FUND FULCRUM
May 2011

Mutual funds have witnessed a massive outflow of Rs 1,365 crore in April 2011. But the problem is not just with the fund industry, or investor behaviour, but with the so-called equity cult itself. Equity mutual funds enjoyed rising inflows from December 2010 to February 2011, with collections peaking at Rs2,495 crore in February 2011. It was after this that the decline started. In March 2011, net inflows were just Rs 454 crore, which was mainly due to ELSS schemes which collected Rs578 crore, whereas pure equity saw redemptions amounting to Rs124 crore. April 2011 has seen the highest outflow since October 2010. But, whether we can expect to see money return to equity schemes anytime soon is still in doubt.

The real problem is that fund mobilisation by mutual funds from the investing public is weak. Investors still prefer bank fixed deposits and categories other than the stock market in spite of the fact that the market has gone up by more than 20 times. Ever since the Securities and Exchange Board of India (SEBI) put a ban on entry load, equity funds have suffered redemptions. Distributors have found fund-selling unviable and nearly 50% of them have moved out of the business. There are about 80-85 thousand active numbers and those who were actually, very active in selling mutual funds were only 30% of it.

The other serious issue is that of poor retail participation. Volumes in the cash market have declined to historic lows. In April 2011, the daily average cash market turnover dropped to 11% of the overall volume, compared to 18% in the month a year ago. Official studies have shown a decline in the investor population, during a decade which has been the best period for the markets. This is also because of the fundamental problem with the way the market functions.

So, investors are happy to put their money in bank fixed deposits. Data from the Reserve Bank of India (RBI) shows that 50% of the household savings goes into bank deposits. In 1990, the percentage of savings in shares, debentures and investment in UTI was 14%, and this went down to 13% in 2007-08, even while the market has climbed by 20 times in this period.

Mutual funds that invest in highly liquid instruments (liquid funds) may face redemptions in excess of Rs 60,000 crore over the next six months, amounting to a third of their assets. In a move to prevent the circular flow of money between mutual funds and banks, the RBI, in its recent monetary policy, asked banks not to hold more than 10 per cent of their net worth in liquid mutual funds. Indian scheduled banks had a combined net worth of nearly Rs 5 lakh crore, based on a rough calculation extrapolating the data for listed banks. RBI data show that these banks held Rs 1.18 lakh crore in liquid funds as of April-end. Given that the RBI caps the investment in liquid funds at Rs 50,000 crore (10 per cent of net worth), this suggests excess investment of Rs 68,000 crore in liquid funds. Redemptions of this size may significantly dent liquid funds as a category. According to the latest data from the mutual funds' body, liquid funds manage total assets of Rs 2.2 lakh crore. The banks' excess investments amount to almost a third of this. With banks unlikely to be a major source of assets, debt fund houses may also have to scout for other clients. However, debt fund managers clarify that liquid funds will have no problem meeting the redemption requests, as the category has traditionally seen huge inflows and outflows. Over the last few months, these funds routinely saw both inflows and redemptions in excess of Rs 5,00,000 crore every month.

Piquant Parade

Union Bank of India has forayed into the crowded mutual fund space joining hands with KBC Asset Management of Belgium to launch Union KBC Asset Management Company. Union Bank of India holds 51 per cent stake and KBC Asset Management owns 49 per cent stake. Union KBC AMC has floated its first open-ended equity scheme called Union KBC Equity Fund, which is currently open.

Bajaj Finserv, a financial services company, is planning an investment of Rs. 50-75 crore in the asset management business in partnership with Allianz. While the business would be launched in calendar year 2012, the investment would be made over 2-3 years. The firm will invest Rs 50-75 crore in the AMC business with its joint venture partner Allianz.

Bank of India will be re-entering the mutual fund business by January 2012 and is presently in talks with multiple players for a strategic partnership for the venture.

Dutch financial services group Aegon intends to surrender its licence to operate in India's mutual fund industry. This is the first instance where a mutual fund has expressed its intention to the market regulator to give up its licence. Aegon is yet to launch a mutual fund product in India since receiving the licence from SEBI in October 2008 to start an asset management venture with New Delhi-based Religare Enterprises. But a month later, Aegon and Religare parted ways amid speculation of a rift between the two. The two companies continue to be partners in their life insurance joint venture, Aegon Religare Life Insurance. Aegon has been hunting for a partner, especially a bank, for the asset management business since the split, but did not manage to find one. The speculation is that the inability to find a joint venture partner could have contributed to the proposal to give up the mutual fund licence.

The ambitious plan of market regulator SEBI to make stock exchanges a selling point for mutual funds is yet to find favour among investors. Broker apathy towards selling mutual funds, along with overdependence of asset managers on traditional distributors, is preventing exchange platforms from taking off in a big way. The Bombay Stock Exchange on an average logs about 193 fund buy or sell orders worth about Rs 1.79 crore every month while the National Stock Exchange (NSE) executes about half the number of buy or sell orders worth about Rs 70 lakh, according to exchange data.

The initial enthusiasm of mutual fund houses to promote micro-systematic investment plan, or SIP, an investment route to attract low-income individuals to invest regularly in equities, is waning due to high costs and regulatory hiccups. Higher costs to service such accounts without adequate growth in investor base had been deterring mutual funds from promoting this channel. Now, the Securities and Exchange Board of India's decision to make know-your-client, or KYC, norms mandatory for even investments of less than Rs 50,000 in mutual funds has hit the final nail in the coffin of micro SIPs.

to be continued…