High operational cost a major challenge before MF industry

Written by Markets Bureau | Mumbai, June 18 | Updated: Jun 20 2008, 05:02am hrs
Investors' education, high cost of operations and slow expansion of the distribution network were major challenges before Indian mutual fund (MF) industry, a combined study conducted by Confederation of Indian Industry (CII) and PriceWaterhouseCoopers' (PwC) revealed.

The report, titled 'Mutual Fund Summit 2008: Indian Mutual Fund industry: Sustaining growth in a maturing market', was released by CB Bhave, chairman, Sebi on Wednesday in Mumbai at Mutual Fund Summit-2008.

Commenting on the report, Jairaj Purandare, head, financial services India, PwC said, "One of the biggest challenges for existing as well as new firms is the mounting cost of operations. Lease rentals and staff costs contribute to the bulk of operational costs. As more and more investors enter the market, the responsibility is on the industry to build investor confidence and set a benchmark for others to follow," Purandare said.

The report also said that the revenues as a percentage of the assets under management (AUM) for the AMCs in India compare to and in some cases are even higher than other developed markets. As the capital markets tend to be cyclical in nature, the current downward trend in the market could be followed by an upward one, once the temporary negative sentiments pave the way for more positive developments, the report said. There were also discussion on real estate mutual funds (REMF) which is to be soon launched. The report further said, "The investors education is essential for REMF to be successful." The report also added that, "Investors need to correctly appreciate the risks and rewards of investing in schemes which seek to offer returns through investment in derivative instruments, gold and overseas investments."

The report also suggested that the technology should be used properly to reach a larger audience. The report said that the MF industry is now at a stage where in order to progress to the next level of growth, it needs more support from other sectors of the economy. "For the long-term benefit of all the players in the industry, it is necessary to join hands with other sectors such as banking and telecommunications," the report said.

The PwC report also suggested that the MF industry can walk on the path of outsourcing as the MFs in other countries do. Purandare further said, "Most top fund houses across the globe focus all their energies in doing what they know best - managing money. The other functions such as accounting and compliance are in most cases outsourced, the report said.