The mutual fund industry, which has been in the dumps because of a lack of interest from the investing public, is slowly and steadily making a comeback.
Market analysts said the factors contributing to a revival of interest in mutual funds are the poor state of the primary capital market, the loss suffered by investors when some non-banking financial companies (NBFCs) went bankrupt, gold losing its glitter as an investment, the decline of the real estate market and the consistent fall in bank deposit rates.
But the shot in the arm for the Indian mutual fund industry came from the latest Reserve Bank of India (RBI) announcement allowing it to invest in the overseas markets with an overall ceiling of $500 million and an individual cap of $50 million, the analysts said.
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Industry sources said Unit Trust of India, the countrys largest mutual fund-cum-financial institution, would be the first one to jump on to this overseas bandwagon. This will allow local investors to diversify their risks and take advantage, said UTI chairman GP Gupta. We hope to mobilise at least Rs 15,000 crore ($4.28 billion) this year, said the chairman of a Mumbai-based mutual fund.
The RBIs new measure will open up fresh investment avenues to Indian mutual funds as well as help develop fund management skills, remarked Pratip Kar, executive director of the Securities and Exchange Board of India (Sebi).
A mutual fund manager described this as a prelude to capital account convertibility.
The RBI, in its new credit and monetary policy, has also allowed money market mutual funds (MMMFs) to invest in rated corporate bonds and debentures with a residual maturity of up to one year. It has also reduced the minimum size of the issue of commercial papers from Rs 10 lakh ($28,571) to Rs 5 lakh ($14,285) and a minimum transaction size to Rs 5 crore ($1.43 million) from Rs 10 crore ($2.85 million).
This will definitely help MMMFs get more business and enable them to pay higher returns to their investors, said UTIs Gupta.
Echoing Guptas views, LIC (Life Insurance Corporation of India) Mutual Fund chief executive RG Sharma said that MMMFs are by nature considered to be safe and tilted towards gilt instruments.
However, there is a feeling that since interest rates are higher in India, there would not be a rush of mutual funds to invest abroad.
National Stock Exchange managing director RH Patil does not agree with this and says that the rate of returns abroad will be as good as in India. But volume of business and proper management would go a long a way in the fund becoming successful in the overseas market, Patel said.
Already, Sun F&C Asset Management has filed papers with the Sebi for foreign investment, thus becoming the first Indian mutual fund to do so. According to its chief executive Nikhil Khattau, the asset management company (AMC) has placed proposals for setting up two open-ended funds, a $50 million equity fund to be followed by a global income fund of a similar size. There would be a minimum investment level of Rs 5,00 crore ($142.85 million) for each investment.
Sebi chairman DR Mehta said he would soon issue guidelines for mutual funds to invest in the overseas markets. But they will have to first get themselves registered in the respective countries for which they will have to raise their standard considerably, he said.
On the domestic front, Mehta said, Sebi has allowed JM Mutual Fund, GIC Mutual Fund, Escorts and Reliance Mutual Funds to launch new schemes. The Sebi sources said it will also clear the pending applications of other mutual funds. New mutual funds in the offing are Tata Mutual Fund, SBI Mutual Fund and Kothari Pioneers.
The Sebi sanction comes after a four-month moratorium on new mutual fund schemes following the recent crash of NBFC, the CRB Ltd. The idea of the ban was to inspect the records and accounts and rectify the deficiencies in the past schemes, Mehta said.
In fact, we hold regular meetings with the Association of Mutual Funds of India (AMFI), he said justifying the ban. Following the CRB scandal in which depositors lost several millions of rupees, there was also a row on whether NBFCs come under the RBI or Sebi.
Also, the settlement of the Canstar tangle, where Canbank Mutual Fund promoted by the public sector Canara Bank failed to pay the promised redemption price to unit holders, helped boost the image of the mutual fund industry. The Canstar issue was amicably settled in September 1997, when Canara Bank announced a one-time offer to purchase Canstar and Can 80 L units from individual investors at a price of Rs 23 per unit.
Fund managers of asset management companies (AMC) feel that the mutual fund industry was in good health till the outbreak of the CRB fiasco. In fact, in the first six months of the current calendar year, the aggregate fund mobilization hit Rs 3,000 crore ($857 million), which was quite good in a bad market. This collection had been possible through 26 schemes which was launched in the period January-June 1997. But the CRB scandal spoilt the sentiment and brought a bad name for everyone, said the chairman of an AMC who did not want to be identified.