Study on factors influencing the Indian Mutual fund

Industry

Name: Harpreet Kaur (2006 – 2008)

Title: Study on factors influencing the Indian Mutual fund

Industry

Summary

Mutual Fund is a retail product designed to target small investors, salaried

people and others who are intimidated by the mysteries of stock market but,
nevertheless, would like to reap the benefits of stock market investing. At
the retail level, investors are unique and are a highly heterogeneous group.
Hence, their fund/scheme selection also widely differs. Investors demand
inter-temporal wealth shifting as he or she progresses through the life cycle.
This research project is home in on to understand the fund/scheme
selection/switching behaviour of the investors and the factors influencing the
investment decisions of the individuals. Financial institutions are also
affected by them in making of the portfolio of the individuals of different
funds available in the market. For analyzing the outcome of micro and macro
factors on the economy this project undertakes a study what all these factors
are and how can they influence the economy and investment decision.
Objective:

Through my project I will try to analyze the factors influencing the Indian
mutual fund industry and the perception of retail investors about mutual
funds and how can one make the portfolio of these funds and manage it.

Conclusion

The comparison of the Indian MF industry with respect to global standards

showed that India has a lot of catching up to do in terms of penetration, the
diversity of products, and the risk mitigation techniques used. However, the
attitude of the regulator towards investor protection and governance of
mutual funds was found to be very close to global standards. The Indian MF
industry is possibly at a point of inflection on the verge of explosive growth.
The factors that point towards this are the existence of robust capital
markets and the presence of an impartial regulator. In order to reap the
benefits of this growth, the mutual fund industry has to introduce changes at
the rate of knots. These changes include introduction of newer products,
improvements in MF distribution and better governance of mutual funds. The
MF regulator (SEBI) should increase the accountability of all major players
including the AMCs, distributors and brokers to build trust among retail
investors.

Higher asset price efficiency will make it difficult for portfolio managers to
beat the benchmark index and peer funds. So, fund-houses may find it hard
to justify the high fee structure and loads.

At the extremes, high net worth individuals and small investors with access
to private information may shift from mutual funds to direct investing. For
this class of investors can score on market timing and lower impact cost. It is
time the mutual fund industry realized this and desisted from introducing
products that are minor variants of existing ones. In a game-theoretic sense,
introducing such minor-variant products should not be the dominant strategy
of the fund houses.

In India, mutual funds still constitute a small proportion of the market.

Perhaps, this factor helps the portfolio managers outperform their
benchmark. But such out-performance may be difficult as the industry
expands its AUM and asset price efficiency improves.

Recommendations

As penetration level is less great scope exists for the growth of mutual funds
in India. Mutual funds have to compete with bank deposits and government
securities for a share of consumer savings. This requires the regulator and
the AMC to increase the credibility of MFs and develop a trust among the
average retail investors. I recommend the following steps on part of SEBI and
AMCs:
Steps to be taken by SEBI

Increase Accountability among Different Players

• Give the board of trustees the right to choose a fund manager of their
own choice. This will make them more accountable and aware as to what
the AMC is doing.

• Benchmark the performance of funds with peers as well as with specific

indices.

• Restriction on who can be appointed as sub-brokers.

• Implementation of international accounting principles across the mutual

fund industry will help promote fairness and stability of the sector.

Development of AMFI as an SRO (Self Regulatory Organization)

This will reduce the regulatory burden on SEBI. Most of the developed
countries have SROs that publish monthly disclosures of important MF
related figures, and enforce a model code of conduct.

• AMFI will work towards increasing investor awareness through the

publication of documents, organizing seminars etc.

• Also AMFI serve as a regulator of distributors because mutual funds

complain of poor distributor regulation as the biggest challenge to the
industry.

Regulating Corporate Investments

Regulatory requirements that require mutual funds to segregate large and

small investors. This would enable retail investors to pay expenses that are
relevant to their investments and turnover rates.

Investor Education Programs

As the principal regulator of financial services in the country SEBI should

invest in programs that give investor knowledge about financial products in
the country. Investors should be able to make informed decisions after
knowing how MFs can be used for financial planning. This could be done in
conjunction with AMCs, AMFI and other participants in the financial sector.

Steps to be taken by AMCs

• Make mutual fund offer documents more comprehensible by making

disclosures more simple and relevant, and fund structure more distinctive
to the common people.

• Make disclosures regarding the MF expenses more transparent especially

distributor expenses which form a major chunk of entry loads.

• Make fund managers accountable to unit holders. Organizing Annual

General Meetings of unit holders where performance of the fund would be
reviewed can do this.

The above article was extracted from dissertations by the

students of Skyline College. Skyline College is amongst the top
MBA and BBA institutes in Delhi, Gurgaon (NCR)