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Who am I?

MF industry has no clue as to what they stand for. They can't even call themselves retail as more than two-third of the money managed by them are corporate and institutional money.

twitter-logo Mahesh Nayak        Last Updated: November 13, 2015  | 12:08 IST

Mahesh Nayak, Senior Associate Editor
There seems to be a serious identity crisis going on in the Indian mutual fund industry. Unlike banks, fixed deposits which stands for assured returns or for that matter insurance stands for taking care of one's risk, the mutual fund industry has no clue as to what they stand for and for whom do they serve or stand for.

They like to call them money managers but can't be called pure money managers because their peers including insurance sector too perform the same function. There is cat & dog fight between them when it comes to returns and whenever there is a comparison, the insurance sector stands to outscore them but with insurance scheme being closed one can't have apple to apple comparison. Few years back the market regulator was trying hard to give mutual fund industry the exclusive status of money managers, but strong lobby from the insurance sector and their regulator as well as the government sabotaged the entire idea.

MF industry can't even call themselves retail as more than two-third of the money managed by them are corporate and institutional money.

Many would not agree, but in 15 years not much has changed in the MF industry. Efforts have been made by regulators to make them focus on more retail investors, but it has not had much of success and the MF industry still remains an industry that is only chasing money or asset under management (AUM). In the past one could say it's was a coterie of ex-bankers and ex-Unit Trust of India (UTI) officials trying to run the mutual fund industry and only thinking about their own interest and the interest of the mutual fund which they ran. Sad part was mutual fund that was run by people who didn't have a tag of being an ex-banker or ex-Unit Trust of India didn't enjoy the blessing of the coterie. It was like a closed boys club who used to purely focus on garnering money. Today the closed boys club may not be strong, but seems to be a confused lot. The latest being active fund management versus passive fund management.

From August 2015, employee provident fund (EPFO ) has decided to put 5 per cent of its incremental pension fund money into equities. EPFO have decided to invest through exchange traded fund (ETF ) than directly buying stocks.  In fact some of the corporate treasury have also started investing through ETF in the market. To service EPFO, some of the large mutual fund houses have started providing ETF, a passive product that mirrors the benchmark indices. This is not a change in philosophy, but a strategy to garner pension money. In fact a few days back one of the top mutual fund houses bought a mutual fund that was exclusively providing ETFs. The sad part is rather than being straight forward and admitting the reason for buying an ETF mutual fund house they are trying to justify how going ahead passive fund returns overtakes active fund returns. (In fact there is no evidence that equities as an asset class delivers positive returns in the long run.) One of the top five MF have also got a separate person to sell ETF and his remuneration is decided on the growth in ETF AUM he was able to garner at the end of each year. Some have even started a separate sales department for selling ETF. After all the sole interest is to garner AUM.

But reality is bitter and bites. Today diversified funds have delivered 50 to 60 per cent more returns than ETF funds. Then how do you sell ETF to investors. Interestingly, the fund house that acquired the ETF fund house - primarily sells its MF schemes through third party distributors. Second distributors won't sell ETFs due to low commission compared to selling normal mutual fund. So in terms of returns and commission in both quadrants selling ETF becomes difficult to retail investors.

Large mutual fund houses are finding it difficult to manage huge AUM as it impacts returns and therefore they are finding different ways to garner AUM so that the income tap remain robust. Even the legendary investor Warren Buffett has maintained it would be easy for him to manage small amount of money to deliver return beating the benchmark by huge margins than delivering returns with huge sum of money in hand.

There are only a handful of fund houses that differentiates from the rest. Differentiating reaps good results as one of them last week saw investor Prem Watsa's company Fairfax picking stakes in the MF. It's high time Indian mutual funds should carve out a clear and a definite identity for themselves than just being a me-too as it won't help in an industry that despite recording all-time high AUM has still only scratched the surface.

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