Mutual fund returns decline

The current financial year has proved to be a year of plenty for India's mutual fund industry as it's asset size crossed Rs 3 lakh crore for the first time. The year also marked an entry of global fund houses like J P Morgan, UBS, AIG and Nikko, while Standard Chartered made an exit from its India AMC business.

The Indian mutual fund industry, hailed as the top return-yielding destination, has lived up to its reputation. Some of the best performing schemes gave a return of up to 65 per cent during the 2006 calendar year. Going by their performance in the last 10 years, eight Indian funds adorn the list of global top ten, while on a 3-year horizon, six of the 10 best performing schemes are from India, a recent study by market research agency, Lippers said.

However, 2006-07 saw mixed returns for mutual funds. Compared with the previous financial year, the returns have declined, mainly due to a fall in the stock prices. The net asset value of most equity funds fell nearly 10 per cent since January 2007. Sector-specific funds, such as auto, FMCG and healthcare yielded negative returns. In spite of the fluctuations in the prices of banking and IT stocks, funds dedicated to these have given healthy returns on investments, while diversified and tax saver schemes have managed to perform better than their respective benchmarks. 

YEAR OF PLENTY
Fund	Category	One year returns (%)	Benchmark performance
Equity	Technology	35.98	BSE IT : 29.11
Equity	Banking	20.10	BSE Bankex : 26.36
Equity	Index	16.74	Sensex : 18.46
Equity	Other speciality	15.19
Debt	Floating rate long term inst	8.92
Hybrid	Equity oriented	8.77
Equity	Diversified	7.65	BSE 100 : 13.92
Equity	Tax planning	5.41
Equity	Pharma	-3.83	BSE HC: -4.42
Equity	Auto	-4.22	BSE Auto : -6
Equity	FMCG	-8.15	BSE FMCG : -22.69
MF Returns are one year average percentage from 26 March 06 Source : ValueResearch

Following the ongoing corrective phase of the stock markets, the fund houses are witnessing a rising bias among the retail investors towards assured returns-providing fixed maturity plans over equity schemes. Since January, the MF industry has witnessed the launch of a phenomenal number of FMPs, that provide around 10 per cent interest over a one-year time horizon.

The industry's Asset Under Management (AUM) was Rs 2,31,045 crore on March 2006, and swelled by nearly 52 per cent to Rs 3,53,309 crore till February this year. During the last two years, the country's stock markets have grown by nearly 40 per cent each year, while MFs have out-smarted them by growing at around 50-60 per cent.

The size of AUM in India is around $ 68 billion, which is much below the country's GDP of $ 780 billion.

In many developed economies, the AUM size is more than that of the nation's GDP. The analysts interpret the existing gap as an opportunity for the industry to grow in the coming years.

"In the next three years, the AUM size would go up by roughly three times to cross the $200 billion mark. The number of players will also double from today's 32. Many firms will go for consolidation and will add new partners or sell off their business to foreign partners," Ajay Bagga, CEO of Lotus AMC said.

The year also saw the launch of the much-talked gold exchange traded funds. However, the Securities and Exchange Board of India is yet to issue final guidelines for launch of realty mutual funds, while the proposal to allow MFs to invest in the commodity sector is pending with the government.

During the fiscal year, the stock market witnessed a meltdown in May 2006, when it corrected to the extent of 30 per cent.

It is witnessing volatile movements since February, resulting in a correction of around 10-15 per cent. During the May fall, the mutual fund industry saw a large number of redemptions from liquid as well as equity schemes.

Analysts say that the year 2007 might not reflect the kind of returns experienced in 2006. As an indication of things to come, the markets have been volatile and NAVs of most of the equity schemes have gone down post January 2007.

"The markets have been choppy since the last few days. The decline has been mainly because of global cues and not due to domestic reasons. My advice to the investor is to stay invested with a long-term horizon and diversify his portfolio using newer options like gold ETFs and overseas investment schemes," a fund manager from SBI mutual fund said.

In a move to bring the liquid funds on par with the other investment options used by companies and the high tax bracket investors to park money, the government has upped the dividend distribution tax on these funds. However, these funds still attract lower taxation as compared with the bank deposits.

The growth of the economy and stock markets has resulted in a larger number of investors taking the mutual fund route to enter the capital market.

The increasing inflow of investment in the tax saving Equity Linked Saving Schemes (ELSS) shows demonstrates that the retail investor is increasingly relying on the fund market. However, despite the growth of number of investors, the liquid schemes continue to bring the most funds for the industry.