With Rs 6.4 lakh crore of asset under management (AUM) in May 2009, the 20-year old Indian mutual fund industry is at infancy. Even as India?s 38 mutual fund houses together manage assets equalling 15% of its gross domestic product (GDP), teething troubles persist. A summit on mutual funds organised by Confederation of Indian Industry (CII) on June 17 brought to the fore a number of problems dogging the industry. A report by consulting firm KPMG, released at the CII summit, said that the industry profitability is expected to reduce gradually as revenues of asset management companies (AMCs) shrink due to focus on low-margin products to attract risk averse investors. Most speakers made right prognosis of the ills, but a solution was far from sight.
High distribution cost, complexity of schemes, and taxation remain to be the major problems of the mutual fund industry. While all these problems are pertinent, the broader issues remain to be the lower level of fund mobilisation from households and individual investors. Fund houses? obsession with AUM figures and rankings has resulted in a situation where investments by corporates far outweigh those from households. Worldwide, a mutual fund is defined as a vehicle for small investors to invest primarily in equity market. In the US, retail investors contributed 82% of the AUM as of 2008-end.
In India, ironically, mutual funds are primarily places for corporates to park their funds. Consider this poser. In fiscal year 2007-08, corporates and institutions accounted for 56.6% of the AUM. Individuals, including high net worth individuals, contributed 37%. On the other hand, 54% of the gross financial savings of households went into bank deposits.
Mutual funds garnered only 8% of their savings. Even after two decades since the first mutual funds other than UTI started their business, why is the individual investor not enamoured by mutual funds?
Most experts believe that the complex structure of schemes are difficult for the common man to understand. There are close to 1,000 schemes but a large number of them, from the same fund house, mirror one another. Prefixes such as ‘growth’ and ‘income’ are used widely but they most of the time do not make sense for the common investor. The need of the hour is to streamline the product contents. This is a view in favour of product differentiation is echoed by many mutual fund veterans such as HDFC Asset Management Co Ltd managing director Milind Barve.
Though the number of retail investors from Tier II and Tier III towns has increased over the last few years, the awareness level of the people from those places and the rural India is deplorably low. Most people are repelled by mutual funds as risky business associated with the stock market. In reality, though, it is debt products and not equity schemes that mobilise 49% of the AUM. Equity schemes contribute a far less 26% and the remaining divided between others such as liquid funds. This bias towards the money market, with all its positive aspects, is at the same time an impediment on the way to development of the mutual fund industry.
With most of the people look up to bank deposits as safe havean for their lives’ earnings, accurate statistics regarding retail participation in mutual funds is not available. Mutual fund regulator Securities and Exchange Board of India (Sebi) figures for 2008 peg the total number of mutual fund investor accounts at 4.2 crore. But folio numbers are bad indicators of the accurate number of investors because one person may hold different schemes of different fund houses, but in official statistics they end up as different folios and thus different individuals. Adding to this problem is idle demat accounts.
Stricter know-your-customer (KYC) rules are another factor that deter individual investors, mostly uneducated and rural population. Investing in mutual fund schemes involves long procedures such as submission of documents and permanent account number (PAN). Common people find it easier to open a bank account than parking their money in mutual funds.
Fund houses and distributors are not able to convince a prospective investor, wavering towards bank deposits or insurance policies, about the many advantages of mutual fund investment which banks or insurers will not be able to provide. Tax benefit is the single largest among these.
Even as tax relief is the main attraction of mutual fund schemes, the fund houses themselves are reeling under the burden of taxation. Many fund houses are of the view that tax burden must be reduced in the ensuing Union Budget in the first week of July. UTI Asset Management Company chairman and managing director UK Sinha has called for tax incentives for the industry.
There are a combination of factors that stand in the way of enhancing the participation of individuals and households in mutual funds.
There is a convergence of view that unless mutual funds shed their infatuation with corporates, in their mad rush for shoring up AUM, the interest of the industry as a whole is at stake. Sebi chairman CB Bhave has reiterated the need for increasing retail participation in mutual funds.
Increasing the penetration level is one of the cardinal requirements for the sustained growth of the industry. This is also key to improving the profitability of the mutual fund industry. For the last several years, the profitability of fund houses has not kept pace with the rise in AUM.
In fact, as per an analysis in the KPMG report, despite a 35% compounded annual growth rate in AUM between 2005-09, the profitability declined from 0.25% in 2004-05 to 0.14% in 2007-08. This sharpening contradiction points to an appalling situation.
This also calls for a re-orientation of fund houses? strategy which must entail devices to attract an increasing share of household savings.