Funds as planners

Over the next 10-12 years the MF industry in India will mushroom to an assets under management level of $1 trillion. This will propel India to the global top five rankings.

Ajay Bagga | Print Edition: August 23, 2007

Ajay BaggaGlobally, mutual funds (MFs) have been in existence since 1924. Today a high proportion—44%—of assets is in equities, 23% in money markets and 20% in bonds with the remainder in hybrid funds. The Americas account for 57% of these AUMs, with Europe a distant second with 33% and Asia-Pacific at 10%.

However, the last 10 years have seen a strong growth in Asia-Pacific fund assets led by Australia, Singapore, Hong Kong, South Korea, China and India. In India, the 43-year-old industry has leapfrogged in the past three years to a sizeable $110 billion of assets as of 31 July 2007. With 32 fund houses offering over 500 schemes to approximately 2.5 crore investors, it is a vibrant, sunrise industry.

Let’s take a look at what we can expect in the next few years:

Entry of international players: Over the next 10 years, all major international players are expected to enter the Indian market. In addition to the existing 32 players, there are nearly 20 other players in various stages of preparedness for an Indian launch. The industry will hence be marked with a proliferation of offers from a number of players.

Concentration of AUMs: As is the case globally, in India too, the top players will account for a sizeable chunk of the MF industry’s assets. At present the top five AMCs account for 50% of the AUMs, the top 10 AMCs hold 73% and the bottom 17 account for just 11%.

Scheme size: The biggest MF schemes today in India have a size of $4 billion-plus. Over the next 10 years, top-performing Indian schemes will reach the global levels of $20 billion in assets.

Product innovations: Apart from product innovations like capital guaranteed, capital protected and life stage products, new asset classes like real estate MFs, commoditylinked funds, multi-strategy funds as well as affinity-based products like Islamic funds and socially responsible or ethical funds will be introduced and will be significant growth drivers. Potential adjacent spaces will be filled up with managed and wrap accounts. Exchange traded funds (ETFs) and fund of funds will offer customers wider choice and access as well as customisation.

Increasing penetration: The share of mutual funds in the households savings is an abysmal 3%. The average mutual fund investor is Sec A, urban, male, 40 years old with investments in direct stocks and a house ownership. Per capita income has grown 2.6 times in the past 10 years. From the current levels of Rs 29,800, we expect the per capita income to grow at 15% a year in the next five years. This will release a huge investible surplus in the range of $250 billion a year, growing at over 15% a year. It will lead to households investing a larger portion of their savings into MFs. Some segments like software sector employees already have an 18% penetration. This will grow to around a 15% penetration for the entire urban population over the next 20 years, translating into an investor base of 10-crore plus.

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