Mutual fund assets trebled in the last six years

When DNA was first published on July 30, 2005, the total assets under management (AUM) of the mutual fund industry was only Rs1.76 lakh crore - exactly the sum the Comptroller and Auditor General said the government lost through the telecom scam.

Yet, that’s less than half the assets managed by the top three mutual funds today and smaller than a third of the Rs6.73 lakh crore to which the industry has eventually grown into.

The number of players in the industry was 30 then; it’s 42 now.

This is despite the worst recession that the world has seen since the Great Depression and regulatory changes which industry officials say made it impossible to sell their product.

The Securities and Exchange Board of India (Sebi) banned the collection of upfront commissions from investors to pay distributors on August 1 2009 and the world is still recovering from the global financial crises.

The growth in assets of mutual funds has been helped by the rise in the stock markets which has gone up four times since 2005 as well as institutional investments in debt funds, say experts.

“The equity markets themselves have multiplied 4 times over in the last 5-6 years. So a rupee of assets under management as on December 2005 has today become Rs4 just by being in equities. If you lift the veil, the growth has been bulky because of institutional investors, concentrated in 10 cities and led by market growth,” said Navin Suri, managing director and chief executive officer, ING Investment Management.

Harshendu Bindal, president, Franklin Templeton Investments (India), also alludes to the rise of the equity cult and the market’s dependence on short-term institutional money.

“A large chunk of industry assets come from short-term products such as money market funds with 40-60% of overall assets (from such funds) in the last two years,” he said.

In July 2005, equity assets were at Rs46,637 crore, income funds accounted for Rs51,519 crore, liquid and money market funds for Rs66,027 crore. Equity funds today account for Rs1.68 lakh crore, income funds for Rs3.05 lakh crore, while liquid and money market funds account for Rs1.42 lakh crore.

Other segments too have shown growth. Balanced funds, which today manage Rs17,558 crore, then did only Rs5,367 crore. Equity linked savings schemes managed Rs2,131 crore, now they are at Rs24,914 crore.

Exchange traded funds did not make an appearance till 2007 and fund of funds not until 2008. They manage Rs10,332 crore now.

The dependence on institutional money on the debt side could impact assets growth after the Reserve Bank of India limited such investments to 10% of networth, giving banks six months to comply.

“It is expected that Rs40,000-50,000 crore of bank funds will move out from mutual funds over the next 4-5 months. Some of this outflow has already started,” said Suri.

The blow could be softened for the mutual fund industry with the stock market regulator contemplating an alternative commission structure to compensate the lack of entry load. U K Sinha, former head of UTI Mutual Fund and the current head of the Sebi, has expressed his willingness to provide regulatory relief on commissions in various events. He has also come out in support of allowing mutual funds to manage pension money.

There is also humongous money outside the equity circle. For example, te Employees’ Provident Fund Organisation manages Rs3.5 lakh crore and does not invest any of it in equity. The New Pension Scheme manages Rs9,000 crore, and can take up to 50% exposure to equity.

A favourable policy framework would could help the industry grow at 15-20%, said Bindal.

“Unlike the developed world, the domestic industry doesn’t get to manage the pension and insurance assets in a meaningful manner. These two segments account for a large chunk of mutual fund assets overseas,” he said.