Mumbai:
Mutual funds are supposed to tap savings of the common man. Yet, in a country of 120 crore people or 1.2 billion people, there are only 4 crore or 40 million (3.5 per cent) mutual fund unit investors. In US, every second citizen is a mutual fund unit holder.
Here are some pointers that could help you comprehend the trend:
• Poor investor interest: Assets managed by mutual funds are falling. For the month ended March 2012, assets under management with all mutual funds plunged 13 per cent to Rs 5,87,000 crore, according to Association of Mutual funds in India (Amfi) data. This is the lowest since June 2009. This means investors have pulled out money. While March usually sees a high outflow of funds as corporate India pulls out money to meet tax and other working capital requirement, the absence of a diverse retail base hurts. The industry needs more common people to own mutual fund units and not just large corporates to park their money.
• Other attractive investment avenues: For the common man, the Indian government offers saving schemes with sovereign guarantee. With high interest rates and tax rebates, post office schemes like public provident fund or National Saving certificate offer better returns to investors. Individuals have Rs 5,19,162 crore invested in the post office or government guarantee schemes, according to Karvy, securities firm. Employee Provident fund and public provident funds manage another Rs 2,81,000 crore. This is more than the size of the total mutual fund industry in India. High bank deposit rates also reduce the risk appetite. Indian individuals own fixed deposits and government guaranteed bonds worth Rs 22,16,307 crore, according to Karvy. Another Rs 6,20,000 crore is held in savings bank accounts with public and private sector banks.
• Equity assets stagnant: Mutual funds manage Rs 1,82,000 crore in equity assets, according to the Amfi data. This is barely 3 per cent of the total market capitalization of the Bombay Stock Exchange. Foreign institutional investors control five times that. A successful asset management business is evaluated on the basis of the equity assets it manages. However, with sovereign guarantee schemes dominating most of the household investible surplus, it is a challenge to ask individuals to take risks.
• Individuals prefer direct equity investment: Direct equity holding is estimated at Rs 22,73,043 crore, more than 11 times equity assets managed by mutual funds and a third of the BSE market cap. This means investors prefer to buy or sell shares on their own and not rely on mutual funds. Mutual funds have failed to educate this segment to allocate resources to them.
• Tough business to be in: Fidelity, one of the biggest mutual fund manager in the world, sold its India business to L&T Finance Holdings recently. They are not the first foreign company to exit. Most of the foreign exits from India were due to global restructuring or M&A. Fidelity’s exit from a loss-making India business highlights problems of doing business in India. It is not clear yet why Fidelity decided to exit. However, an exit by one of the largest mutual fund company in the world should not be taken lightly.
• Restrictive mandate: The mutual fund industry in US relies heavily on US state and private pension funds to manage a large amount of money. So Fidelity and Templeton are engaged by state pension funds to manage a portion of the pension money. In India, pension reforms are part of a major political wrangle. Politicians do not allow government pension funds to invest in equity markets. Even if some agree, they are not able to push through any reforms that could push up assets under management for mutual funds.
Here are some pointers that could help you comprehend the trend:
• Poor investor interest: Assets managed by mutual funds are falling. For the month ended March 2012, assets under management with all mutual funds plunged 13 per cent to Rs 5,87,000 crore, according to Association of Mutual funds in India (Amfi) data. This is the lowest since June 2009. This means investors have pulled out money. While March usually sees a high outflow of funds as corporate India pulls out money to meet tax and other working capital requirement, the absence of a diverse retail base hurts. The industry needs more common people to own mutual fund units and not just large corporates to park their money.
• Other attractive investment avenues: For the common man, the Indian government offers saving schemes with sovereign guarantee. With high interest rates and tax rebates, post office schemes like public provident fund or National Saving certificate offer better returns to investors. Individuals have Rs 5,19,162 crore invested in the post office or government guarantee schemes, according to Karvy, securities firm. Employee Provident fund and public provident funds manage another Rs 2,81,000 crore. This is more than the size of the total mutual fund industry in India. High bank deposit rates also reduce the risk appetite. Indian individuals own fixed deposits and government guaranteed bonds worth Rs 22,16,307 crore, according to Karvy. Another Rs 6,20,000 crore is held in savings bank accounts with public and private sector banks.
• Equity assets stagnant: Mutual funds manage Rs 1,82,000 crore in equity assets, according to the Amfi data. This is barely 3 per cent of the total market capitalization of the Bombay Stock Exchange. Foreign institutional investors control five times that. A successful asset management business is evaluated on the basis of the equity assets it manages. However, with sovereign guarantee schemes dominating most of the household investible surplus, it is a challenge to ask individuals to take risks.
• Individuals prefer direct equity investment: Direct equity holding is estimated at Rs 22,73,043 crore, more than 11 times equity assets managed by mutual funds and a third of the BSE market cap. This means investors prefer to buy or sell shares on their own and not rely on mutual funds. Mutual funds have failed to educate this segment to allocate resources to them.
• Tough business to be in: Fidelity, one of the biggest mutual fund manager in the world, sold its India business to L&T Finance Holdings recently. They are not the first foreign company to exit. Most of the foreign exits from India were due to global restructuring or M&A. Fidelity’s exit from a loss-making India business highlights problems of doing business in India. It is not clear yet why Fidelity decided to exit. However, an exit by one of the largest mutual fund company in the world should not be taken lightly.
• Restrictive mandate: The mutual fund industry in US relies heavily on US state and private pension funds to manage a large amount of money. So Fidelity and Templeton are engaged by state pension funds to manage a portion of the pension money. In India, pension reforms are part of a major political wrangle. Politicians do not allow government pension funds to invest in equity markets. Even if some agree, they are not able to push through any reforms that could push up assets under management for mutual funds.
