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FUND MANAGER 2006

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Hard times

Nearly 15 years after the private sector was allowed to set up mutual funds, the industry remains a small one with total assets under management of less than Rs 500,000 crore. The majority of this is in fixed income schemes with just about Rs 1,40,000 crore parked in equity schemes.

Had it not been for the buoyant markets, the amount would have been lower. Net inflows into funds during the current year are actually lower than they were last year. In the meantime, disposable incomes are rising and a stock market rally that began a couple of years back refuses to end.

Where has the mutual fund industry gone wrong? To be fair, their task has not been easy. To begin with, high interest rates in a country where the mindset of investors remains conservative hasn’t helped. While the savings rate may be at 33 per cent, most of the money remains in fixed deposits. Those who want a little more, buy Fixed Maturity Plans (FMPs) which offer a post-tax return of 8-9 per cent-plus. Foreign investors may be pouring billions into the equity market but the Indian investor is not convinced: just about 5 per cent of household savings is in equities and related products.

There are of course people who punt on IPOs and flip the stock when it lists. Fortunately, the markets have been on a roll so it’s been an easy ride whether in the cash or in the F&O segment where one can also leverage the position. The mushrooming of portfolio managers, who are getting most of their calls right in a market, where FIIs are buying as if there is no tomorrow, has only led to more individuals becoming day traders or short-term investors. Who wants to simply beat the benchmark over a year when you can make returns of sixty and seventy per cent?

The mutual fund industry is also handicapped to some extent because it does not have the last mile connect with investors and is dependent on distributors. The life insurance industry, on the hand, has managed to build large agent networks and is also able to sell through the bancassurance route. Almost 90 per cent of the products sold are ULIPs which give agents huge commissions of anywhere between 20-40 per cent in the first year and a trail for a few more years.

In contrast, a distributor would make about 2.5 per cent on an equity scheme with a trail of 50 basis points. That’s possibly why they keep churning their clients’ portfolios. For their part the funds try to woo distributors with higher commissions. The emergence of more independent financial advisors and an increasingly young and less-risk averse population, should help change the industry’s fortunes.•

Shobhana Subramanian
shobhana.subramanian@bsmail.in

Business Standard • FUND MANAGER • October 2007