The controversy stirred up by Pru-ICICI Mutual Fund has put paid to the mutual fund industry's plans to enter the pension sector as and when it is opened to private players.

Mutual funds had been lobbying hard for being allowed to handle the vast corpuses of pensions. It had even got the Securities and Exchange Board of India to side with its cause.

However, the recent development over mismanagement of money entrusted by private provident funds has suddenly altered the scenario.

According to Sanjay Sachdev, managing director and CEO of Principal Asset Management, "Anything that is done by one or two players in any sector affects the entire sector." He added that it would take a while to bring back people's trust in the sector again.

A few foreign fund houses said that it will definitely jeopardise the interests of the asset management companies in the short term.

 "However there is no saying what can happen in the long term," the chief executive officer of a foreign fund house said.  Nevertheless, this single incident is expected to make the position of the anti-privatisation brigade stronger.

Allowing small private trusts to invest in mutual fund schemes was seen as a confidence building measure on both sides - the PF trusts entrusting their money to a third party to manage, and mutual funds' ability to manage long term money with no downside risk since it represented an individual's life savings.

However mutual funds are allowed to invest such funds only in gilt schemes. The Kanpur office of Pru-ICICI MF was found to be switching a private PF trustee's funds from gilt to equity schemes and back.

Many mutual fund houses such as Principal Group, ING Vysya have set up their operations in India with a longer term view of ultimately getting into the management of pension funds and other retirement funds, since this is where they can manage a huge corpus.

Many of these funds have sacrificed mobilisation of assets in favour of showing performance. "Ultimately our ability to bargain with the government will hinge on our showing consistent performance rather than getting money," sources said.