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The great Indian mutual fund illusion

Positioned as instruments that are safe (safer than venturing on one's own into equities) and that promise attractive returns (more attractive than bank deposits), mutual funds are supposed to be the retail investor's best bet. Why is it then that 85-90 per cent of the assets managed by Indian funds are those of institutions and high net worth individuals?

By Mahesh Nayak | Print Edition: August 12, 2007

Retired and a father of two, 56-year-old Yusuf Unwala doesn't quite fit the stereotype of a swaggering investor strutting his ample stuff on an upbeat Dalal Street. Yet Unwala is just one of the teeming millions who believe in the power of equity. The ex-banker prefers to buy and sell shares directly in the market, via a broker-an investment gambit that investment planners would slot higher up on the risk scale, given Unwala's profile.

Mutual funds would seem a safer bet for Unwala, who's been active in the Indian markets for the past 15 years.

Yusuf Unwala
Retired bank employee
But singed fingers notwithstanding, courtesy a couple of securities scandals along the way, Unwala prefers to offload his savings to a broker rather than mutual funds (a few months ago his daughter too began investing directly in the share market). "The known devil is better than the unknown devil," quips Unwala. "The trust and faith built over years with one individual can't be taken away in a day. Unlike a mutual fund, my broker gives me personalised service at a cheaper cost.

Also, the purpose of investing in equities is to multiply your savings faster and not just beating a benchmark." Unwala has a portfolio worth Rs 10 lakh, half of which is in a portfolio management scheme (PMS) with the Mumbai-based Angel Broking.

Unwala is clearly not a great advertisement for India's 30 mutual fund houses (and their 756 schemes), but then this isn't an isolated individual who trusts his friendly-neighbourhood broker more than a fund house, and who is enamoured of the chunkier returns that the "known devil" delivers. Across the length and breadth of the country, the bulk of the estimated 20 million investors appear to be reposing more faith in investment alternatives other than MF schemes; these include plain vanilla bank deposits, or insurance products or, like Unwala, buying into stocks (either in the cash market or via derivative instruments, either online or offline).

M. Damodaran
Chairman, Sebi

Indeed, mutual fund penetration as a percentage of household savings is a meager 3 per cent in India, as compared to 16 per cent in the West. Says Pankaj Shah, Regional Head-South Mumbai, Angel Broking: "We give the right advice backed by research, we are available 24X7, and best of all we make money for the client-which is why their faith has been restored in brokers like us."

On the surface, mutual fund (MF) clients too, it would appear, have plenty of faith in this Rs 4 trillion (Rs 4 lakh crore) industry. Proof of that loyalty lies in the numbers themselves, what with the assets under management (AUM) of MFs doubling in the past 18 months.

Most of those MF clients are corporates. Consider the numbers: Of the total industry AUM, as on March 31, 2007, of Rs 3,28,745 crore, only 42 per cent was individual money. Compare this picture to the us scenario, where 87 per cent of the total assets managed by us fund managers is individual money. It doesn't end there: Of this 'individual' stash, only 23.6 per cent is retail money, the rest being funds from high-net worth individuals (the Securities & Exchange Board of India-the guardian of the small investor-defines a retail investor as one with an investible surplus not exceeding Rs 1 lakh). Avers Krishnamurthy Vijayan, whole-time Director & ceo, jp Morgan AMC: "Retail money would be around 10-15 per cent of the industry's AUM."

The upshot: The mutual fund industry, which ostensibly exists to multiply the small investor's hard-earned money, has been hijacked by Corporate India. Another way to look at the lopsided picture is that the MFs just aren't trying hard enough to woo the retail Joe.

That may be why M. Damodaran, Chairman of the investor watchdog, sebi, chose to rap fund managers on their knuckles at a recent funds summit organised by the Confederation of Indian Industry (CII). "The MF industry seems to be prematurely patting itself on the back," thundered Damodaran.

Krishnamurthy Vijayan
Director & CEO, JP Morgan AMC


"The question is: 'who has made what sort of growth?' The numbers provoke more questions than provide answers." Pointing out that liquid funds were "not the only way to grow," the SEBI Chairman added that "the large investments by corporate houses in MFs could generate conflict of interest and something more needs to be done to get more types of money into mutual funds."

So why is that most Indian retail investors in the country are fund-averse, either preferring to let their money gather moss in bank vaults or-winging to the other extreme-courageous enough to grapple head-on with bulls and bears amidst periodic bouts of stomach-churning volatility? Rachana Baid, Assistant Professor, Indian Institute of Capital Market, has an explanation for this phenomenon.

"It's more of a social problem. Unlike the West, the lack of social security in our country has seen mutual fund investment as the sixth or seventh layer of saving." Forget the unorganised sector, even in the organised sector only 11-13 per cent of the working class will enjoy pension benefits after retirement. The rest will have to find ways to build assets post-retirement in an era in which many of them will go on to live up to 85-90 years.

From the funds' point of view, chasing corporate money gives them the obvious advantage of size. The larger the assets of a fund, the more likely it is to attract even more investors. Says Vikaas Sachdeva, Country Head-Business Development, ING MF: "Size matters and that's the reason why everyone is chasing AUMs. Irrespective of a fund manager's ability to generate returns, investors tend to invest in asset management companies (AMCs) with higher AUMs." What is more, size assumes significance in an industry that's still only 14 years old, and is still seeing a steady stream of new entrants who are attempting to play catch-up (although UTI was the first mutual fund to be flagged off in 1964, the private sector was allowed into asset management only in 1993). There's only one way to open the account.

Sanjay Prakash
CEO, HSBC AMC
As Arindam Ghosh, Head of Asia Pacific, Mirae Asset Management, a Korean major in the process of setting up shop in India, says: "Our initial strategy will be to focus on high net-worth individuals (HNIs) and institutional money." Adds Nilesh Shah, Chief Investment Officer & Deputy Managing Director, Prudential ICICI AMC: "Relatively, we are still new as an industry. It's only in the last five years that a good market has helped us to build confidence and a comfort level amongst investors." As of 2006, the Indian MF industry accounted for just 0.26 per cent of the total assets managed by mutual funds across the globe.

One way to increase retail penetration is for funds to go up-country, and penetrate into smaller cities and towns. That's something that every fund house worth its AUM is professing to be doing. But the numbers just don't tell the story (see The Metro Fixation). At the end of 2006, 81 per cent of the industry's AUM came from the top eight cities. If anything, the contribution of the top eight metros has only increased over time-in 2001 it was 78 per cent. Whilst a few funds like Reliance MF and SBI AMC have been making headway in tier II and tier III cities, there are those who wonder whether it's worth all that effort when the big cities aren't yet saturated.

Asks ING MF's Sachdeva: "When tier I cities themselves are untapped, why would someone want to make haste and spend resources in tapping uncharted territory? When the money that I can mobilise from one centre of suburban Mumbai is equivalent to the entire collection of Indore, why should I be in a hurry to enter such markets?" He adds that the youth in the metros working in sunrise industries like it services and business process outsourcing are an attractive target market that is waiting to be tapped.

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