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Educating lay MF investors still remains a major task

The mutual fund industry experts anticipate net inflow to further pick-up in 2013 as the government and SEBI have expressed their intention to revive equity culture in India

January 01, 2013 5:21 IST | India Infoline News Service
The year 2012 was a significant year for the mutual fund industry. A lot of changes were introduced by capital market regulator SEBI (Securities and Exchange Board of India) to revive the industry and attract retail participation. The industry also witnessed some major consolidations and exits due to presence of some non-serious players. The number of registered asset management companies (AMCs) in India has reached 50, with the addition of PPFAS Mutual Fund on 10th October, the SEBI data indicated.

In 2012, SEBI allowed asset management companies (AMCs) flexibility on fees. The regulator allowed AMCs to charge up to 30 basis points (bps) more as total expense ratio (TER) if they are able to get inflows from smaller towns beyond the top 15 cities and if these inflows are 30% of the total inflows. (100 basis points refer to 1%). AMCs may be able to charge up to 20 bps as additional TER if the inflows from cities beyond top 15 are not redeemed within one year. SEBI also decided to have a separate plan for direct investments, with a lower expense ratio. 

SEBI also made it mandatory for AMCs to make complete disclosures regarding efforts taken by them to attract investments. They would be required to report details of opening of new branches beyond top 15 cities and other efforts undertaken. The regulator also allowed AMCs to pass on service tax payable on investment management fees to investors. It would now be charged to the scheme.

SEBI also introduced new guidelines such as participation of mutual funds in credit default swaps (CDS) market as users (protection buyers) and in repo in corporate debt securities.

The mutual fund industry assets under management (AUM) stood at around Rs. 8 trillion at the end of 2012. The total industry AUM stood at Rs. 6.11 trillion at the end of 2011, while the same was about Rs. 6.26 trillion at the end of 2010 and Rs. 6.65 trillion in 2009.

Inflows in money market funds AUM stood at Rs. 1.77 trillion in 2012, while the inflows in liquid funds increased to Rs. 3.87 trillion in 2012. In the same period, equity funds’ AUM rose to Rs. 1.65 trillion, whereas AUM of equity linked savings scheme too increased to Rs. 250.27 billion. 

The new norms by SEBI are expected to make the industry more stable and attract fresh investments especially from semi-urban and rural regions. The new valuation norms mandate portfolio valuation on a daily mark-to-market basis, making the returns equal to actual market realities and, thereby, less prone to risk.

The Indian MF industry is still to flourish in the country compared to the growth of banks and insurance companies. At present its growth is limited to urban areas. The industry has a relatively narrow base, in terms of number and geographical spread of investors. There are just over 3,800 mutual fund folios per lakh of population in India as against over 50,000 savings bank accounts and over 26,500 life insurance policies, according to Mumbai-based Cafemutual.

The investors invest in mutual funds especially equity funds for short term period and easy exit. As a result, the industry lacks long term investment funds from retail investors. Debt-oriented MFs gave good post tax returns in 2012, but the retail investors continued to focus on equity schemes.

SEBI emphasized that the question on the role of mutual funds in management of pension money in India is not “if” but “how”. SEBI also suggested that more private sector instruments with proper incentives and safeguards are essential for the growth of pension industry. 

The mutual fund industry experts anticipate net inflow to further pick-up in 2013 as the government and SEBI have expressed their intention to revive equity culture in India and help channelise the household income into stocks, mutual funds and insurance sectors, rather than in idle assets like gold. However, one of the major challenges remains educating the investor to make informed decisions, which could make them aware of the benefit of asset allocation and ensure continuation.

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