Mutual funds in the aftermath of October bloodbath

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: October will go down in the annals of the mutual fund industry as perhaps the bloodiest month. The action that was building up in all the asset markets found its way to the mutual funds sector and caused the industry to shiver. Assets under management fell from Rs .29 lakh crore to Rs 4.31 lakh crore, a fall of around 18.37%, or around Rs 97,201 crore, in a month. For some of the smaller funds the erosion was as much as 30%.

Now, this means a lot. First, it means that some players in the industry will not be able to sustain their operations. An asset management company runs on the management fees generated as a percentage of the fund corpus. When the fund corpus or the assets under management shrinks, the funds available to run the business become less. An 18% fall in one month, therefore, means a huge hit. It’s no wonder that the fund house bosses are left with the horrendous job of sacking team mates and in some cases selling off to prospective buyers, as was the case of Lotus Mutual Fund.

On the other hand, the huge redemption pressure meant that the fund houses had to literally take a trip to New Delhi to coax the finance minister into offering sops. The mutual fund industry saw almost Rs 90,000 crore of net outflows in September and October.

“The biggest dent is that there has been a good amount of damage to the investor confidence in fund houses. And that is of utmost importance as it is intangible and extremely critical,” says a fund manager.

The toll that investors have taken due to the fall in markets and redemptions has gathered a lot of importance. Little wonder then that the regulator, Securities & Exchange Board of India (Sebi), has been working on getting more details from fund houses and planning new guidelines for them. Some of the mutual funds, under the guidelines, went too far to compromise on investor interests. This was the case of fixed maturity plans (FMPs) where some of the schemes had invested in simply one company or one sector. Non banking finance companies (NBFCs) were the preferred destination. Clearly, there is a need for greater transparency here and the regulator will soon be addressing it.