The mutual fund industry: Waiting for Godot?

Jayant Pai |






A journalist called me up last week asking for my views for a story that she was working on. It dwelt upon the fact that investors were deserting mutual funds in droves as they were disillusioned by a lacklustre market. So much so that the Prime Minister himself was sorry to see the state of the industry and was keen to lend a helping hand. She then asked me what could mutual funds and the Regulator do to ‘attract’ investors once again.

If she was hoping for some revolutionary ideas from my side she must have been disappointed…as I told her that nothing more or new was required. I was neither being defensive nor escapist when I said this… Here’s why:

  • First of all, the belief that investors are deserting mutual funds has been gaining ground due to the tepid growth in the assets of equity mutual funds. However, such funds form only around 30% of the mutual fund industry. The other 70%, comprising all forms of debt funds and hybrid funds is in better health, as is evidenced by the strong growth in the assets of Fixed Maturity Plans, Capital Protection Funds etc.
  • I strongly believe that the Indian mutual fund industry is one of the best regulated sectors this country. There are myriad safeguards, both at the front-end and the back-end, which are aimed at protecting the interests of investors and ensuring that the asset management companies (AMCs) and fund sponsors do not enjoy carte-blanche. Investors could hardly ask for more in terms of transparency and disclosure levels in all matters that directly affect them, be it in terms of portfolios, expenses ratios, risk and return measurement etc. Of course, there are a few investors who want the AMCs to underwrite the market-risk too…That is asking for too much.
  • The industry has gone into overdrive over the past five years or so, explaining the merits of investing through mutual funds and the futility of timing the markets. This is evident in all forms of media as well as in on-the-ground activities, in the form of events, seminars etc. These have sought to allay apprehensions andmanage expectations of current and prospective investors. That such efforts have not been entirely fruitless can be seen from the growth (and stickiness) exhibited by Systematic Investment Plan programs albeit from a small base.
  • The long arm of the Regulator has also ensured that the no advertisement is misleading or exaggerated in any way. For instance, in many ads the risk factors are highlighted more prominently than the Unique Selling Proposition (USP) of the product. Sure, some may feel that it is this very forthrightness that scares away investors but I would consider it a necessary evil.
  • The various education and marketing efforts have been well supplemented with investor-friendly transaction mechanisms be it online or offline.

Contrast this with other popular investment vehicles such as real estate, physical gold, corporate bond issues, etc. all of whom suffer from some drawback or the other such as opacity, an element of unaccounted money, purity related issues, illiquidity etc. Insurance companies have also failed to acquit themselves well in terms of simplicity and standardisation with respect to disclosures of policy features and portfolio characteristics.

While I cannot say exactly when mutual funds will garner a greater share of the wallet, the current state is certainly not due to any lack of trying on the part of the industry. Also, I am not part of the camp who believes that the abolition of entry loads is the sole cause of the seemingly comatose state. Even today, there are several dedicated distributors who consider mutual funds to be an important part of their client’s asset allocation, even though they are only earning trail commissions. It is only the mercenary distributors who have vanished from the scene.

It may just so happen that investors will throng to equity funds AFTER the stockmarket has risen manifold from the current levels, merely because they do not want to be left out of the party. During that time, the industry may actually be warning them against injudicious purchases…but then (as it is today) no one may be paying heed.

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