Churn in the mutual fund industry

Forecasts about the market are as bad as guaranteed returns. Both fail spectacularly. Yet on a particularly wet and gloomy September in Delhi, with the debris of CWG 2010 littered all round, just as one feels the event will finally compensate for all the present woes, the chop and change in the mutual fund industry, too, one feels, will be worth the pain.

The return of the domestic retail investor could possibly be the biggest story of the upcoming festival season. After the pain, as the retail investors come back into the mutual funds, they will face a far cleaner landscape to park their investments. With the spectre of being short-changed gone, the investors will now have a reason to believe in the vehicle they have been riding. While every country has its own pattern of investment preferences, one is sure that as soon as the turnaround happens in the world economy, the graph for investments made into the mutual fund industry will soar. Will this also benefit the insurance industry? One cannot be sanguine. The rules of the game are still being written and the insurance companies have yet to take a hair cut.

As of now, the current spectacle in the mutual fund business is messy. There is no doubt that the churn in the mutual fund industry has been the biggest gamechanger in the Indian financial market for a long time. This churn has been painfully cutting into the balance sheet of several fund houses. For sure, it has also cut into the interest level within the middle class for investing in the stock markets through mutual funds. The middle class, which feeds the retail investor category, is the bulwark of the Indian financial sector story and its absence has ensured there could be no extended rally in the stock markets for a long time.

That this has happened in the span of two years, which have been the worst periods for the financial sector globally, has not eased matters. Still, at a point when the financial sector is not throwing up news to gladden us, there are two straws in the wind that makes one believe things could pan out well. In terms of impact, while the introduction of dematerialised shares changed the technology of the Indian securities market, the clearing up of the mutual fund space is likely to alter the very dynamics of the Indian market as a means to build long-term wealth.

An early straw in the wind is the re-emergence of growth in financial sector investment by households in the latest national income numbers. Despite the global economic turmoil, financial assets as a percentage of domestic savings have risen to 11.9% in 2009-10 from 10.4% in 2008-09. Aggregate savings for this fiscal are also higher so far. The disaggregated numbers for the current year will, of course, not come in soon but matching the rise in the financial assets with the flat trajectory of bank deposits means that money is not chasing the banks.

In the current fiscal, instead, RBI data shows cash with the public has risen, disproportionately more than that channelled into bank deposits. Sure, in the same period, assets-under-management of the mutual funds have fallen for most months, except for August. Overall, this would imply that the interest in the financial sector is back with the public.

The second straw in the wind could be if—and this is a big if—retail investors lap up the Coal India public issue—India’s largest ever. The issue is coming after a string of lemons. So, in October, a change in the investment pattern will unequivocally show that investors are here to stay.

As the Indian markets gathered steam post-2003, more and more retail investors began to find the virtues of investing through mutual funds. The funds also discovered them. The number of public offers soared accordingly and the types of investment vehicles also widened fast.

Predictably enough, as the numbers invested in the schemes rose, complaints about mis-selling and high costs also zoomed. It was at this point that Sebi intervened. The one thing that the market regulator could not factor in then was the simultaneous onset of the global meltdown. Just as it took away the fun from the market, the gloom of the financial crisis worsened the confidence of the investors.

From 2008, almost as soon as CB Bhave became the chairman of Sebi in February, the regulator has moved in for what some of company CEOs called a “demolition job”. But while some of the companies complained privately about the strict regulations that Sebi rang in one after another, it appears the investors disappeared more due to the broader economic crisis.

Sebi had reason to wade into the fortunes of the mutual fund industry when it did. The Indian stock market rests on two major countervailing powers—the foreign institutional investors and the domestic ones. The latter basically included the mutual funds. The FIIs are a heterogenous set, and beyond setting the rules of what constituted a fund and the extent of market exposure, Sebi has little jurisdiction over them.

To set a timeline for a happy ending is dicey. But the makings of a good story are already in place. As one suspects, this could happen soon. The market regulator can then take pride in a job well done.

Source: http://www.financialexpress.com/news/churn-in-the-mutual-fund-industry/677979/0