FE Editorial : All dressed up...

Written by The Financial Express | Updated: Jun 29 2011, 06:18am hrs
Its a tad ironical that at a time when retail investors in the country are fleeing mutual fundsthe number of equity folios has fallen by about 16.5 lakh in the last one yearthe fund industry is being thrown open to foreign retail investors. Nonetheless, following up on its proposal in the Union Budget for 2011-12, the government on Monday announced it would allow Qualified Financial Investors (QFI) foreign individuals to buy into Indian mutual fund (MF) schemes up to a limit of $10 bn. A QFI, the finance ministry says, could be an individual or it could be an insurance or pension fund. As of now, non-resident Indians and Foreign Institutional Investors (FIIs) are allowed to buy into mutual funds schemesBirla Sun Life AMC, for instance, has some $300 mn of FII money across its schemes. However, FII investment in MF schemes is estimated at a little over 1% of their total exposure to the Indian stock market of roughly $280 bn. Thats despite the fact that there are some big foreign players in the Indian MF market like BlackRock and Fidelity.

As for retail money, which the government is targeting, its hard to see foreign individuals wanting a direct exposure to the Indian market just yet; one would think they would prefer to avoid cumbersome proceduresclearing the KYC, opening a demat account, placing ordersand instead park their savings with a reputed fund overseas, which, in turn, could invest in India either directly or through local mutual funds. That might just be a simpler way to go about it. Indeed, it could be a while before Indian MFs build up a sizeable foreign retail clientele even if they teamed up with distributors in those markets rather than setting up marketing and sales offices on their own. They could, however, tap offshore customers of foreign banks operating in India, in return for a fee. Nonetheless, the task at hand is not easy; products would need to be registered with local regulators before investors feel comfortable parting with their savings and, of course, fund managers would need to have a good enough track record to convince investors that its worth all the trouble. So perhaps MFs would want to pick the low-hanging fruitsmaller institutional investorsto begin with. It may be just easier to persuade local retail investors to start buying MF schemes again.