MFs fail to widen investor base despite rise in AUM

India’s mutual fund industry has faced flak for its failure to reach out to more investors in the country’s far-flung areas.

Despite the MF industry’s average assets under management (AAUM) having grossed more than Rs 8-lakh crore, its penetration among investors, especially retail investors, continues to be a cause for concern.

The industry’s AUM continues to rise, but this rise can’t be attributed to the number of investor accounts, but rather is due to rising short-term investments made by banks and corporates in income and debt funds and to stock valuations in equity mutual fund schemes.

According to the lobbying arm of mutual fund industry, Association of Mutual Funds in India (Amfi), there are about 4.07 crore equity folios — equity investor accounts — in the country as of May ’10. This, however, doesn’t indicate an equal number of investors since it’s common for an investor to have more than one investor account, having pumped money into more than one equity scheme.

If the latest figures are compared with those in November last year, the number of equity folios has marginally declined by about 1% from about 4.11 crore in November ’09. The equity AUM, on the other hand, has increased by 1.5% from Rs 1.92 crore in November ’09 to about Rs 1.95 crore as on May ’10.

This rise in equity AUM of the MF industry can well be linked to the rise in the market during the same period. The Nifty index, for instance, has risen by about 1.1% during this period. Similarly, the market took a pounding during the period April ’10 — May ’10, when the Nifty index declined by about 3.6%. The AUM of equity schemes also shrunk by about 3% during this period.

While many blamed heavy redemptions and profit-booking by investors on account of market volatility as a reason for the decline in the equity AUM, the fact remains that there was hardly any movement in the number of equity folios during this period. In fact, redemptions from equity schemes declined by about 33% while equity sales were up by about 9% vis-à-vis the previous month (March ’10-April ‘10), clearly reflecting the fact that the decline in equity AUM was more of a ball-game of share valuations than the change in the number of investors.

A correlation of the growth in the number of equity folios since November ’09 till date to the growth in the equity AUM during the same period also reveals a high negative correlation (0.7), indicating that the growth in the equity AUM has little to do with the growth in the number of equity investors and vice versa.

However, if one were to correlate the growth in the equity AUM with the movements in the equity market, the outcome is a highly positive correlation, close to 1, indicating a direct association of equity AUM with the valuations in the stock market.

This leads to the conclusion that even if the mutual fund industry may appear gung-ho about the rise in its assets, especially equity assets, it can’t be viewed as an indication of the rise in popularity of schemes or the number of investors.

It is clear that the mutual fund industry should shift its focus from boosting its AUM to increasing its core investor base, especially in the retail segment.

Source: http://economictimes.indiatimes.com/personal-finance/mutual-funds/analysis/MFs-fail-to-widen-investor-base-despite-rise-in-AUM/articleshow/6103425.cms