FE Editorial: For mutual benefit

: After a gap of five months, retail investors have once again started investing in equity-linked saving schemes (ELSS) of mutual funds, which saw a total inflow of Rs 1,300 crore in January. This is an encouraging sign for mutual fund companies as they were getting overexposed to banks that, in turn, were parking their surplus money in income schemes. But with credit offtake gradually moving up, banks have started redeeming their investments from mutual funds. Also, with Sebi planning to implement mark-to-market norms for liquid-plus schemes with less than 91 days maturity from July 1, companies will no longer find it attractive to invest their idle cash in liquid-plus schemes. And after the full implementation of the 0.75% cash reserve ratio hike, bank exposure in mutual funds will see a slow return to a seen in December last year. All these will see a spate of high-value redemption, and fund houses will have to attract retail investors to invest in mutual funds. Retail investors, who typically do not invest in the stock markets directly, prefer to put money in ELSS because of tax incentives under section 80C of the Income-tax Act. But the schemes lost its edge after the market regulator put a ban on entry load last year and distributors no longer found it lucrative to sell mutual funds to retail investors. In fact, ELSS witnessed net outflows of about Rs 8,000 crore since August to December last year, but the fresh inflow sends a strong signal that retail investors are once again buoyant.

The recent correction in the markets has brought retail investors back into play, and now fund houses will have to be proactive in attracting investors. They will have to reinvent their business models so that the huge redemptions in ELSS seen in the past do not take place again. Sebi data shows only 4% investments in mutual funds are through the direct route and the rest still rely on distributors. The onus now falls on mutual fund companies to educate investors on various schemes and build a direct sales force. A recent KPMG report estimates that asset under management of mutual funds will grow in the range of 15-25% by 2015 and they will have to focus on low-margin products to attract risk-averse investors. So, it is in the interest of fund houses to attract retail investors for long-term funds flow instead of just focusing on companies and high net worth individuals where fund movements are mostly for the short term.