Land mines waiting to blow

So, it has finally happened! The country's largest mutual fund, with trust as its middle name, has sent shockwaves across the country. By barring trading in its flagship scheme, US-64, the Unit Trust of India (UTI) has jolted the retail investing community like never before.

However, it is not very surprising that this action has been taken. The writing was clear on the wall for some time now, that all was not well at the country's largest fund. The government has, as usual, bolted the door after the horse has fled! Seeking, and getting, the resignation of PS Subramanyam, the chairman of UTI, is not the answer to the problem that bedevils UTI.

True, as the chief honcho of the fund, the buck stopped with Mr. Subramanyam and he had to go. However, the problems with UTI are more endemic. It would take more than just the scalp of the chairman to bring glory back to India's largest mutual fund.

In a closed environment UTI was always top dog, even if its investment practices were, according to many leading financial experts, questionable. For many decades the UTI was used to settle scores on the stock markets – thanks to the interference the political masters managed to wield over the institution.

UTI has always been at the receiving end of many criticisms. Its investment policies were never research-driven, instead they were more influence-driven. It was always slow in spotting trends in the stock markets and always tardy in getting in and exiting at the right time. It was never customer-focussed. Its investments were too skewed in favour of equity. The list goes on.

As long as the financial markets were closed and controlled it got away with all its inefficiencies. But with the liberalisation of the financial markets, its weaknesses became its Achilles heel and threatened its very survival. Instead of aggressively seeking to restructure and repair the damage, its management behaved like ostriches with their heads in the ground and carried on as if nothing had happened, with the net asset value (NAV) of its funds consistently below par.