PowerMF Blog – Empower Yourself

My hearty wishes for a healthy and wealthy New Year to you and your near and dear ones.

The year 2010, brings along a new decade and it is appropriate for us to look at the decade that went by and also identify the trends and changes that will not only provide us insights of what went by but also will give an understanding of what is in store.

The period 2000-2009 is an important decade for the Indian Mutual Fund Industry. While the Industry got opened up for private and international fund houses in the 90’s it is was during the last decade when the industry actually saw the emergence of the Mutual Funds as an industry to reckon with in the financial services space and more importantly started getting noticed by Investors across the length and breadth of the country and being used by them for managing their investments.

Taking stock of the decade that went by:

Overall Growth

One of the key measures that is used for identifying the growth of the industry is its Assets Under Management (AUM). The decade under review saw the Indian Mutual Funds AUM grow phenomenally. The AUM grew from Rs. 97,028 cr. as on 31 Dec 1999 to a whopping Rs. 8,21, 659 cr. as on 30 Nov 2009 representing over 7 fold increase in the Assets under management.

Product Range

The number of AMCs and more importantly the number of schemes available for investments also grew phenomenally during this period. When we entered the last decade in 2000, the number of equity schemes which was around 70 is now around 400 schemes.

Product Reach & Service

This decade also saw the implementation of service standards in the Mutual Fund industry in terms of turnaround times for transactions and the reach of the product. As many AMCs focused on the retail side of the business, infrastructure for transacting in Mutual Funds got created in over 300+ cities and towns in the country. Further, the launch of many schemes through New Fund Offers (NFO) brought in a large number of investors in the market. One of the major achievements of the industry during this period is its ability to bring in a large number of investors into its fold. As against a number estimated to have been around 20-25 lac investors in 2000, the Industry today boasts of over 450 lac investors.

Introduction of New Asset Classes

Other important developments during this period include launch of new products. In fact, this period saw the launch of products like:

1. Exchange Traded Funds (ETFs)
2. Gold Funds (Gold ETFs)
3. Investing in International Equities

While the Gold ETFs brought under the mutual fund ambit the new asset class of Gold, international equity products enabled Indian Investors to have exposure to International capital markets.  The launch of ETFs brought in passive funds management directly reflecting the markets. These products have had phenomenal success in the international markets and were expected to be used effectively by Investors in India.

Concerns during the decade:

While the industry grew impressively during the decade and brought in new asset classes and products, it was not devoid of concerns and issues. Some of the issues that marred the industry during the decade include:

Low Retail participation in AUM growth

The table below provides a snapshot of the AUM growth across various classes of mutual fund schemes is given as under:

Mutual Fund as an instrument is an ideal one for the retail investors who do not have too much of knowledge on the markets and do not have access to market analysis and other such tools. However, the growth of AUM during the period was more skewed towards the institutional monies. As may be seen in the table above, the Income Funds and Liquid / Money Market mutual Fund schemes grew by around 10 times and 35 times respectively. However, the growth of Equity schemes were around 7 times and the balanced schemes which again is a product for retail investors came down by 25% from the Assets of the Industry during 1999.  Currently, the equity and balanced schemes share in the AUM has come down drastically from around 50% to around 26%.

NFOs driven Customer Acquisition

The decade in general and the period between 2006 and 2008 in particular, saw a large number of New Fund Offers (NFOs) attracting fresh investors in the Mutual Fund Industry. However, the ongoing schemes were not getting too much attention, be it from the investors or from the distribution and AMC community. This led to a large number of schemes being launched. This further impacted and triggered various practices in the industry including reportedly excessive churning of investors portfolio by distributors and reduced focus on investors requirements and benefits.

Further, there were issues including naming the schemes in a highly ‘attractive’ manner which may not be representative of the objective of the scheme.

Overdependence on Institutional Assets

As a direct impact of the low retail participation and  NFO driven volumes, the focus of AMCs during non NFO periods went on to increasing the AUMs which was done through focusing on institutional products. Products like Fixed Maturity Plans, Liquid Funds and Liquid Plus funds ruled the roost during this period.

Directions set for the new decade

The final two years of the decade have been one of the most critical in the financial services industry across the globe. With the global melt down and its resultant impact had its tremors going on across the industry. While the Indian markets as well as the Indian mutual fund industry was relatively insulated from the impact, the Regulator SEBI thought it fit to bring in strict regulations, specifically for investment vehicles like Mutual Funds. This brought in a series of initiatives which is setting the tone for the next level of growth of the industry. The key developments are:

1. Scrapping of Entry Load for Investment in Mutual Funds: While on the face of it, this looks like an initiative for reducing the cost of transactions, the key factor to be looked at is the need for the distributors to earn their revenues from the Investor. This clearly means that the distribution and advisory community will need to be focused on the Investor and earn the revenues from him. The side effect of this is profound. Effective implementation of this will mean that there are expected to be far lesser mis selling and more efficient advisory process.
2. Enabling Transactions through Stock Exchanges: This again is an area projected to be one resulting in cost saving. This will enable effective use of already existing equity infrastructure for the mutual fund industry. Further, the process of purchase and redemption of units is expected to become simpler.
3. Demat of Mutual Fund Units: This will enable an investor to hold his equities, debt as well as mutual fund units in a single account.
4. Improved governance for Mutual Funds: Other developments that are being undertaken by Regulator includes improved disclosures, better governance and accountability.

These developments, which took place during the last year or so, have set the tone for the future of the industry. While these initiatives are expected to have a short term negative impact, these have the opportunity to improve the face of the industry during the new decade.

Crystal Gazing

The new decade (2010-2019) will see the emergence of ‘Advisory Based’ selling which will be highly focused on the individual investor and his needs,

‘More Efficient Transaction Process’ which will make ‘transaction service’ taken for granted by investors.

When this is backed by ‘Transparency’ and ‘Quality Governance’, the industry is set to grow efficiently.

Furthermore, these changes are expected to improve the faith retail investor thus improving the share of his allocation to the industry. Yes, the Industry will see challenges from ULIPs of Insurance Companies which have the ability of paying higher commission to the distribution network on one side and the Low Cost National Pension Scheme on the other with liquidity option. The industry will need to handle this and more importantly need to fight through the phase of ‘Metamorphosis’ from distribution focused selling to advise driven selling.

If you enjoyed this post, make sure you subscribe to our RSS feed or Email Newsletter.