The Indian mutual fund industry has clocked an impressive growth in the past five years. Its assets under management (AUM) has registered a compounded annual growth of 28% during 2006-10. However, the AUM of equity funds and balanced funds has grown only 20% during the same period. These funds’ net sales in 2009-10 have been the lowest in recent years.
A report by PricewaterhouseCoopers, ‘Indian Mutual Fund Industry—Towards 2015’, analyses the current state of the industry in India and assesses the impact of recent regulatory changes on the sector. It also looks at the reasons for low retail participation and offers suggestions to improve it. Excerpts from the report:
The AUM of mutual funds grew by 47% in the 12 months ending 31 March 2010. However, this rise was driven by investments from the corporate sector. Retail investors accounted for only 26.6% of the total mutual fund investments, a marginal increase from 21% the previous year. This, despite the 84% growth in the AUM of retail investors, the highest for any segment.
Banks, financial institutions (FI) and FIIs accounted for an insignificant fraction of the total investment in mutual funds. While banks and FIs witnessed a 6% drop in their AUM between March 2009 and March 2010, the AUM held by FIIs increased barely by 5%. Given the rise in the markets during the period, it is clear that these investors withdrew considerably.
Figures indicate that investors in equity funds do not realise the long-term growth potential of equities. The average equity fund investor stays with it for nearly 18 months. According to the Association of Mutual Funds in India (Amfi), nearly 38% of retail investors exit equity funds before they complete two years. Even in the HNI segment, only 48% of people remain invested in equity funds for more than two years. The growth in equity base was particularly sluggish in 2009 and was burdened with a huge outflow of funds.
Another measure is the segmentation of clients, wherein the lower rungs of revenue earners are being encouraged to transact online. Also, retail strategies are being modified to optimise efficiency. However, this has also resulted in a group of distributors, which is using the regulatory change to acquire new clients by luring them with attractive funds but selling them high-margin products such as Ulips.
It has become increasingly important for distributors to encourage financial literacy among investors as they depend largely on the volumes generated. This can happen only when people are assured that investing in mutual funds yields realistic returns with regard to risk. Although investor education is being stressed continuously, segmenting the client base and aligning product offerings to cater to the requirements of customers are equally important.
Diverse Range Of Products: In the US, fund houses offer products that cater to the entire life cycle of an investor. In India, mutual funds have to compete with bank deposits and government securities. To make mutual funds more acceptable to retail investors, fund houses will have to offer comprehensive financial planning to meet their investment needs. Regulation For Distributors: Though certified by Amfi, many distributors fail to provide professional advice to investors, resulting in the funds being mis-sold.
Mutual funds need distributors, who can guide investors to the products that suit their requirements. Trading Through Stock Exchanges: Recently, Sebi permitted trading of mutual fund units on recognised stock exchanges. This can provide greater depth and reach to mutual funds. Real Estate Mutual Funds: Real estate funds could be the next big thing for the industry, provided regulators bring in more clarity on monitoring and tax-related issues.
