Indian retail investors stayed away from the equity mutual fund schemes in 2010-11 as the fund market witnessed the largest fall in its equity folios during the year. This comes as a major blow to the fund houses which have been struggling to reach out to investors in order to build up equity assets.
According to the Securities and Exchange Board of India (Sebi), the domestic fund industry lost a whopping 1.8 million equity folios in 2010-11. Such a decline has made industry’s equity folios touch three years low. The folios include Equity Linked Savings Schemes (ELSS).
In relative terms, industry lost close to 13,000 folios in the previous financial year, the year which saw the capital markets regulator bringing in the no entry load on equity schemes.
Industry experts say the abrupt fall in folios is due to a combination of factors. “As soon as investors, who had invested in 2007-08, broke even they moved out. Moreover, there was a significant reduction in new fund offers (NFOs) which resulted in no new and mature investors entering the industry,” says Dhirendra Kumar, chief executive officer of Value Research (which tracks mutual fund industry).
He further added consolidation of folios also contributed to reduction in folio number, “but it could not be a major contributor.”
Dhruva Raj Chatterji, senior research analyst, Morningstar India, agrees. “There was subdued participation from investors last year and as the markets rose they booked profits which hampered the inflows too.” However, fund managers blamed it on the persistent unwillingness of the distributors’ community in pushing the equity products.
A foreign owned mutual fund house CEO, said: “The industry is yet to recover from regulator’s entry load ban on equity schemes. Distributors are not finding mutual funds worth selling, due to the difference between commissions they earn by selling other financial products and what they get from the mutual funds.”
Agreeing with him, one of the CEO of the top five MFs, added: “Equity sales are not proving profitable to the distributors. We as an industry pay around 1.7 per cent commission to the distributors, which is certainly not matching with what other products offer. In short, distributors cannot run a profitable business.”
According to Chatterji, “The transition due to the regulatory measure has not happened. Unless it happens and distributors gain bargaining power for charging investors, it would remain difficult to attract investors to the fund market.”
Last year saw a record net outflow of Rs 13,000 crore from the equity category against a net inflow of Rs 600 crore in FY10. The first three quarters of FY11 continued to remain under pressure as the industry struggled with high outflows, which had reached as much as Rs 7,000 crore in a single month.
During the year, industry added 21 equity schemes taking the total to 376 against 355 schemes in FY10.