The Budget has brought out an interesting opportunity for the Indian Mutual Fund Industry. (See Link)  It is proposed that Foreign Investors can invest in Mutual Funds in India. While complete details are still awaited, this could be one of the important milestones in the Indian Mutual Fund Industry.

While lot of arguments can be put forward against the move, including

a. Industry is yet to even scratch the surface of the Indian Investor,

b. Yet to completely create confidence in the Indian Investing Community

c. Even within India, the focus (and hence high % of the AUM) are in the hands of the corporate & institutional investors

d. Any focus on new class of investors may reduce the already declining interest of the retail Indian investor in this MFs over the last year or so

Indian Thali

I still believe that the move allowing a new class of investor in the Mutual Funds. This is expected to provide a lot of positives to the MF industry. In my view, the following are the positives for the Industry:

a. Ability to access a new class of investor, who is expected to have far higher ‘average ticket size’

b. Positive impact on the range of products and services offered in line with international products (while I believe that the Indian MF industry is pretty close to International best practices, there are still certain areas which can be of additional value to the domestic industry.

c. Effectively channelising the investment interest of foreign investors in India in a hopefully easy and efficient manner. Thus making the access to the Indian markets by foreign investors easy.

d. Brininging in the best practices in fund management

e. Moving closer towards a open system of fund management across geographies (as Indian MFs are already allowed to invest in foreign markets)

I believe that this could  be an important development for the Industry. Waiting to see this getting implemented effectively and more importantly the response of the Industry for this opportunity.

Happy investing

Fundu Vishy

Your Mutual Friend

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The last 3 years has probably seen the most action from SEBI in the Mutual Fund space, probably as much if not more than when the Industry was opened up. We have seen action by the regulator across various activities of the Fund commencing from Distribution to Valuation, Fund Management etc.

Having acted on all these areas and making people who run the business responsible for a large number of activities, SEBI has taken the most important and critical step of arming the Trustees with the knowledge and understanding of their role.

As all of us know, the funds invested in the mutual fund scheme is managed on trust and hence the role of the trustees is extremely important. The Industry on its part have been able to attract the ideal profile of respected individuals from across various walks of life to become trustees. This enables ‘faith’ on the trustees. However, with so much of change in the industry and its regulation over years, there is a need for the trustees to clearly understand their roles and responsibilities in order to fulfill their role effectively.

It is in this background that the action of the regulator to get the trustees and independent directors of various fund houses through workshops (See Link: http://www.livemint.com/2011/02/15213117/Sebi-puts-mutual-fund-trustees.html) is a welcome move.

Sure, that we are moving in the right direction to not only have a well regulated environment for mutual funds but also a well empowered people who know their roles and responsibilities to run the same.

Fundu Vishy

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The Regulators & the Exchanges have created Investor Protection Fund in order to provide relief to investors. However, it is understood that the usage of the funds are not effectively being done resulting in the objective of the fund not being achieved though there are funds available. See Link (http://www.moneylife.in/article/how-is-bse-using-its-investor-protection-fund/13856.html). It is time that clear objective based utilisation of funds happen out of this for the benefit of the Investors.

Fundu Vishy

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A Background

The Indian Mutual Fund Industry has introduced various products and packages over the last couple of decades. One of the products which was supposed to provide asset allocation option for the investor was the Balanced Fund. In fact, the first open ended scheme in the Indian Mutual Fund market was a Balanced Fund in the form of US64. Keeping in line with the experience of the US64 scheme, the whole category of Balanced Funds seems to have had a roller-coaster ride.

Balanced Funds – A review

To put it in perspective, the table below provides the comparative AUMs between Dec 1999 and Dec 2010 across various asset classes.

From the above, it can be seen that it is only the ‘Balanced Fund’ Category which has had a negative AUM growth over the last 12 years.

Tracking its AUM over the period ranging from 1999 to 2010 gives interesting insights. The Table and the graph below gives a tell tale story about this category of scheme in the Mutual Fund Industry.

Hence, the Balanced schemes have hit the nadir in 2003 and have grown subsequently to reach around Rs. 19800 cr. in Dec-2010, which is still below the Dec 1999 numbers.

More than looking at why these numbers of come down or gone up and the impact of the US64 saga on the balanced scheme, it may be interesting to look at the same from the customer orientation and investment opportunity standpoint.

Why Balanced Funds?

The Balanced Funds invest across multiple Asset Classes. Typically, most balanced funds focus on investing between both equity and debt instruments. The decision on % Allocation across the asset classes is taken by the fund managers depending on the market conditions, of course, keeping in line with the terms of the scheme.

Thus, an investor investing in the balanced funds, gets exposure to 2 or more asset classes. It is a fact that there is a need for Asset Allocation across multiple asset classes for any investor. Hence, a balanced fund creates an opportunity for one to allocate through a single investment instruments

Why have they not appealed to investors?

Only the retail investors invest in balanced funds. There is hardly any institutional / corporate investment activity in the balanced fund. This is clearly visible from the fact that only around 3% of the overall assets are parked in the balanced funds.

While theoretically, investors need to spread across multiple asset classes, we have seen very clearly in the past that investor flock certain asset classes sometime and the other in the other time. When the equity markets are booming, we see people investing heavily in equities and when they are not doing well they shun equity. This mentality of momentum based asset allocation has continued for long time now in the markets which has sidelined an asset allocation product like Balanced Funds.

There are also issues of taxation and distribution commission which have affected the balanced fund category.

Is there a future?

Ideally, a balanced fund should be a good product to invest in.  However, history shows that neither  has it caught investors fancy nor has it attracted the attention of the fund houses in their marketing approach. Further, with the new regime of advisors representing the investor, it will be in the interest of the advisor to handle the allocation across asset classes for the investor by choosing specific and performing products in each of the asset class rather than go for a coupled product like balanced funds. While it may not be curtains for the balanced fund industry, only innovative product design backed with effective marketing which will see the growth of this category in the mutual fund space.

Fundu Vishy

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Draft Direct Tax Code has come out and there are a lot of areas where an Individual Tax Payer has reasons to be happy including the proposed slabs and exemption limits.

However, when it comes to Mutual Funds,  keeping up with the continuous spate of changes and concerns faced by the industry, DTC adds one more: removal of ELSS from the approved investment options for tax saving.

Currently, ELSS schemes have around Rs. 23,700 cr. under management in May 2010, up from around Rs. 11,800 cr. in May 2007. This represents around 60 lacs to 120 lacs investors using the ELSS as a tax saving route which is expected to be foregone by the industry.

Sure, this is probably not the most important issue in the minds of most Industry players only owing to the spate of other immediate issues to grapple with. But one sigh of relief the industry will probably have is that ULIPs may also be treated the same way as ELSS.

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Mutual Fund as an investment vehicle is one which will enables retail investors, who do not have either knowledge or time or both for managing their investments to pool in the investments which is managed by professional fund managers. In light of the above, equity investments with its complexities and time requirements makes it ideal for retail investors to go through the mutual fund route.

In light of this, a review is being attempted in this blog on the position of the investments in the equity schemes in Indian Mutual Funds. This is in continuation to my earlier blog on ‘Indian Mutual Funds (2000-2009): A Decade to Remember.

As brought out in the earlier blog, the AUM of Equity Schemes has grown from a meager Rs. 24,288 cr. to a staggering Rs. 196,691 cr. in the last 10 years. Over 7 time increase in 10 years is no mean feat. What is more interesting is to look at this growth from the number of investors whom the Industry services. Equity schemes being retail in nature compared to other products accounts for around 90% of the investors in the industry. Hence, a number of around 25 lac investors have moved to over 400 lacs, a 8 fold increase which again is no mean feat.

Further, the number of equity schemes in the market has moved up from around 70 schemes in 1999 to over 380 schemes in 2009 and the major part of the growth happened during the period 2004-2008. It was only in 1993 when the launch of equity schemes commenced with Private & International AMCs being set up.  The period between 1999 & 2000 saw various technology and other specialty and sector based funds being launched, 2004-2008 saw a spate of NFOs which garnered large AUMs at the time of the launch itself and more importantly attracted a large number of new investors in to the Mutual Fund system.

It gives an interesting study to look at the AUM of a scheme vis-à-vis the age of the scheme. The tables below provide the necessary data.

From the above chart, we can clearly see that 67% of the AUM is held by the schemes having assets over Rs. 1000 cr. Age wise analysis of these schemes give an interesting insight:

As brought out in the table, while around 40% of the schemes have over 5 year vintage, 60% of the schemes were relatively new schemes with less than 5 years of existence. A further review of the schemes launched over 10 years back gives a more interesting perspective. By the end of 1999, there were 70 equity schemes with the assets around Rs. 25K cr. The same schemes assets as of date Rs. 62K cr. representing a growth of around 150%. It may be noted that during the same period, the Sensex moved from 5000 points to 17500 points representing 2.5 times growth over the 1999 numbers. This provides an interesting insight. Over the last 10 years, most of the schemes in this list of 70 schemes have maintained performance better than the index or at least in line with the index. Hence, actually, the above numbers represent that the money has gone out of these schemes.

On the other hand, the schemes launched between 2004 and 2008 have been able to attract AUM. While many of these schemes have lost AUM post their NFO, still the long term impact on these schemes will have to be seen. One interesting perspective is that the performance of the older schemes are still in line with the newer schemes. It seems that there is an attraction for the new in spite of the old schemes still performing better. This may be attributed by some to churning of portfolio and such other practices. However, what is interesting to see is that the attraction of NFOs seems have died down over the last couple of years. This coupled with the new guidelines of distributors having to get advisory fees from the investor is expected to change the trend. An interesting time ahead which promises to reverse the trend of New for Old to Good for Average irrespective of the age of the scheme.

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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.

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Like any building, which requires 4 pillars to stand on, personal wealth creation also requires 4 strong pillars. All financially successful people have gotten their success thanks to their understanding of these 4 pillars. They are

1.    Nothing happens without a Plan

2.    Knowledge your only weapon

3.    Risks & Return Trade Off

4.    Importance of Liquidity

Nothing happens without a Plan

Planning is the most important part of any activity. Wealth Creation and Investments are no different. The areas which need to be planned include:

a.    Income, Expenditure and Savings

b.    Investments

c.     Tax

d.    Insurance

e.    Retirement

f.      Goal Setting

The most important part of the Plan is to define your Goals in an un-ambiguous manner. There are various Financial Planners available who provide a comprehensive plan. However, it is your responsibility to articulate your goals in life and more importantly for implementation of these plans. Hence, a clear commitment to these plans as well as the Goals is a pre requisite for success in your journey towards financial independence and wealth creation.

Knowledge your only weapon

The only weapon we have in our endeavor to create Wealth is our Knowledge. While we do not need to be an expert, we should have basic understanding of various products and markets. Believe me, it is not a rocket science. It only requires us to spend a little time. May be around 5-6 hours upfront for understanding the basics of finance and not more than an hour every week to update  yourselves with the requisite understanding. An hour for managing the money is probably a very small portion compared to over 40 hours of work per week we do in order to earn the money. With technology and information reaching far and wide and easily accessible getting quality information is not difficult for one who seeks for it.

Believe me, it is not difficult.  A person with basic IQ levels can understand the markets and products to the required extent. Even when you take advise from professionals, in order to ensure that you are taking the right decision, and in order to provide right inputs to them, you need to know the basics.

Risk Return Trade Off

When it comes to investment, there is nothing called a Free Lunch. For every effort to make money in terms of returns, it is necessary that certain risks are taken. Higher the returns sought, higher is the risk that is required to be taken. In every situation, we need to clearly understand what are the risks involved and should not get carried away by the projected or promised returns in any investment option. If you find something to be too good to be true, then it probably is.

There are two emotions which typically drive our investment decisions viz. greed and fear. Greed makes us run behind the returns and sometimes blind us with respect to the risks associated with it. Similarly, when Fear takes over, we do not see the opportunities that the market presents. Most of us do not take right decisions with regard to investments owing to the fact that emotions take over wisdom. The moment one overcomes these emotions, he can take informed decisions understanding the risk return trade off, which is bound to be far more close to being the best decision. Hence, clear focus has to be kept on the risk – return trade off when we take any investment decision.

One more area of focus for effective wealth and investment management is to know what the risks are. There is a normal tendency to generalize risks associated with any decision. However, it is important to note that we cannot generalize risks and risks are not comparable. Further, depending on the markets the risk changes with time. For eg. The relative risk of equity markets is found to be lower over longer periods of time than over short periods of time. It is important to know these things when deciding on the investments, which will enable us to use the right product for the right  purpose.

In addition to investment risks, there are general risks one is exposed to. Insuring self, health and property are very important in order to ensure that our hard earned money which have been saved and put aside for long term goals are not withdrawn for the purpose of catering to exigencies.

Importance of Liquidity

While Risk and Returns are important, one factor that needs to always be kept in mind is liquidity. There is a need to have enough liquidity in order to cater to unplanned expenditures and requirements. While Returns and Risk are important and so is the need to make the hard earned money work harder, it is equally important to keep enough liquidity. It is generally advised that 6 to 9 months expenses are always available in the liquid form so that in case of exigency, you can fall upon this and ensure that your long term objectives are not compromised owing to such situations.

Also, when taking any decision on any specific investment one are which needs to be given focus in addition to risk and return is the liquidity of such investment and the cost of such liquidity where applicable (like pre mature withdrawal costs, exit loads etc.). Depending on the purpose for which the investment is being made, you can decide on the liquidity parameter.

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