DEVELOPMENTS IN MF INDUSTRY

DEVELOPMENT IN THE MUTUAL FUND INDUSTRY IN THE COUNTRY

There have been a lot of changes in the mutual fund industry in the country in the last few years. The industry has gone from being one dominated by debt funds to having more of a balance of debt and equity schemes and at the same time there has also been a change in the fund rankings in terms of the assets under management as several funds have managed to acquire large assets through new launches as well as inflows in to existing schemes.

In the initial period of the mutual fund industry in India, which started in the sixties there was one entity, which dominated the entire sector and this was the Unit Trust of India. The term UTI was used interchangeably with mutual funds as investor’s thought of it as a safe and secure option to park their funds into. The next wave of action saw the entry of the mutual fund arms of several public sector banks like Bank of Baroda MF, Canbank MF, IndBank MF etc. They were followed in the nineties by the private sector mutual fund players and this is when the industry started witnessing a major change in all aspects of its operation.

In the last few years quite a few of these old things have changed in the mutual fund industry in the country as several other players have established themselves and grown in size. The crisis that hit UTI in terms of the US 64 issue as the well as the high assured returns for several other schemes led to the restructuring of the institution wherein assets of the US 64 scheme and other assured return schemes went to the undertaking called UTI 1 while the other schemes fell under UTI 2, which was called UTI Mutual fund. Even after this break up the fund had the largest assets under management for a few years till recently when private sector Prudential ICICI MF has managed to edge ahead in some months.

At the same time various public sector bank arms that went into the mutual fund arena except for a few have failed to emerge as very big players in the competitive space while the private sector funds have established their position of preeminence in the mutual funds industry.

The biggest transformation however has come in the last few years and this has been on account of the change in the composition of the assets under management of the various mutual funds. Till around three years ago the biggest type of schemes with assets under management were income schemes and this along with liquid schemes and other debt schemes comprised of around 80% of the total assets of the industry. This meant that just a small part of the industry comprised of equity assets.

As the fall in the interest rates in the economy stopped the investor interest in income funds also began to dry up and the consequence of this was that investors began shifting their money to different class of schemes. In the immediate aftermath of the change in the overall scenario the funds first went towards liquid schemes and this category became the one with the largest assets under management in the industry but the prominence of debt oriented schemes in the overall industry remained.

Beginning 2003 the continuous run in the equity markets changed the entire scenario for the industry. For the first two years investors were still cautious as there was widespread doubts as to whether the gains will sustained whether the investor will be able to gain from the investments. In the last one year however there has been extreme optimism by investors towards equity-oriented schemes whereby thousands of crores has flowed into equity schemes.

There are two different ways in which one has to evaluate the whole situation. The first is the net inflow into equity-oriented schemes whereby investors make purchases into existing equity oriented schemes less the redemptions from the scheme and there is also the second route whereby they pour money into new fund offerings. The entire situation exploded in 2005-06 and net collections zoomed as investors kept pumping in more and more money into these equity schemes. At the same time the new fund offerings started to flow in from all sides and these received a tremendous response from investors. At one point of time a collection of over Rs 2,000 crore in a new fund offering of a mutual fund became a common feature in the market.

At the same time the equity markets were on an upswing so at that time the portfolio of the fund also began appreciating thus increasing the total assets base for equity oriented funds. The situation changed to such an extent that equity oriented funds kept getting a bigger share of the total mutual fund assets and this figure even crossed the 50% mark for a period of time thus signaling a change in the industry. Further in 2005-06 a record number of schemes showed a return of over 100% in a year as the equity markets hit record highs.

This period was also one where the big bang equity schemes made their mark. This meant that there were several equity schemes where the assets under management were more than Rs 1,000 crore. Such a situation was never witnessed earlier in the mutual fund industry in India where the funds were always on the lookout to get more funds for their schemes. Suddenly this appreciation in assets plus the new inflow meant that some mutual funds had to actually close their schemes to new applications for a certain period of time till things cooled down a bit.

All these events are clearly witnessed in the various figures for the industry that are available from Association of Mutual Funds in India (AMFI). The part of the transition of the Indian mutual fund market was clearly being witnessed at the end of March 2005 when the total assets under management in the country had gone to just around Rs 150,000 crore. Out of this Rs 47,000 crore was in Income funds while Rs 54,000 crore was in liquid schemes. This meant that in percentage terms liquid schemes with 36% was just marginally higher than the 32% figure of Income funds. At that point of time inspite of two years having passed since the rally in the equity markets started the assets for growth schemes was around Rs 36,000 crore which meant that the figure in percentage terms was just 25%. The rest of the categories had negligible figures in percentage terms.

A year later the situation was dramatically different because growth scheme corpus had surged to around Rs 93,000 crore giving them a 40% shares in the total assets of the mutual fund industry in the country. As against this the liquid schemes category had Rs 61,500 crore while the figure for Income funds was around Rs 60,000 crore. This gave both these categories a share of around 26-27% while the total assets of the industry were Rs 231,000 crore.

The consequent crash in the two months after this has also changed the situation in terms of interest of investors but mutual funds says that there has been no significant outflow from equity funds. At the end of June 2006 the total assets for growth schemes was just Rs 87,000 crore which means that in absolute terms there has not been a loss especially considering that the value of the investments would have gone down. However it seems to be losing out on the new flow of funds in the sector, which seems to be playing safe at the moment. This was seen as the figure for the liquid schemes has crossed the Rs 108,000 crore which is a massive surge in the last three months and this gives it a share of 41% of the total assets under management that have climbed further to Rs 265,000 crore. Income funds have witnessed a further erosion as the figure here has dropped to Rs 54,000 crore. Another significant change has been seen in equity linked savings schemes category where the assets have gone up from just Rs 1,700 crore just in March 2005 to around Rs 5,922 crore at the end of June 2006.

After looking at all these figures if one just goes back to March 2003 then the dramatic shift in the entire industry becomes very clear and it will also put the entire growth of the industry in proper perspective. At the end of March 2003 the total assets under management was just Rs 79,000 crore. Out of this a massive Rs 47,000, which means nearly 60% of the figure was just in income funds where the investors still preferred the safety of this route and the fact that interest rates were on a downward spiral

Another massive Rs 13,000 crore was in liquid schemes that were being used by coprorates and other large investors to park their short term fund with gilt funds bringing in another Rs 3,900 crore, This meant that equity oriented funds were just a shade under Rs 10,000 of assets under management which meant that around 15% of the total assets were in this route and which shows very clearly that the dominance of the debt sector was complete and total.

There is also a significant distribution of the assets among individual mutual funds because of the fact that there is an increasing effort by various private players to ensure that they get a larger share of the market. Launches of a large number of new schemes and various marketing efforts are paying off well and at the end of June 2006 there were more than 10 mutual funds that had an asset base of more than Rs 10,000 crore. Earlier there was only one way in which the asset base of the mutual fund would rise and that was through attracting bulk investments especially from the corporate sector in debt oriented schemes however funds are now increasingly looking at tapping the retail sector and that too with their equity offerings in order to get stable long term money for their funds.

There have been quite a few launches of several close ended schemes in the market in recent times. For all those who thought that the era of close ended schemes was over with the end of the early part of the development of the mutual fund industry there is a bit of a reality check. With equities becoming increasingly volatile there is a need for fund managers as well as investors to concentrate on the long term so that their money is able to earn better returns rather than just an effort to time the market. In this sense the stability of the fund will also mean that the mutual fund manager will be able to take longer calls on various stocks that they like. The general make up of all these schemes is such that they are close ended for a certain period of time usually three or five years and then they turn out to be open ended which means that they open for further repurchase and sale by investors at any time.

A lot of mutual funds are also launching schemes that are close ended for 5 years but they are not fully equity based. A large part of the portfolio of the scheme remains in debt with a small portion in equity in order to position this as a kicker for the growth in the scheme. This is a strategy whereby there are stable returns on the debt part and the equity part is expected to generate higher returns for the investors.