance Mutual Fund schemes asking themselves about the impact this is likely to have on their mutual fund investments.
Reliance Mutual Fund investors were not impacted by news that has shook their counterparts invested in Reliance's stock. Sample this: over the last couple of weeks Reliance Mutual Fund's leading diversified equity funds -- Reliance Growth Fund and Reliance Vision Fund appreciated by 1.61 per cent and 2.20 per cent, respectively.
In our view this is just another reason why retail investors must consider investing through mutual funds. There are more controls and better systems to ensure that investors are insulated from news that would otherwise divide the investing community down the middle leading to erosion in their investments.
More from rediff