MFs' illiquid paper sales face investor ire

The terrible phase that the mutual fund industry went through in October saw group entities come to the rescue of some fund houses.

As a part of the bailout, mutual funds offloaded illiquid papers of real estate and non-banking finance companies to group entities, including insurance arms or the parent.

This move has come under some criticism, as, under this practice, the unitholders of the insurance company and the shareholders of the group entity are incurring the cost of bailing out mutual fund unit holders.

So far, only two names have been discussed in the media, HDFC Mutual Fund and LIC Mutual Fund, but officials say the list is not restricted to this. Grapevine has it that a leading mutual fund, which is strong in the fixed income segment, has sold a sizeable chunk of its illiquid paper to some group entities including its insurance arm, though top fund officials have strongly denied this.

In most cases, a large chunk of the papers were bought by the insurance arms, as these companies are not answerable to their unit-holders in the short-term unlike mutual funds, who are under constant pressure to deliver in the short term.

Industry officials said in a few cases, there is hardly any evidence of an inter-group sale of this sort, as the sale might have happened through ���friendly��� holding companies.

Contributed by Deeptha Rajkumar & Nishanth Vasudevan