Mutual Fund Industry – Future Ahead
Purpose– The purpose of this article is to discuss the challenges and the future trends in the mutual fund industry in India.
Design/methodology/approach– The article, first, discusses the challenges faced by the mutual fund industry. Then, addresses the revival plans initiated by the Association of Mutual Funds in India (AMFI) and the Securities and Exchange Board of India (SEBI). Secondary data was collected from AMFI database, SEBI site and special report from the magazine-Business World.
Value – The article analysis the current dynamics of the mutual fund industry in India and the measures to address the challenges faced by the industry. It contributes to the debate between the industry experts and investors in reforming the industry.
Key Words – Mutual Fund Industry, AMFI and Revival Plan
A mutual fund is a professionally managed collective investment vehicle that pools money from many investors to purchase securities. While there is no legal definition of mutual fund, the term is most commonly applied only to those collective investment vehicles that are regulated, available to the general public and mostly open-ended in nature (mutual funds). There are a number of players in the mutual fund industry – the fund managers, distributors, financial advisors, registrars and other service providers and, of course, the investors. But central to the plot are the investors; the remaining players exist because of them and not the other way around. Mutual funds play an important role in India’s financial sector development. Apart from pooling resources from investors mainly the small ones, they also provide informed decision making tool to them. Thus they contribute not only to the financial sector participation, but also financial inclusion, thereby enhancing market efficiency and transparency.
CURRENT STATUS: MATTER OF FAITH
Early 2012, market expert and participants questioned if the mutual fund industry has reached its low point – redemptions had been increasing since 2011; markets continued to be volatile and investors appeared to be escaping to safer bets like gold and bank deposits, the distributor fraternity was shrinking.
Shift in Trend – Preference for income over equity funds
Source: AMFI (2012-Does not include Fund of Funds)
But the end of 2012, the story changed considerably, AUM increased and the fund performance in terms of returns improved since 2011.Large Cap equity mutual funds returned nearly 28 per cent by the year end and small and mid-cap equity funds returned just under 40 %. Even the fixed income and bond funds did very well, returning over 10 per cent. When the economy fared rather poorly – The major growth indicators continued to decline for the third year running – the relatively good performance of mutual funds offered positive signs and encouragement. So how does one explain the turnaround from the start of 2012? Mutual fund performance is always linked to the underlying markets which performed fairly well compared to 2011. (Srinivas)
“This year, there has been a big increase in debt Folios” – Mr. Vikas Sachdeva from Edelweiss
The issues of the mutual fund industry are not just because of the regulatory actions like the ban on entry load much to the disappointment of the sales force and distribution channels, or the low fund management fees and profitability of AMC. The cause’s lie much deeper which needs to be further researched. So the scares are unlikely to disappear quickly and easily by a mere rectification of past errors. In fact, the troubles of mutual funds are the cumulative results of the way in which mutual funds have been functioning for a long time. Some of the challenges are
· Sustainable growth of a mutual fund depends on its ability to attract new money, which can come from either the entry of new investors or the existing investors investing additional money.
· There is a belief that mutual funds are concentrated on a limited geographical area in the country, which makes a good case for mutual funds to reach out to investors in semi-urban or rural areas.
· The Indian financial markets, unlike the financial markets of developed economics have some differences. The investors in India have continued dominant preference for time deposits of commercials banks, life insurance products, small savings schemes, provident and pension funds. The fund houses have to rework on their strategies to design their offering to suit and attract these investors. (Kar, 2012)
· One of biggest challenge is retaining existing investors. All AMCs acknowledge that there has been nearly continuous redemption by retail investors. Some financial analysts believe that retail investors have, in fact, given up on mutual funds almost entirely.
· On domestic front, markets were affected by weak domestic economic indicators, downbeat earnings reported by some index majors and the Union Budget falling short of expectations.
· Part of the problem stems from the reduced number of independent financial advisor, an important link in the distribution channel.
Current Statistics – Domestic mutual fund industry’s month-end assets under management (AUM) fell by 1.5 per cent to Rs 8.14 lakh crore in Feb 2013 from the record high of Rs 8.26 lakh crore in January 2013- Source AMFI Monthly released. Deccan Herald
Adaption to changes is necessary for one’s existence. And if one discards to change with the times, it surely leads to downfall. With the focus shifting more towards investor interests’ and education & awareness, the capital market regulator – Securities and Exchange Board of India (SEBI) and the Asset Management Companies, have brought in a slide of changes for the mutual fund industry.
· AMCs have now started to increase their focus on global market, selling a slew of equity and debt products to raise their AUM. The AMC’s are holding road shows and investor presentations across the US, Europe, Japan, Middle East and South East Asia. The Fund houses are using the global route as it is more cost-effective than selling in India. For instance, AMCs can raise $50 million to $100 million from a single high net-worth individual, but it is difficult to raise a similar amount back home.
· One of the biggest changes has been the relaxation of expenses that AMCs are allowed to charge. In a push to give mutual funds an incentive to go beyond the urban landscape of the 15 largest cities B15. The Securities and Exchange Board of India (SEBI) has allowed mutual funds to charge a higher expense ratio beyond these 15 cities. Even a shift of 1 per cent of saving into mutual funds means an additional Rs. 40,000 crore from these investors.
· AMCs and the AMFI are spending a lot of time and money in investor education and increasing the number of advisors. The Fund houses will set aside 2 basis points of AUM (about Rs 150 crore) to educate and create advisors who can sell easy to understand mutual fund products to potential investors in smaller cities.
- Among other measures, the fund houses would have to calculate the Net Asset Value (NAV) of the scheme on daily basis and publish the same in at least two daily newspapers with nation-wide circulation. Comprehensive disclosures by mutual funds in order to protect the interest of investors.
“There is a very strong appetite for Indian debt and equity products in the overseas,” – Sundeep Sikka, CEO, Reliance Capital Asset Management.
Year of 2012 has also been a year of instability. There have been changes in regulations, some consolidation, and some serious thinking within the industry about coping with several challenges that face the industry. The instruction of setting aside portion of a mutual fund’s assets (AUMs) for investor education and awareness could get several investors on the learning curve and may promote financial literacy which could eventually help investors to take prudent investment decisions.
But the impetus for growth would have to come from within the industry itself. In the circumstances, the long-term policy focus would necessarily have to be on the sustainable growth of the sector and on regulations that preserve an environment for innovations, which encourages asset management companies to design new business models, develop differentiated products for different segments of investors and engineer processes to widen the reach of mutual funds.
So will 2013 be better? Markets sentiments have changed; through most funds managers prefer to be guardedly optimistic rather than enthusiastic (they have been in the past and missed the mark). The economic indicators and environment will probably improve with structural reforms which will have a positive influence on the mutual fund industry.
Kar, P. (2012, August 21). Mutual funds – Investors still matter. Business Standard
. (n.d.). Retrieved from investopedia.
Srinivas, S. (n.d.). It’s a Matter of Faith. Business World