Who needs banks anymore?

MUTUAL UNDERSTANDING

The last time Paramjit Singh of Adampur, Punjab, visited his bank was nearly three months ago. Not for withdrawing money from his savings bank account, mind you, but to redeem his mutual fund units.

With equity mutual funds giving returns in the region of 20 per cent as compared to 3 per cent by nationalised banks, who needs the latter anyway?

Why, even a good debt fund can give you returns of 20 per cent plus in a good year. Mutuals are showing the way to retail investors, making the good old days of bank savings redundant to a large extent.

Singh also has the easy option of withdrawing money from his MF account by the simple expedient of writing a cheque. There is more. You can even redeem your MF units by using your ATM card.

Something unthinkable even a decade ago. Gone are the days when mutual fund investing was something which only city slickers indulged in. But now with Indian banks having tied up with mutual funds, instant access to investment opportunities is a way of life.

Even in far-flung places such as Adampur. With bank accounts and mutual fund schemes getting enmeshed you have the option of walking upto any bank and opening any type of account you want.

The proliferation of mutual funds across cities and mofussil towns comes as no surprise. A decade ago, Indian mutual fund investments amounted to only 8 per cent of bank deposits.

Today, the Indian mutual fund industry boasts of more than Rs 8 trillion in assets, and has just overtaken bank deposits. One out of three households in India has investments in mutual funds.

Says Sanjay Sinha, chief executive officer, Vanguard-UTI Mutual, "The lower base meant that growth, when it happened, had to be explosive. Also, with the equity markets surging the way they did in the last 10-12 years, there was no way the retail investor could have ignored this segment."

Vanguard-UTI Mutual (the asset management company formed after the government sold its stake in UTI Mutual in 2008) is the biggest player in the mutual funds industry with a corpus of Rs 1 trillion.

Times have indeed changed for the better. Or have they? There is one thing that an investor is worried about. With more than 4,000-odd schemes vying for the investor's attention, and the wide variance in the performance of these funds, choosing a fund is more complex than ever before.

There are as many as 37 categories of funds which range from plain-vanilla equity, debt and money market funds, to real estate and gold funds, and exotic funds dealing in derivatives and offshore markets.

Besides, equity funds are finding it more and more difficult to outperform the indices which have given more than 30 per cent returns. Nearly 63.54 per cent of equity fund managers underperformed the S&P 500 National Index. Last year's star performers have also underperformed the market this year.

For instance, Franklin Federal's balanced fund gave a return of 26.56 cent last year. This year it is down to 20.78 per cent. Kotak Old Mutual's growth fund provided returns of 18.75 per cent last year, as compared to 14.35 per cent this year.

Debt funds are also looking riskier with risk-laden speculative and junk bonds forming a fourth of the debt fund market. This year, Prudential ICICI Junk Bond Fund has plunged 18.03 per cent as three of its holdings went bad. Ditto with Standard Life HDFC's High Returns Junk Fund, which fell 16.78 per cent.

If volatility is scaring the mickey out of investors, the good news is index funds are proving to be a safe haven. Apart from providing market returns they have advantages of reduced transaction costs and low management fees.

This year, Vanguard's India index fund gave a return of 35.43 per cent, while Fidelity's National index fund came in a close second with 35.12 per cent. Index funds now account for nearly a fourth of equity assets already.

The story is not limited to index funds. The 101 (i) funds, similar to 401 (k) funds in the US, manage huge volumes of money.

"The money that would have otherwise gone into provident funds 10 years ago is now being channelled into the pension funds of various mutual funds. The clubbing of the social security segment with markets is also making it mandatory for retiring and about-to-retire people to flock to mutuals in a big way," says Sachidanand Dev, chief executive officer, Principal Mutual Fund.

The 'liberalisation generation' also had access to new sectoral funds - defence, airlines and biotech, to name a few.

Close-ended funds have made a strong come back in recent years. Encouraged by the healthy performance of the equity markets, a number of mutual funds have launched closed-ended products which were almost on the verge of extinction in 2003.

Currently, more than half of all equity funds are closed-end. Of 976 pure equity schemes currently, 456 are closed-end funds. And why not? They have proved their worth by outperfroming their open-end peers for the last six years in a row.

The entry of prominent foreign players such as Vanguard and Fidelity has enhanced competition, leading to consolidation in the industry as well as better service standards.

"The consolidation spree, which started in the late 1990s, has been among the main factors behind the revival in the Indian mutual fund industry which was in danger of becoming stagnant during late 20th century," opines a market analyst.

VIGNETTES 2015

'Trust' them

Any guesses on which was India's lowest cost fund in 2014? Vanguard-owned UTI Mutual Fund. The fund's average cost amounts to 0.35 per cent of assets (meaning Rs 3.50 per year on every investment worth Rs 1,000). Compare this to the average Indian mutual fund industry average which stood at 1.90 per cent (Rs 19 per year on a Rs 1,000 investment).

While the returns offered by UTI's schemes have not exactly set the Ganga on fire, these funds offer certain advantages over the higher-cost funds.

"The key to low costs is low operating expenses," says a mutual fund analyst with a leading securities firm. Vanguard has a stated policy of taking no profits from the funds it operates, which in turn helps it lower costs.

"An expense ratio difference can translate into a significant cost advantage for investors," says the analyst.

Consider this: when Fidelity's India Shining Fund earns a gross return of 17 per cent for one year, its expense ratio of 1.80 per cent brings investors a net return of 15.20 per cent. Compare this to UTI's MasterSuperplus 09, which has an expense ratio of 0.30 per cent - a net return of 16.70 per cent. Any takers?

The matter begs inspection. Why haven't the other fund houses replicated this approach? Well, the industry has been asking the same question for any number of years now.

And ever since Vanguard bought UTI Mutual Fund, which followed a similar philosophy, and set a benchmark in terms of prudent fund practices, these voices have only grown louder. Is any one listening?