Fund of hope

Jan 07 2014, 09:45 IST
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SummaryThe year gone by was forgettable for the MF industry, but there are strong signs of turnaround

The year 2013 was a difficult one for the mutual fund (MF) industry. Inflows were thin, the number of retail folios, especially those in the equity segment, continued to decline, new and small fund houses seemed far from breaking into profit and the number of active distributors continued to fall.

Though 2013 ended with the industry’s total outstanding assets under management (AUM) closing at their highest-ever level of around Rs 9,00,000 crore, equity portfolio numbers continue to decline steeply over the past few months. Being driven primarily by strong liquid funds inflows, the industry awaits the return of confidence among retail investors, who continue to exit.

In fact, 2013 also started subdued on account of lack of retail appetite. To make matters worse, investors exited the industry each time the market rose. Institutional inflows remained lacklustre for a major part of the year on account of the not-so-encouraging liquidity conditions. Sometime in the first half of the year, the industry saw a revival in inflows from institutions, HNIs and retail investors in duration debt products. There was widespread anticipation of a rate cut by the central bank, which was expected to generate handsome capital gains to investors.

The rate action by RBI in July reversed the expectation and, along with it, the inflows in such duration debt products. The situation was compounded by fears of reduced inflows on account of the ‘tapering’ announcement by the US Federal Reserve. The broad trends, however, have not changed much fundamentally. The RBI paused rate hikes in the last policy review, but it has confirmed its intention to up rates if inflation doesn’t come down.

Further, there could be a change in the reference rate on the policy front, from the WPI to the CPI, which could make rate cuts a little difficult till consumer price inflation becomes benign. The Fed has announced its first installment of tapering of $10 bn, and promised to go ahead with higher doses if the US unemployment rate comes down further. In the backdrop of such developments, uncertainties continue and fundamental growth constraints remain. The recent flows have been primarily into liquid funds, which is more a function of improved liquidity in the system than new-found confidence in the industry.

Notwithstanding the above worries, we look forward to a better year in 2014. Hopes are based on a gradual improvement in economies, particularly the US. The UK and the euro zone have

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