Gaining heft

Few red marks in pvt mutual funds' 25-year scorecard

Twenty-five years after mutual funds were opened up to the private sector, the asset class has emerged as an important investment avenue, providing Indians an alternative to direct equities. Today, the industry manages assets of more than Rs 23 trillion, accounting for a fifth of all bank deposits. A decade ago, mutual funds took up barely a tenth of bank deposits. The net asset value of the oldest equity mutual fund scheme today — UTI Mastershare — has grown at a compound annual growth rate (CAGR) of 18 per cent since its launch in 1986, compared to the 14 per cent CAGR for the Sensex and gold prices rising 6 per cent every year over the period. Franklin Bluechip Fund, one of the oldest private sector mutual funds, launched in 1993 as Kothari Pioneer Bluechip, has earned its unit holders an impressive 21 per cent a year since its launch, twice that of the Sensex. Unlike Unit Trust of India’s Unit Scheme-1964 (US-64), which had huge problems in terms of disclosure, private sector funds brought in transparency.

The industry though has a long way to go, as it has not always demonstrated that the interest of its unit holders comes first. Nor has it done enough for investor education. The industry is guilty of proliferating schemes through new fund offerings (NFOs), which were easier to sell than existing funds, to garner assets. Investors who bought the flavour-of-the-season story, be it tech funds in the late nineties or infrastructure funds in 2007, were left holding lemons. Many say the fund industry has also been opportunistic in creating a culture of churn where gullible investors were told by distributors to not hold funds longer than a year as they made commission every time a fund was sold. Distributors were also paid higher fees to sell NFOs over existing funds. The regulator has had to routinely clamp down on the malpractices of the industry, the main one being mis-selling. On their part, mutual funds have complained that there isn’t a level playing field between them and the insurance industry’s unit-linked investment plan.

However, the last five years have been a distinct improvement for both investors and asset management companies. The industry’s assets have tripled in size on new inflows and rise in stock prices, and investors too are in the money, although lower than three-four months ago. The pooling of securities with clear product definition, adequate disclosures, professional management with appropriate asset allocation, diversification across securities and low ticket size have all made mutual funds appealing. Plus, the falling interest rate cycle made a lot of fixed-income products unattractive and with equities delivering robust returns, the investor lapped up mutual funds, especially systematic investment plans of equity funds. The regulator has brought more discipline in terms of how many schemes a fund can have in each category, and forced fund houses to merge schemes.

During this bull run, mutual funds have been conscious to alert investors regularly on inflated valuations, especially in the small- and mid-cap segments. Even as a large part of the market is in the midst of a correction, mutual fund investors have kept the faith. If the industry has managed to convey the message that wealth creation requires patience and happens only over the long term, then the industry’s campaign “Mutual funds sahi hai” may be working.