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Personal Finance Outlook 2013: Mutual Funds - Overcoming hurdles

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SummaryA very significant year for the mutual fund industry has just passed. The year presented its own set of challenges.

A very significant year for the mutual fund industry has just passed. The year presented its own set of challenges. There were notable exits/consolidations in the industry. Sales were sluggish, with not many enthusiastic takers for mutual fund schemes.

The year saw continuous outflow from the equity portfolio. The commission structure did not appear to be very attractive to distributors. New valuation norms were introduced by Securities and Exchange Board of India (Sebi), fund houses were permitted to launch corporate repo and credit default swaps as also infrastructure debt funds (IDF) as mutual fund products.

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Further, Sebi came out with a new set of regulations, which could have a profound impact on the industry and its fortunes. On the other hand, this was a year when all the fundamental asset classes — equity, gold and debt — performed well at some point of time or the other. Investors with prudent allocation between the three assets benefited from the market movements, with some estimates putting the returns from such multi-asset allocation at decent double-digit figures.

The aforesaid events in the industry could be viewed from two perspectives (a) actual on-ground happenings; and (b) regulatory changes. The regulatory changes, in essence, could make the industry more vibrant and less risk-prone. The new valuation norms mandate portfolio valuation on a daily mark-to-market basis, making the returns in tune with actual market realities and, thereby, less prone to fluctuations.

Sebi, through its recently published guidelines, which are still being discussed and debated on, has brought forth the need of the industry to go more retail, diversify marketing network and penetrate into newer markets. The proposed regulatory changes could bring a larger number of customers to the market and, eventually, give rise to a fast growing diversified mutual fund industry, which can, then, meet the needs of the ambitious India growth story. Introduction of infrastructure debt fund as a mutual fund product, permission for launching corporate repo and credit default swaps, etc., by mutual funds could have a synergistic impact on development and deepening of Corporate Debt market. It will be some time before the policy changes unfold at the operational level. Their beneficial impact, therefore, would take time to take effect.

The Indian MF industry has a relatively narrow base, in terms of number and geographical spread of investors, compared to banks and insurance companies. In addition

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