Domestic mutual lag global peers

AUM at 4% of GDP in '02 vs 61.27% in US

Despite a huge growth in assets under management (AUM), the Indian mutual fund industry still lags behind other countries as a percentage of gross domestic product (GDP), both in the developed and the developing world, according a Crisil sector report.

The AUM of the Indian mutual fund industry in proportion to GDP has increased from three per cent in 1999 to four per cent in 2002. In comparison, the AUM of the mutual fund industry in Australia accounts for 88.22 per cent of the GDP, 19.95 per cent in Brazil and 10.54 per cent in Germany.

In the US, the AUM of mutual funds accounts for 61.27 per cent of the GDP, 21.73 per cent in Taiwan, 18.81 per cent in the UK and 101.08 per cent in Hong Kong.

"There is a huge latent growth potential as the industry size is very low compared to developed markets," Crisil said in its report.

Meanwhile, the domestic mutual fund industry has grown by around 200 per cent from Rs 47,000 crore in March 1993 to Rs 1,40,000 crore in December 2003 due to a shift in investor preference for mutual funds and growing presence of private sector fund companies, according to the Crisil sectoral study.

"The shift in preference towards MFs has been facilitated by fiscal incentives, increasing returns from debt mutual fund investments due to the decline in interest rates and the growing number of choices available to investors," Crisil's (director-financial sector ratings) Raman Uberoi said.

Going forward, the competition in the Indian mutual fund industry would intensify and fund managers would need to continuously innovate and deliver relevant products to attract investors, the report added.

Excluding the Unit Trust of India (UTI), however, the growth has been eight-fold in just under five years, from Rs 15,200 crore as in March 1999 to Rs 1,20,300 crore in December 2003, Crisil said.

The gradual change in the investors' risk profile and the Association of Mutual Funds of India's (AMFI) efforts for an appropriate regulatory environment have also contributed to the growth of the mutual fund industry, it said.

Interestingly, only around 20 per cent of the funds are allocated to equity categories and rest is invested in debt.

"That is mainly because of the risk-averse behaviour of Indian investors as well as the high returns offered by debt mutual funds till 2002-03," the report said.

Commenting on the volatility of returns and risks, Crisil's report says equity funds have shown a reduced risk behaviour over the last two years while debt funds are exhibiting greater risks in their returns.

Crisil said this could be attributed to the increased volatility in the debt markets due to the uncertainty over interest rate movements.

The debt funds' volatility has, in fact, more than doubled from 1.1 per cent in January 1999 to 2.9 per cent in January 2004, it said.

On the returns front, Crisil said debt funds have gone through a full cycle. While their returns increased from 11.3 per cent in January 1999 to 18.6 per cent in January 2002, only to fall sharply to 5.8 per cent in January 2004.

Meanwhile, equity funds have outperformed the index in times of boom in equity markets but have underperformed it in bear periods. These funds gave excellent average returns of 82.39 per cent in the one-year period ending January 2004 as compared with a Sensex return of 67.37 per cent.

Debt funds have registered a strong performance in the first four years on account of falling interest rates. But this excellent performance by debt funds has slowed down recently, largely because of uncertainty on interest rate trends.