Assured Return Schemes by Mutual Funds: An Appraisal of Regulatory Issues

The assured return schemes like MIPs (Monthly Income Plans) launched by UTI and others are peculiar to the Indian Mutual Fund Industry. These schemes have, in the past, resulted in problems for the investment manager as well as sponsors of the mutual funds, examples being that of Canara Bank, SBI AMC and others. These schemes were commonly launched prior to 1993, when the industry was operating without well-defined regulatory framework. Even after SEBI's regulatory framework came into force during 1993, UTI has been launching MIPs as UTI was outside the ambit of SEBI jurisdiction. These schemes have attracted substantial criticism in last couple of years particularly in the wake of UTI's problems with its largest mutual fund scheme, US-64. The problem of assured return schemes is that they impose risks on the investment manager/sponsor and also have the potential to create pricing distortions (assuring returns higher than the returns applicable for similar risks). As a response to these problems, SEBI has disallowed assured return schemes. However, if the Indian investors have lower risk-tolerance (as has been their revealed preference), then the policy makers and regulators need to reconsider the possibility of allowing alternative scheme-structures on the lines of assured return schemes. The alternative structure based on lower assured returns than risk-free rate and management fee structure linked with the performance of the scheme can take care of specific criticism related to assured return schemes. Such a structure, though not found elsewhere within Mutual Fund framework, is commonly seen in the financial intermediation businesses, and is likely to be more “popular†among the investors and financial sector players.