FUTURE OF THE MUTUAL FUND INDUSTRY IN INDIA

FUTURE OF THE MUTUAL FUND INDUSTRY IN INDIA

Mutual funds have made rapid strides in the Indian market over the last few years. This has been witnessed both in terms of the growth in the assets of the mutual fund industry as well as the rise in the number of unit holders. This is a welcome development as investors now have an increasing choice to invest their money in different avenues through the mutual f und route.

However all this is a very small part as compared to the true potential of the mutual fund industry in the country. There is a long way to go for the mutual fund industry but there are signs all around that the next few years promises to be full of new developments. The first reason that gives such an indication is the fact that mutual fund houses are now striving to get bigger in size so that they can service their clients better and make this a more profitable business for themselves. Thus they are aggressively looking at raising funds from the unit holders across the country plus many are also looking to consolidate. There are also reports that several new foreign fund houses are planning to enter the business in India.

The implication of this for the investor is that one there will be an increasing presence of mutual funds in different areas as well as geographical reach due to which they can expect better services and new innovations from the mutual funds. The entry of additional players will also give the individuals exposure to different styles of fund management because as the number of players in the industry increases the distinction in the way in which funds are managed becomes a distinguishing factor for investors.

As far as the investor is concerned the first important change that they will witness is that additional schemes will keep continue to hit the market for quite some more time. This will mean even further dissection of the way in which the schemes are managed as well as the areas in which the funds are invested. Due to this investors will get the full choice of options for them to ensure adequate asset allocation. It is also likely that various funds will seek to complement their portfolio with a wide variety of schemes as they try to mobilize additional investments from the public. This translates into the fact that every small need of the investor will have a solution provided by the mutual fund industry.

Things are getting a bit difficult on the issue of launching of new schemes as the market regulator the Securities and Exchange Board of India (SEBI) has been frowning upon the fact that mutual funds are launching schemes similar to what they already have in their offering thus not providing anything extra for their investors. However the coming period is likely to witness the entry of several different funds investing into different asset classes.

Among the first two expected in the market are gold funds and real estate funds. The first thing that investors have to do under the circumstances is to understand what these funds are and what they stand for. This will ensure that there is a correct expectation from the new funds that are being launched in the market. Many times in the past investors have burnt their fingers trying to gain from new innovations in the market without getting their basics right and then they understand the situation only after a poor real life experience. Investor should look at the asset classes and then think how their investment into these areas would fare directly as against the investment through a mutual fund. Again one should be careful and not compare equity oriented funds with say a real estate fund because the nature of the assets of the scheme are completely different. In some cases even liquidity of the holdings can be a problem and hence the scheme will have to function in a separate manner either in terms of a specific lock in or in terms of the declaration or even change in the NAV of the fund.

Apart from such schemes that look at new kind of assets there is also the expectation that schemes that are targeted at specific type of investors will make their mark in the Indian context. This could include something like capital guaranteed scheme where the capital of the investor is protected and this can be used by several risk free investors who are currently worried about the risk that he schemes carry and are hence not yet investing through the mutual funds.

Another category of scheme can be no load funds where investors would be charged zero entry loads if they go and invest directly with the fund. This is done in order to ensure that the investor who does not use the services of the distributor does not end up paying for it in the form of entry loads or exit loads or even extra charges on the fund. Currently there is no way in which the fund can distinguish between their investors on this count and hence everyone ends up bearing the same kind of expenses on their investment.

There is also likely to be differentiation created by various funds depending upon the charges that they end up billing the investors on their fund. Lower charges means that indirectly there is a boost to the earnings of the investor in the scheme and as the industry matures and more and more variations come into play all these factors will start getting important as a means to differentiate one fund from the other.

The real challenge for the industry will however remain the issue of increasing the coverage of the schemes in the country. This will actually determine how popular mutual funds turn out to be in the final analysis because the real growth in the industry will come only when the industry penetrates down to the retail level in small towns and villages of the country. Mutual fund representatives agree that this is the area that will determine future growth but progress has been slow on this front.

Mutual funds started out as an urban option available to investors in specific areas and for a large period of time a large part of the corpus of the schemes came from the top cities of the country. Slowly this has penetrated downwards into smaller cities and towns but still a lot more needs to be done in this area in order to realise the true potential of the Indian investing class. The challenge will also be to ensure that it is the retail investor and not large ticket corporate investors who make up a large part of the overall investor base of the mutual funds. Attracting corporate investors are an easy way of increasing funds under management for mutual funds especially on the debt side as they can put in large sums of money that boosts the asset base of the mutual funds. However this is not stable money and as is witnessed in various liquid schemes the money can move out too very quickly. While this money is required for certain type of schemes its importance in the overall scheme of things this is balanced by stable flows.

Another challenge that will be increasingly taken up by mutual funds is that of educating the investor. Even investors who put their money into mutual funds are not very sure of the actual functioning of these funds. Some of the common perceptions of the industry are that mutual funds are linked to the equity markets. This is not wholly true as only equity schemes are linked to the equity market while the movement of the other assets will dictate schemes investing in these asset classes.

Similarly many people expect mutual funds to behave like stocks which is rise by 5 or 10 times or double suddenly in a matter of weeks. Such expectations have to be tempered because of the fact that the performance of the mutual funds depends on the performance of the assets that it holds. Thus unless the assets of the scheme double there is no way in which the NAV of the scheme will double. Similarly demand and supply factor can have an impact on the traded price of scrips but the same in not true in case of demand for a mutual fund because here this factor is not a price-determining factor for the mutual fund.

The movement of mutual funds down to the smaller cities and towns also means that there will have to be good and consistent performance for the mutual funds because they have to build the necessary confidence in the minds of the investors especially when they are still new and the investors are just testing them out as an investment avenue

Another area of concern as well as a challenge would be to distinguish various types of schemes. The number of schemes is increasing very rapidly and it is becoming increasingly difficult to track them. At the same time the name of these schemes are so confusing that one is not able to know what they actually stand for. In many cases it is only after a bit of study and research that one will be able to understand the situation. One has to be a bit alert because in many cases while the mutual fund will not mention this fact to the investor the conditions in the scheme or the various features will ensure that it works in a certain way.