It’s the soaring Sensex that has helped top funds survive the ban on entry loads. The bull run in the equity markets has come to the rescue of the Indian mutual fund (MF) industry, allowing it to report bumper profits for 2009-10. Had it not been for the 81% upmove in the Sensex during this time, mutual funds may not have ended up so profitable. In fact, it’s surprising that the industry made any profits at all, given that for the eight months of 2009-10, it saw a total redemption of Rs 7,000 crore from equity schemes. In fact, ever since entry loads were banned by market regulator Sebi last August, MFs have been facing redemption from their equity schemes.

Indeed, the growth in profitability for 2009-10 appears higher on the lower profit base of the previous year, when the fund industry was hit by the global financial crisis as Dhirendra Kumar, CEO of Value Research points out. ?The stupendous rise in equity markets has contributed significantly to profitability of fund houses,? Kumar observes.

Equity assets of the MF industry were up 82% during 2009-10 at Rs 1,74,054 crore, according to data from the Association of Mutual Funds in India (Amfi). The average assets under management, an important figure from the point of view of MF profitability, were also up 26%. Mutual funds added over Rs 32,000 crore worth of average assets, the base on which they charge fees.

Equity assets are major contributors to the profitability of MFs. While equity comprises just 25% of overall assets of Rs 7,13,281 crore, its contribution to profitability is much higher. ?Over 70% of MF profits come from equity schemes and the balance from debt schemes,? explains Kumar. This happens because MFs charge higher management fees of 1-1.25% p.a on equity assets as compared to 0.05-0.30% for debt assets.

And this is the reason MFs were able to charge higher management fees on equity schemes when the markets surged after March, 2009. On an average, management fees were up 38% for top fund houses while net profit was up 47% in 2009-10 as compared to the previous financial year. HDFC MF topped the charts with a profit after tax of Rs 208 crore, becoming the only fund house to cross Rs 200 crore.

It was followed by Reliance MF (Rs 195 crore) and UTI MF (Rs 170 crore), whose profits were up over 47% each during the financial year 2010.

The profits have surged despite the fact that folios have been falling for the MF industry. As per Amfi data, overall equity scheme folios were down by 7.8 lakh during FY10. Around 80% of the fall in folios was witnessed in the retail investor category.

Retail investors have been going for redemption of equity schemes over the past one year. While some are redeeming to book profits, others are refraining from investing, due to lack of sufficient distributor push. After the ban on entry load, there has been a lack of incentive to sell mutual fund schemes. Earlier, entry loads were passed on to distributors as a financial incentive. Some MFs are reportedly now making up for this by doling out upfront commissions from their own pockets.

Interestingly, the MF industry started the current financial year with a bang as the April-July 2009 period witnessed rapid inflows to the tune of Rs 7,400 crore into equity schemes. After August 1 though, there were redemptions of over Rs 7,000 crore.

FE research shows that close to one lakh investors have exited the industry in the last financial year. Today, there are an estimated 50 lakh mutual fund investors in the country.