The great mutual fund crisis

Srinivas Chittaluru is not the kind of man who reads four pink papers with his morning coffee and then devours research reports with breakfast. With around Rs 10 lakh in the market, you'd think this 41-year-old software engineer would be far more tense than he is about the state of the markets. But Chittaluru, who has been investing since 1995, has seen the market rise and fall and knows it will ultimately stabilise. More importantly, he has not put his money in stocks and has chosen to invest only through mutual funds. Unlike stocks, mutual fund investment is less risky and offers scope of diversification, he says. And he's tested this for himself. He moved his equity investments to debt funds this January, and has also branched out into gold and new thematic funds, which he hopes will pay out over the next three years or so. Chittaluru could be the poster-boy for the Indian mutual fund industry savvy and unfazed by temporary swings.

But why are there so few of them in the country? Retail participation in mutual funds in India is pathetically low; less than 3% of household savings go to MFs, compared with over 15% in the developed countries. So where do people invest if not in funds? They swing wildly between two extremes safe and poorly paying bank accounts on the one hand, and direct equities on the other. The reason why funds are not on the preferred list of retail investors is largely due to the way in which fund houses in India operate.