Mutual funds lose charm, retail investors their money

Mutual funds lose charm, retail investors their money

Mutual funds lose charm, retail investors their money

Is the mutual fund (MF) industry headed for a bright turn of events?  Yes, if one restricts the focus to only the top 10 funds in India; otherwise it is witnessing continuous erosion of equity assets since 2008.

As these assets peaked at around Rs 2.5 lakh crore to Rs 2.6 lakh crore in January 2008, their share in overall MF assets was about 38 per cent between January 2006 and December 2007 and went up to about 45 per cent once or twice in that period.

However, the spate of outflows that started then, continues till date at the rate of Rs 2,000-3,000 crore per month on average. Despite markets hitting all-time highs recently, outflows didn’t abate. Total equity assets now stand at around Rs 1.5 lakh crore, 17 per cent of the total assets under management (AUMs).

During the same time, analysts point out that bank deposits grew from Rs 30 lakh crore to Rs 70 lakh-crore, while real estate is estimated to have attracted an additional Rs 20 lakh-crore and gold has seen inflow of over Rs 8 lakh crore. Non-equity assets of mutual funds (MFs) rose from around Rs 3 lakh-crore to Rs 7.3 lakh crore. Why this phenomenon?

For one, equities have never been in the mainstream of the domestic investment basket as most households in India traditionally put their money in fixed deposits, real estate and gold. The first shift towards equity cult came during the last bull-market phase in 2003-2007.  Then also, money flows into MF equity schemes went mainly to new fund offerings (NFOs) and not to existing equity schemes. The reason was simple: NFOs were allowed to charge investors a greater portion of their expenses than existing schemes.

Entry loads were allowed in MFs, but only to the extent of just about 2 per cent. So, attractive payouts to distributors led to gullible investors getting into new equity schemes without understanding the risk-reward payoff most often. Simply put, MFs did not spend much to make equity schemes a pull product. Later when some of those initiatives like entry loads were abolished by the market regulator, the push for such products became difficult.

Distributors -- who got used to 5-6 per cent commission from needy promoters -- were unwilling to work for just 0.75-1 per cent. The opportunistic behaviour of MFs in launching a large number of closed-end schemes once NFO expenses were banned in open-ended funds also hurt investors. In the process, many of them (distributors) moved out from selling MFs, simultaneously many asset managers started shutting down offices as inflows dropped, which led to a situation where investors had neither an asset management company (AMC) person nor a distributor to guide them.

Bigger AMCs, that hold most of the equity assets, have seen phenomenal rise in profitability over the last two years as product distribution expenses have gone down and historical assets have contributed towards fees. These AMCs have tried to boost profits in the short-term when they could have used some of the money for investor education and attracting investors to MFs by showcasing long-term benefits.

Also, with equity markets remaining volatile, MFs continue to lose investors. In all, MFs have lost 34.7 lakh retail folios or 8 per cent of total retail folios in April-September to 3.79 crore folios, industry body Association of Mutual Funds of India (Amfi) data showed. This was the sixth consecutive half-yearly decline in retail folios as per Amfi's disclosure. The gain in folios in the high net worth individuals (HNIs) category capped the fall in investor accounts to 15 lakh folios.

"The sharp decline in retail folios was mainly in the equity category, which has been impacted by the ongoing volatility in the segment," an analyst at ratings agency Crisil said.

HNI faith in markets

Unlike retail investors, HNIs reposed faith in markets. Folios held by HNIs, defined as individuals investing Rs 5 lakh or more, jumped three times in April-September on the back of a sharp rise in equity folios.   Of the 30 lakh HNI folios, 21 lakh were added in the latest half-year period. While the equity segment saw an addition of over 14 lakh HNI folios, balanced funds and debt-oriented funds added 3.45 lakh and 2.72 lakh folios respectively in April-September. In AUMs, HNI portfolio in equity-oriented funds increased by 30 per cent, balanced funds by around 14 per cent and 8 per cent in debt-oriented funds.

The number of equity folios declined by over half-a-million in a single month in September 2013. With this, MF industry not only loses nearly a crore of equity investor base since March, 2009, but also faith (which takes considerably long time to build) of thousands of investors in equity markets.  So much so, when top-10 fund houses made a killing in terms of net profit at a whopping Rs, 1,100 crore (for the fiscal 2012-13), retail investors were at the mercy of precarious market movements with no returns in sight.

Investors have been waiting not for a year or two but for more than five years. And, this wait is not to book astronomically higher profits but to take away just the principal investment they made when markets were inching higher to touch peaks in 2007-2008. In most cases, they do not mind even if the market value of their investments falls by few thousand rupees.  In case of new investors, they are too happy if they could recover just the principal amount, let alone any returns (at 8-10 per cent) which they would have got it had they safely put it in bank deposits.

If one were to factor in inflation into MF investments during these years, investors would see erosion in nearly half of the investment value in absolute terms. Though many large fund house executives aver that the "only way to beat inflation is investment in equities", one is not sure about tracking and managing a volatile market. Above all it still didn't work out in last five years.  Even as so-called optimists are quick to call this an "aberration," they (fund house executives) have no explanation to offer to those investors who invested lump sum in NFOs 5-6 years back, where the net asset values (NAVs) are either zero or close to it.

In short, investors seem to be just not trusting these so-called market experts.  Recently, AMF chief executive H N Sinor termed that less than a lakh monthly reduction in equity folios as a "trend reversal".  In August 2013, only 63,000 equity folios stood closed - the lowest since December, 2011. Further, he noted that it should sustain as investors were coming back to equities as confidence in the market was reviving. 

So far in the current fiscal (April-September), the MF industry has seen closure of a little over 2 million equity folios. Which means, MFs are losing over 11,000 equity folios every day.

Most retail investors are of the view that MFs, barring the top-10 fund houses, do not know how to manage investors’ money. “They (fund executives) make enough money to cover their fat salaries and bonuses, but nothing for investors,” said an annoyed Rupesh Singh, a mathematics teacher from Mumbai suburb whose calculation has gone awfully wrong by investing in MFs. Let's face it.

  Investors already gave enough time to the MF industry to manage their funds.  So, what's wrong if they are taking their money back whenever the value nears their costs? After all, they are finding other avenues to park their hard-earned money where they can at least get an assured post-tax returns of 8-10 per cent.  Initially, when investors started putting in MFs at least they believed that the industry could rewards returns slightly better than the interest earned from bank fixed deposits.

Chairman of market regulator Securities and Exchange Board of India (Sebi), U K Sinha loses no opportunity to talk about investors' safety and continuous low penetration level of mutual fund products. Yet, investors are not making money from being invested in mutual funds.
This is all happening on the back of losing faith on the industry's capability of managing money. Explains Rajesh Dedhia, director, Vantage Institute of Financial Markets, “Fund houses used to tell retail investors during 2005-08 to investment for long term, that is, at least three-year horizon.  Now after the lapse of five-six years, with most of the investors having gained little, (fund houses) are quick to blame investors that they invested at a wrong time and got stuck.”

What went wrong?

Most unit-linked insurance plans (ULIPs) offered by insurance companies were sold as MF schemes and these had huge costs associated with them -- footed by investors -- and they were hidden but as long as markets were doing well and giving positive returns, it did not matter.

But as markets turned sour with negative returns, the costs started becoming more and more visible. By the time the regulator stepped in, investors had already put a lot of money into such schemes. The loss of money in these schemes also hurt MFs as most investors who lost money in ULIPs are wary of investing in equity schemes.

Without educating investors, AMCs started pushing the most fancied schemes, which proved to be their undoing. In the process, the entire concept of asset allocation and financial planning was given the go-by. Now, when the performance has been reversed, as evident in a large number of cases, confidence has yielded to skepticism and investors are understandably raising concerns.    

Get a round-up of the day's top stories in your inbox

Check out all newsletters

Get a round-up of the day's top stories in your inbox