FUND FULCRUM
(July 2009)
Changing landscape of the Indian mutual fund industry

A paradigm shift …

Public sector mutual funds, once dominant players in the industry, have gradually ceded market share to the private sector, according to a report by CII-KPMG. Public sector mutual funds comprised 21 per cent of the total industry AUM in 2009 as against 72 per cent of the AUM in 2001. Even the number of PSU mutual funds has declined from 11 in 2001 to five in 2009, with UTI, LIC and SBI being the main PSU players. While the PSU presence in running asset management companies or mutual funds is declining, many PSUs, particularly banks, have been getting engaged in distributing mutual fund products of other companies.

Debt dominates…

Over the past three to four years, the asset mix of the Indian mutual fund industry has been skewed towards debt products. Debt, equity and liquid funds comprise 49, 26 and 22 percent of the total industry AUM in the financial year 2009 respectively.

Retail loyalty dwarfs corporate control…

According to an AMFI report released in March 2009, corporates, banks and FIIs collectively control over half of the assets of the Indian mutual fund industry. Retail investors and HNIs control 43% (Rs 1.8 lakh crore) of the total assets under management. Fixed Income funds, which contributed over 70% of the assets are dominated by the non-retail investors. They controlled nearly three-quarters of the 2.9 lakh crore assets of fixed income funds. Retail and high networth individuals were the main investors of equity funds that managed Rs 1.1 lakh crores. Retail investors take a long-term view of mutual fund investments rather than HNIs, FIIs, banks and domestic financial institutions. While 46% of retail investors’ assets in equity funds were held for more than 24 months, 36.4% of the assets of HNIs were held for the same period. It is a mere 18% in the case of banks, FIIs and domestic financial institutions. When 1 to 2 year holding period is considered, retail investors lost to HNIs, who held on to 37.85% of their investments over the period, without exiting. AMFI data further points out that on an overall basis, nearly 82 percent of retail investors assets stayed invested for more than one year in equity funds. Retail investors also made up around 64.8% of the equity assets that are lying with mutual funds, while they scored higher in terms of balanced funds, reaching beyond 68.2%. HNIs remained the second largest investors in equity and balanced funds, with a 20.5 and 22.2 percent share respectively. Corporates dominated the debt fund category accounting for a 64.8% share, with HNIs at 28.6%. The investment of retail investors in debt funds was a paltry 4.1%.

HNIs hiccup…

According to a report by DSP Merrill Lynch and Capgemini , the number of high networth individuals in India fell to 84,000 in 2008, from 1.23 lakh in 2007 as the equity markets tumbled. This is the second highest drop in the number of HNIs in any country in the world. India comes next to Hong Kong, which had the highest fall in HNIs last year. HNIs are persons with investible surplus of more than $1 million. In 2006, India recorded the second highest growth in the number of HNIs, while in 2007, its HNI growth was the fastest in the world. This is the first time in seven years that the number of HNIs has fallen. The total number of HNIs in the world fell close to 15 per cent in 2008. The combined wealth of the world’s rich dipped 20 per cent to $32.8 trillion. This erosion of wealth has lead many of these HNI clients to “lose their trust” in wealth management firms. The global economic and market downturn has shaken the trust and confidence that HNIs placed in market regulators, financial institutions and the very principles of portfolio management. It has also made most of them shift their money into safer assets such as fixed income, cash-related instruments and domestic investments. With no safe havens, HNIs ended up with cash constituting 21% of their portfolios. As markets recover, they will have the flexibility to readjust their strategies and reinvest in new and developing opportunities along the way. Though the findings of the current survey have been rather dismal, by 2010 things would pick up. By 2013, the combined wealth of the HNIs world-over would increase to $48.5 trillion from the current levels. This growth will be led by the Asia Pacific region.

AUM rises, albeit at a snail’s pace

The average AUM of mutual funds in June 2009 increased by a mere 4.92% to Rs 6.69 lakh crores. Reliance Mutual Fund registered an increase of 5.45%, aided by the successful conclusion of its infrastructure NFO, which garnered more than Rs 2300 cr. LIC Mutual Fund and Edelweiss were the other gainers worth mentioning. But nearly 9 of the 38 funds registered a decline in AUM. The top 10 funds, accounting for more than 42% of the total assets of the industry, saw one new entrant, IDFC Mutual Fund (in the place of Tata Mutual Fund). While debt schemes witnessed outflows, there were favourable inflows in equity schemes of many fund houses. The huge outflows from debt funds are a routine phenomenon during quarter ends as banks and corporate houses withdraw their investments during this period.

Piquant Parade

T Rowe Price has made the highest bid for UTI AMC’s 26% stake sale. It has offered 4 to 4.5% of its AUM as against a mere 3% offered by Nomura for a stake in LIC Mutual Fund.
Dena Bank has entered into a strategic tie-up with Fidelity Mutual fund.

Regulatory Rigmarole

Effective 1 August, 2009, the Securities and Exchange Board of India has put a cap of one per cent on the maximum amount an AMC can retain from the exit load or the contingent deferred sales charges (CDSC) on mutual funds for marketing and selling expenses. The scrapping of entry loads for all mutual fund schemes would also be applicable from August 1, 2009. This would also apply to additional purchases and switch over from one scheme to other schemes, new mutual fund schemes launched on and after August 1 and systematic investment plans (SIPs) registered on or after August 1. Mutual fund application forms will have to carry suitable disclosures that the upfront commission to distributors has to be paid to them directly by the investor.

The removal of entry load is expected to give a fillip to wealth management schemes that are still in the nascent stage in India. If advisors offer advice backed by strong and independent research, retail investors would not hesitate to accept wealth management services at a nominal rate of 1 or 2 per cent advisory fees. The mantle of power is poised for a shift from product pushers to those pursuing the holistic financial model.

Wishes remain wishes…

Thanks to the unexpectedly positive election results, markets had built in rather high expectations from the 2009 budget. The mutual fund industry sported a long wish list, none of which saw the light of the day.

• Establishing parity (documentary requirements and transparency standards) amongst various financial service providers – insurance and mutual funds.
• Approval of Dedicated Infrastructure Funds with a 5 year lock in.
• Equity FoFs, Gold ETFs and Real Estate Mutual funds getting the same tax treatment as equity funds.
• Increase in income tax exemption under section 80 C from the current limit of Rs 1 lakh so as to lure more investors into mutual funds and facilitate access to investor’s money in equities in the long term.
• Rationalisation of the tax structure - the Dividend Distribution Tax (DDT) of mutual funds is 25% (28% if surcharge is included) in the case of liquid funds and 12% in the case of other funds.
• National Pension Scheme (NPS) on an equal footing with other savings schemes
• Extension of tax breaks to schemes investing in overseas equities.
• Retailisation of the fiscal deficit by providing tax breaks for gilt funds·
• Separate tax breaks for pension funds and children’s funds·
• Moderation of Securities Transaction Tax (STT)

Emphasis on the infrastructure sector, coupled with anticipation of policy announcements on the disinvestment front in due course seem to be the overriding factors that camouflaged the unfinished agenda expected to be addressed by the Finance Minister in the Budget. Adverse market reaction was a result of excessive expectation. However, this budget needs to be seen against the backdrop of the current global downturn. India, along with China, has been able to show a lot more resilience as compared to the developed world. The challenge is to take our growth rate even higher on the assumption that global growth rates will continue to remain lackadaisical for the next couple of years. This Budget has incorporated a lot of elements good for India’s long-term growth.

Cautious optimism pays

Cautious bull, optimistic bull, fearful bear are some of the terms hurled at equity investors in the past several weeks. Most investors are waiting on the sidelines, mulling as to whether to enter the market or not. Some question as to whether this rally is sustainable. I would like to draw your attention to two salient points at this juncture. One, markets are unpredictable. Two, equity markets recover much before the actual economy does. There are no easy answers but, of course, there are certain signals one should look at – FII flows, the credit situation, the general sentiment (specific focus on consumer spending), improvement in macro numbers (corporate earnings, inflation, GDP growth, agriculture output, IIP numbers, export numbers, oil prices etc.) and equity market moves.

The best time to invest is when the markets sink. So ignore the noise around you and invest in diversified equity funds with strong fundamentals. Do not put any short-term money, required in the next one to two years, in equity funds. Rational and courageous investors who did buy between October 2008 and March 2009 are now laughing all their way to the bank!