Vipul Sarvaiya is a 53-year-old distributor of financial products, based in Uran, 65 km from Mumbai. He has lately been struggling to convince his clients to hold on to their mutual fund units. Since October last year, when the equity market started to rally, many of Sarvaiya's clients have moved out of mutual funds. "For the past few years investors have not made money on their mutual fund investments. With the market touching new highs, they were able to recover their cost and, therefore, many exited by selling their funds," says Sarvaiya who has been selling mutual fund products for the past 25 years. "People who have moved out have a simple argument - they would have earned more had they kept the same money in fixed deposits. Today no fresh investments are coming into mutual funds. They all go into fixed deposits and bonds."
Indeed, in the last one year up to November 30, 2013, the equity assets under management (AUM) of the entire mutual fund industry has fallen by 10 per cent even though the BSE Sensex went up 7.5 per cent.
Many fund managers have blamed it on the skewed market which favours select stocks. "The phenomenon is seen across the globe. Passive investment is in favour and this is the reason many active funds have underperformed," says Kenneth Andrade, Head Investments, IDFC Mutual Fund, which has been among the top performers. Fund managers attribute the trend to the underperformance of certain key sectors such as infrastructure and energy as well as the lack of participation of mid-caps and small-caps in the recent rally.
Star ratings of mutual funds by various rating agencies, too, have proved unreliable. These ratings are based on a fund's historical risk-adjusted performance compared with other funds in the same category. "The star ratings and relative returns have to go. These have been deceptive and investors have been taken for a ride. We have decided to focus on absolute returns and only sell funds to investors that have performed without actually considering star ratings," says Rajiv Bajaj, Vice Chairman and CEO of Bajaj Capital, a mutual fund distributor.
He is doing it by concentrating on capital protection funds that focus on protecting the invested capital at any given point in time. "The primary focus of investors is protection of their capital which many mutual funds have not been able to ensure in the past few years. This has seen loss of confidence among investors who are moving out of the market." Bajaj seems confident that capital protection funds even on underperformance will give investors 100 to 200 basis points more than savings deposit rates of four per cent.
The challenging times are a wake-up call for the mutual fund industry. "It was a cruel year for actively managed funds, but the fact is only 150 of 750 funds are investment grade. The time has come for the industry to focus on solutions rather than products," says Sanjay Sinha, Founder and CEO, Citrus Advisors, a Mumbai-based financial advisory firm. Solutions are packages which help investors attain their financial goals.
Some funds have already taken the route. Puneet Chaddha, CEO, HSBC Mutual Fund, concurs. "As a fund house we have taken a conscious decision to offer solutions to clients rather than just products," he says. Mutual funds will have to adjust to this new reality. Going forward giving healthy returns and selling solutions rather than products will be the mantra to survive and grow in the industry which seems to have a large pool of players but is actually dominated by a few.
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