'Only a third of equity folios active'

Mutual fund officials say the industry's 32-million equity accounts is a 'misnomer'

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Even as they lost a whopping 700,000 equity folios last month, the largest ever drop in a month, the reality is far more worrisome for India's mutual fund industry.

Of the 32 million equity accounts shown on the Securities and Exchange Board of India’s (Sebi) website, only about 10 million might be active.

This means only one of every three existing equity folios sees transactions and possesses funds. The remaining folios are inactive, according to sector executives.

Although there is no data available, sector officials told Business Standard that a large number of their equity folios had no money and were lying vacant for long.

Nilesh Sathe, director and chief executive officer (CEO) of LIC Nomura Mutual Fund, said: “The number of equity folios is a misnomer. If you look at the current active folios, it would be around a crore (10 million).”

Other sector officials agreed. According to them, fully redeeming the fund value from the scheme wouldn’t make the folio stand closed. That is what many investors do. “Several investors do not request for folio closures while making redemptions and, hence, their accounts continue with no balance,” they added.

Akshay Gupta, managing director and CEO of Peerless Mutual Fund, said: “At a time when there are around 30 million demat accounts, certainly the number of equity mutual fund investors cannot be more than that. The industry has a huge number of zero balance equity folios, which are not being serviced by investors.”

According to insiders, once funds are completely redeemed and if systematic investments (SIPs) are stopped by the respective banks, the folio should stand closed. Currently, that is not happening and the sector is showing a bloated number of equity investors, depicting a wrong picture.

Some players said the Sebi should look into the matter. “You should ask Sebi why the industry is carrying on along all the dead folios,” said a CEO who did not wish to be named.

However, one section sees nothing alarming in the situation. “Even if the industry has 10 million active equity investors, we are penetrating a third of the demat account holders which, in itself, is an achievement," said the executive vice-president of a large fund house.

So far this calendar year, the segment has lost 1.76 million folios. The figure for the comparable period previous year was 1.33 million. With such a sharp erosion of equity investors’ base, the overall number of equity accounts with the sector has further shrunk to 32.2 million, a level previously seen in 2007-08.