Whenever a new set of leaders take over a new state government in India, one of the first things they do is to change the name of the state, capital city or the railway station. While initially the change was necessary to undo the British mutilation of beautiful Indian words, it soon turned into a farce of naming everything after some dead leader. Worse, when the government fell and a new one came, the entire process was repeated.
The matter of entry load in mutual fund schemes has unfortunately assumed such talismanic status among the policymakers and a section of the industry and is threatening to kill what is arguably the most significant investor-friendly measure since the dematerialisation of shares.
When U K Sinha took over as chairman of the Securities and Exchange Board of India (Sebi) last year, he was under tremendous pressure to bring back the load. He made a valiant attempt, but with strong opposition coming from within the committee formed to consider such a move, stopped short of a full U-turn.
Almost a year later, today, we have a new finance minister. Although, he is the prime minister, he is under pressure to establish his ‘reform-friendly’ credentials. He needs to begin somewhere and his ill-advised team seemed to have convinced him that ‘entry load’, the magic potion that will revive a ‘dead industry’, is the best entry point.
Truth no. 1 is entry load is no magic potion and Truth no.2 the mutual fund industry is not dead. The former point has been made several times over, including in columns and news reports in Business Standard. Please read how investors are against the return of loads in this May 2011 report: http://bit.ly/je7RSv.
On the latter point, far from being dead or dying, for a cyclical industry which is largely dependent on the fortunes of the stock market, the mutual fund industry is thriving. Consider this: The most profitable fund house made a profit of Rs 276 crore for the year ended March 2012. Not bad for a company with a total paid-up capital of Rs 10.71 crore in a bearish year. The second most profitable company made a profit of Rs 261, its paid-up capital was Rs 25 crore.
Most of the top fund houses enjoy similar return on capital and have built-up reserves several times their capital over the past several years. This is after paying hefty salaries to their chief executive officers, fund managers, dividends to their parents, usually banks or corporate houses. These are hardly the features of a struggling industry. The ones who are struggling are the new comers and laggards, which is the case with all industries and are best left to market forces.
Where is the struggle then? One number that has cropped up after the abolition of the entry load is the data on folios. Headlines carrying “thousands of folios” lost have become common in the past months. On occasions, this even swelled to lakhs and millions for a particular period. But, this data is at best indicative. It is not a unique number because one investor can own and operate several folios. There is no historical record how it has behaved across market cycles and credibility is at best doubtful, as it comes from people with vested interests.
Even if you believe it’s a tell-all number, in percentage terms, the number of retail folios has fallen by just four per cent between March 2011 and March 2012. Mr Brainfather of the reloading idea must ask himself this: Will I make it legal for a doctor to take a two per cent cut on the medicine he prescribes, just because the number of patients fell by four per cent? Will it make the medicine makers richer or patients sicker?
