Faced with increasing equity outflows, the mutual fund industry needs to come up with measures that will help sustain business growth.
In the last one year, both newspapers and television channels have often reported that the mutual fund industry is in trouble. For example, equity schemes have seen net outflows of Rs 14,624 crore in the last six months – Rs 7,000 crore in September alone.
But the numbers look worse when one looks at the fall in the number of folios. Since March 2010, the number of folios in equity-oriented schemes has fallen from 41.12 million to 39.44 million – a sharp fall of 1.6 million. A single folio is the investment of an individual in a mutual fund scheme.
Yes, with the Sensex scaling 20,000 points, some of this was expected. Many investors who entered the market in 2007 were stuck because of the sharp fall that followed. After three years, they have got a chance to exit at levels seen in early 2008. So, many could have opted to book profits, or if industry experts are to be believed, even after just recovering their money.
The question facing the industry, therefore, is quite serious. Equity investments are the main bread earner for mutual funds. And, while the average assets under management (AUMs) (equity schemes plus equity-linked savings schemes) have risen in the last six months – from Rs 198,120 crore in March 2010 to Rs 212,958 crore in September – it is mainly due to rise in the value of stocks in the rally. The Sensex was up a little over 13 per cent during this period.
While fund houses are coping with the entry load ban imposed from August 1, 2009 by trying to invest more in creating infrastructure and educating investors, things are far from satisfactory. The equity head of a fund house says, “Investments in creating infrastructure or holding investor-conferences in smaller towns are up. But, it is too early to yield concrete results.”
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So the main question facing the industry is how does it raise money in their equity schemes?
Industry experts like Dhirendra Kumar, CEO, Value Research, a mutual fund research agency, feel that fund managers need to pray that the growth in the stock market is more stable now. “Unlike earlier market surges, this one has been quite erratic. Investors enter the market only when the rise is stable,” says Kumar. The industry’s main challenge is to drive growth in systematic investment plans (SIPs). Till the SIP segment stabilises, money will come in fast but go out quickly as well.
Says Nilesh Shah, chief investment officer, ICICI Prudential Asset Management Company, “While fund houses have been talking performance, investors are looking at safety and stability.” He suggests that if part of the provident fund money is used to invest in the stock market, it would have a positive impact because of two reasons: One, investors would learn the importance of regular/forced savings through the provident fund route. Two, long-term returns would give them assurance about the stock market.
While the mutual fund industry continues with its initiatives to expand its asset base, especially in the equity fund category, experts believe that a lot remains to be done. In the new regime, Sanjoy Banerjee, executive director, ICRA Online, feels that the industry association, the Association of Mutual Funds in India (Amfi) needs to step in to educate investors. And the education should be two-pronged.
“Amfi should put out advertisements whereby investors are told that mutual funds have liquidity and they can help meet individuals’ financial goals,” he says.
In an environment where unit-linked insurance plans (Ulips) have been giving tough competition to mutual funds as an investment product, the industry needs to aggressively drive home the message – mutual funds are more liquid than Ulips. That is because, under the new regulations while fund houses have been talking performance, investors are looking at safety and stability. Investments in Ulips are locked-in for a period of five years from September 1.
Similarly, as mutual funds are also competing with fixed deposits (FDs) as a long-term saving product, investors need to be told that the returns can be higher, if they stay invested for a long period, at least as long as a three or five-year period.
“The education should amplify this by using data of multiple cycles – three, five and 10-year periods – to show investors the benefits of mutual funds,” adds Banerjee. In addition, investors need to be educated that returns from mutual fund schemes cannot be 30-40 per cent annually. Typically, one should be happy with inflation plus 6-8 per cent.
An important point that they can put across to investors is that mutual funds have turned ‘cheaper’ after the ban of entry loads, especially in comparison to Ulips and other insurance products. But there has to be some introspection as well. Industry experts strongly feel that fund houses should simplify products.
“Besides finance professionals, few people would understand the meaning of a large-cap fund, a mid-cap fund, a growth story fund and so on... Especially, when there is no definition of how does a fund manager arrive at these themes,” said the CEO of mutual fund distribution house.
There is also a case for scheme consolidation. With many fund houses having more than 100 schemes (equity plus debt), it is really difficult for even them to decide which scheme to promote. “Fund houses need to focus on good-performing brands in their portfolio and promote them,” adds Value Research’s Kumar. This, according to Kumar, would help them concentrate on a few schemes. Important, the marketing rupee would be spent better.
At present, few players advertise their existing schemes heavily. For instance, DSP Black Rock is presently advertising its scheme DSPBR T I G E R launched in May 2004. The scheme already has a corpus of Rs 3,063 crore and has given annual returns of 23.03 per cent in the last five years. Similarly, there are other fund houses like HDFC and Franklin Templeton who have winners that are advertised. But it is not an industry practice.
Like K N Vaidyanathan, Executive Director, the Securities and Exchange Board of India, said in the BS Mutual Fund Round Table, “The industry needs to create schemes that are broad-based such as the HSBC India Equity that manages Rs 35,000 crore.”
Schemes with bigger corpus will ensure fund houses better profitability or the extra buck which they could perhaps use for promoting their businesses further.
The good news is that the recent boom has not seen fund houses launching equity schemes aggressively. It could be partly because of the entry load ban that limits the expenses that they can make to promote a new scheme. Also, heavy outflows from the equity segment are definitely dampening the spirits. On the whole, these are testing times. As Value Research’s Kumar puts it, “There are no short-cuts anymore.”