At the dawn of 2009, the investment landscape poses a curious dilemma for rational mutual fund investors: where does one go after 2008 when investors’ net worth depleted by 50%? Mutual funds don’t seem to be the right vehicle for small investors any longer. But the new year could have better things in store.
For one, the year is likely to see big-ticket regulatory and policy changes, which should finally favour small investors. These measures will protect the interests of small investors who are peddled the long-term story by fund houses, which actually look at quarterly performance to address the needs of corporates and high net worth individuals (HNIs).
The stock market watchdog, the Securities and Exchange Board of India (Sebi), is finally taking it upon itself to run funds with retail investors in mind and offering the benefit of pooled investments to corporates and HNIs.
So funds could declare different NAVs for a fund for retail investors and institutions, and the way the funds are managed may also change. The mutual fund industry will focus on the quality of investment and not the quantity of funds. The regulator may do away with, or at least, check the gross misuse of the tax arbitrage that corporate investors and HNIs get from investing in mutual funds. For instance, early withdrawals will not be allowed for fixed maturity plans and portfolio declaration will be insisted upon.
• There will be no premature withdrawal from closed ended schemes.
• Funds to declare portfolio on closed-ended schemes.
• Closed-ended schemes will have to be listed.
• New fund houses to set up shop.
• Life-stage funds are likely to become prevalent.
|50% is the average loss of retail fund investors in 2008.|
If the regulator decides to segregate retail investors from others, the AUM is likely to have fewer shocks, which will boost investor confidence. So you will not pay for others’ follies in a falling or a rising market. You might even get preferential treatment because of the quality of your investment and not the value of investments of bigger players. This is already seen in the way the tax-saving funds behave, but the same benefit could be available in other equityoriented funds.
On the product front, if ‘overseas’ and ‘commodity’ ruled the markets in the past two years, 2009 is likely to see a greater domestic play, with fewer fund launches. Says R. Swaminathan, head, institutional business, IDBI Capital: “Fund houses will focus on sticking to their investment mandate and on performance in the coming year.” With the capital market movement not being very active, mutual funds will play a big role in strengthening the flow of funds. Most market cycle recoveries start with debt funds, followed by dividend yield funds; 2009 will see action in both. There will be new offerings that will focus on both short- and mid-term debt which is sought by many small investors.
Fund houses will also gain from the opening of the pension sector. This means that fund houses will manage retail money for the long term. The opening up of the sector will also see increased competition, which can further lower the cost of managing funds. All this will benefit the retail investors, who have been paying more for fund management, despite investing for the long term.
It is also likely that there will be a greater focus on capital protection plans as fund managers seek to invest in long-term debt. The return from these funds will largely come from interest payments, as any gains from capital appreciation are unlikely.
Certain capital protection funds will also take the cue from the available arbitrage benefits and use them to generate significant returns, while keeping the capital protection intact. On the service front, the fund industry will focus on investor education and will seek to convince the investors about the virtues of staying invested through SIPs over market cycles. These education programmes will also focus on risk and return and how different funds are meant for different tenures.
Already, fund houses’ communication with investors is on the rise; this is likely to go up further. The industry is likely to increase its use of technology, especially when it comes to investor communication.
“Fund managers will become more answerable to investors and will have to make sure that they don’t seek alpha alone, but also manage the risks in the portfolio in a better way,” says Swaminathan. This will mean that new funds will face a stiff challenge when starting operations; there is every possibility that some of these fund houses will focus exclusively on the retail segment and come up with products tailored for small investors. Lifestyle funds are likely to gain ground, taking into account asset allocation, balance and reinvestments. Beating inflation is likely to be the benchmark set by most fund houses.
Investors should gain from tweaking their portfolios to capitalise on the opportunities that come up. Given the kind of volatility that the fund industry has experienced this year, 2009 will be a year for consolidation, with new players trying to find a footing and the existing players hoping to consolidate their positions.
Don’t play too safe and lose out on opportunities; 2009 will be a good start for holding on to longterm positions.