Vol 4 No.

21 August 05, 2013

developments that matter in financial markets

Trends in the Mutual Fund Industry in India

Indias mutual fund industry would have to shed its despondency and the habit of looking for outside solutions if it wants to fully tap the immense market potential. U K Sinha, Chairman, Securities and Exchange Board of India (SEBI)

Penetration of Mutual Funds in India

The mutual fund industry in India, since its inception in 1964, has evolved into a high-growth and competitive market comprising domestic and foreign players. However, the industry is witnessing negative growth since FY2011 due to adverse global and local market conditions. This led to a slowdown in the penetration of mutual funds in India (as measured by the AUMs/GDP ratio) at 4.7 percent as compared to 77.0 percent in the US, 41.1 percent in Europe, and 33.6 percent in the UK.

This Weeks Graphs

AUMs of Indian Mutual Funds (` bn)

7000 6000 5000 4000 3000 2000 1000 0 6139.8 5051.5 4173.0 5922.5 5872.2

Growing Challenges

The mutual fund industry witnessed decline in assets under management (AUMs) by 3.5 percent y-o-y to `5,922.5 billion in FY2011 and 0.8 percent y-o-y to `5872.2 billion in FY2012. The major reasons for the decline could be the changes in regulatory guidelines, ban on entry load, stringent Know Your Customer (KYC) norms, guidelines on transaction charges, tightening valuation, and advertisement norms. During this period, investors in mutual funds preferred to book profits and exit from the schemes.

Source: RBI

FY08

FY09

FY10

FY11

FY12

Mutual Funds in Household Savings

Around 50 percent of Indian household savings find their way into bank deposits, followed by insurance (20 percent), pension funds (15 percent), and the rest (15 percent) is shared by various market-linked instruments like shares, debentures, mutual funds and others. During the FY2011 and FY2012, households gross financial assets held in the form of mutual funds registered a negative y-o-y change by 1.2 percent and 1.1 percent, respectively. One of the biggest roadblocks in channelizing household savings into mutual funds is the low awareness level and financial literacy among the general public. Despite this negative backdrop, the number of asset management companies (AMCs) increased from 32 to 46 over the last six years. The number of schemes also increased from 779 to 4,473 (counting various options of a single scheme as separate schemes) during the same period. Furthermore, 18 new entrants were added through joint venture (JV) or acquisition, which include Nomura, KBC Bank, L&T Finance, Goldman Sachs, Natixis Global AMC, T Rowe Price, and Pramerica. As of date, 46 AMCs Events at FTKMC (Source: AMFI) are operating in India.

AUMs to GDP Ratio in Select Countries, Europe, and the World in FY2011 (%)
90.00 80.00 70.00 60.00 50.00 40.00 30.00 20.00 10.00 0.00 77.00

41.10

40.30

33.60 12.70 4.70 India 4.60 China

34.00

Source: Association of Mutual Funds of India (AMFI), ICI Factbook

US

Europe

Brazil

UK

Japan

World

Educating the Investor

Current Trends

Participants of the One-Day Programme on Jobbing Trading in Integrated Market with lead faculty Mr Surendra Bohra (seated). The programme, which focused on trading strategies and techniques in equities, commodities, and currency markets and provided practical insight into intra-day trading, was held at FT Tower, Mumbai, on July 29, 2013.

The concentration of AMCs is limited to only a few major cities. They have shown a limited focus in tapping beyond the top 15 cities, primarily due to limited distribution channels and limited investor awareness beyond these cities. The top five metrosMumbai, Delhi, Bangalore, Kolkata, and Chennaitogether contributed approximately 71.1 percent of the total AUMs of the mutual fund sector as of December 2012. Mumbai accounted for about 43 percent of AUMs. The fact that distributors are given less incentives to expand in small towns has resulted in mutual funds becoming an investment product in the hands of urban Indians. Such challenges have led the Securities and Exchange Board of India (SEBI) to allow AMCs to charge an additional total expense ratio (TER) up to 30 basis points, if 30 percent of their net sales or 15 percent of their AUMs (whichever is higher) originates beyond the top 15 cities. In case inflow from beyond the top 15 cities is less than 30 percent of net sales or 15 percent of AUMs, the proportionate amount will be allowed as additional TER. This ruling is expected to give the AMCs more scope to expand their geographical reach. Upcoming Programme:
For details, contact: Ms Maggie Rodrigues Mobile: +91 99302 68329 maggie.rodrigues@ftkmc.com

In a bid to enhance customer awareness towards mutual funds, SEBI has mandated AMCs to set aside at least 2 basis points of their daily net assets annually for the investor education campaign. AMCs should also make disclosures on educating investors and enhancing their awareness. SEBI has advised AMCs to upload monthly portfolio disclosures and half-yearly financial results on their websites. AMCs are also instructed to report additional annual disclosures such as gross inflow, net inflow, average AUM, and distributor-wise gross inflow on their websites.

Strengthening Distribution Network

The regulatory panel should study regulatory provisions in some of the international jurisdictions such as the US and the UK to propose ways to increase inflow to mutual funds. Therefore, through relaxation of TER and charging service tax separately, fund houses are expected to improve their reach and strengthen the distribution network. With these initiatives and announcements, SEBI introduced measures to boost growth in the mutual fund sector, but the industry is waiting for tax incentives that will put this sector amongst the most preferred instrument of investment. Contributed by Pratyusha Nandy
August 26-30, 2013 MUMBAI

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Disclaimer: This Newsletter is prepared to enhance awareness and for information only. The information is taken from sources believed to be reliable but is not guaranteed by FTKMC as to its accuracy. FTKMC will not be responsible for any strategic or investment decisions based on this content.