Weak sentiment & new rules affect MFs in 2010

Last Updated 26 December 2010, 13:32 IST

A significant cause for concern is for the first time in the last 8 years that the MF industry had a very low net inflow in the equity segment and the household participation in equity schemes continues to be low, pointed out the Association of Mutual Fund Industry (AMFI).

As per the data collated from AMFI website till November 2010, as many as 315 schemes were launched this year against 99 schemes in the corresponding period of the previous year, mobilising over Rs 73,352 crore as compared to Rs 20,029 crore in the earlier year. Total funds mobilised both from new and the existing schemes were of the order of Rs 88.39 lakh crore in 2010 against Rs 82.37 lakh crore in 2009, an increase of 7.30 per cent.

Redemptions at Rs 88.85 lakh crore in the 11 months of 2010 were 12 per cent higher than the redemptions of Rs 79.36 lakh crore in the corresponding period of the previous year. In fact, redemptions surpassed the quantum of total funds collected during the year leading to a net negative inflow.

Of the funds mobilised by the industry, liquid/money market schemes topped the list, followed by income schemes and then equity schemes which was relatively low. 

Especially in the April-June quarter, the industry witnessed a net inflow of only Rs 3,547 crore at the aggregate level over Rs One lakh crore in the similar quarter last year, which was  largely due to high redemption of income schemes and partly due to continuing trend of net outflow from equity schemes.

There was a persistent net outflow from equity schemes during the year that underscored concern that gross sales of such schemes have not picked up posing a challenge for the industry. It also implied that the industry would have to activate, strengthen and support the distribution system to play a crucial role in promoting MF schemes among retail households.

This is more so after the market regulator sebi banned the front load in August 2009 and the distribution of MF products suffered majorly with most distribution agents almost switched over to promoting PMS (portfolio management services) products by banks and private parties.

Though fund houses did compensate agents by paying upfront commissions, the quantum was much lower than the 2.25 per cent (load) they used to get.  They (agents) found it logical to concentrate on PMS which has bigger clients and ticket sizes.  So much so, some AMCs (asset management companies) have applied for PMS licences with SEBI this year.

Rules changed

The Year 2010 also witnessed a host of regulatory changes in several areas which would certainly raise the bar, enhance disclosures & standards and promote investors’ protection. Aside the entry load ban, the year also saw MF units being traded (like equity) on the stock exchange and the price was based on the day’s NAV. Trading in MF units is like investing in an IPO where investors have to place a binding order only to buy or sell —  unlike in share trading — there would be no squaring-off before the close of trading hours. Aspects of entry load, management fees to paid AMCs, regulation of distributors and taxation of mutual funds from the investor perspective deserve attention, but it remains to be seen how fund houses adapt themselves to changes in regulations as to share the growth for the future of the industry.

The market regulator Sebi with its clear stance wants the industry to focus on growing the existing schemes, than launching new fund offerings (NFOs) at random, as it would help by way of consolidation of products. It also mandated mutual funds to disclose whether money collected for gold- focused schemes was actually invested in the precious yellow metal and this mentioned in half-yearly reports with a first copy submitted to their trustees.

The regulator also directed AMCs to maintain a list of ‘negative sectors’ and give an undertaking that they would not invest in sectors appearing in that list. Sebi also indicated recently that it would try to find ways to impose restrictions on big companies from getting excessively leveraged. In this context, AMFI Chairman Chandrakant Bhave maintained: “If any sector is over-leveraged for a long time, without doubt it will fail.”

Sebi directed fund houses to strengthen the KYC (know your customer) norms irrespective of the size of their investment by year end — which was earlier applicable for investments of above Rs 50,000. It is also applicable to certain category of individuals indicated as ‘clients of special category’ and it includes ‘politically exposed persons’ meaning people entrusted with prominent public functions in a foreign country such as Heads of States or of Governments, senior politicians and top government officials, etc. Earlier, KYC norms required investors to only disclose broad occupational details.

Good potential

In today’s volatile market environment, mutual funds are looked upon as a transparent and low cost investment vehicle attracting a fair share of investors’ attention. For one, growth in Assets Under Management (AUM) experienced over the last four years has been unprecedented, growing at a compounted growth rate of 28 per cent, which only slowed down a bit during the last two years, consequent to the global economic meltdown and financial crisis.

Even as investor confidence has been significantly eroded and AUMs suffered a dent, the sale of mutual funds did revive over the last few quarters only suggests that it  (investor confidence) is regaining gradually and striving to look at alternate investment opportunities and higher returns, despite the markets continuing to be choppy. At the end of the year, investors have begun to realise that the Indian mutual fund industry has sort of weathered the financial crisis, but the worst may not be over and the industry will still have to deal with challenges of low retail participation and penetration levels.

If you are looking for 2011 outlook, the CII Mutual Fund Summit’s vision 2015 document has one saying that AUM will grow at 15-25 per cent between 2010 and 2015, the pace of growth being matched by the GDP growth rate of the economy. It also estimated higher penetration levels riding on the back of the accelerated drive for investor awareness, increase in investible surplus and a younger population with the capacity to absorb higher risks. Cheers to that.

(Published 26 December 2010, 13:27 IST)

Follow us on