Wake up call for MF industry

The mutual fund (MF) industry which has been going through a rough patch in the last three years is facing the stick once again. While there were a slew of fund offerings recently, the multiplicity of similar schemes, non-performance, complacency and lack of pro-investor steps have come under the regulatory scanner.

Last week, during the annual Mutual Fund Summit organised by the Confederation of Indian Industry, Securities and Exchange Board of India (Sebi) Chairman UK Sinha raised concerns over nine fund houses with half or more of their schemes having underperformed their respective benchmarks and nine others with less than half of the schemes underperforming consistently over the last three years.

While Sinha did not name the fund houses, his wake-up call was loud and clear: “while an investor is free to move out from that scheme, if the performance is not good and this is happening on a continuous and long-term basis, then it becomes a matter for Sebi to take on and where ever we are finding such things we are going to ask questions to the fund managers, CEOs and if needed the AMC board and their trustees.” The presence of a large number of similar schemes has ended up diluting the basic fundamentals of simplicity and ease of investing, because of which investors choose MFs instead of investing directly in bonds or buying stocks from stock exchanges. Too many schemes have ended up confusing the minds of investors.

44 FUND HOUSES, 4,400 SCHEMES

The MF industry has seen the number of fund houses grow from 32 to 44 over the last six years. The number of schemes has grown from 779 to 4,473 (counting various options of a single scheme as separate schemes) in the same period. Further, there have been 18 new entrants through the joint-venture (JV) or acquisition route. The growth in the industry and several new entrants, both Indian and foreign, demonstrate the potential of the mutual fund business in India.

However, in a rush to launch new funds to attract more investors during the bull run from 2005 to 2007, fund houses probably forgot that there are a limited number of key differentiators among various schemes. While exotic names were given to many schemes and an attempt was made to make them look unique, fund houses faltered on the most important factor for investors — delivery of returns. A recent PwC report on MF industry in India said, “with many seemingly similar offerings from multiple MFs unable to clearly communicate their superiority, a less informed investor may find it difficult to make a choice. This uncertainty leads to a weakened ‘pull’ for the product.” During the financial year 2011-12, the MF industry, shrank by 1.6 per cent in terms of assets under management due to the redemptions by investors and stiff global and local market conditions.

CONSOLIDATION

The NFO boom that happened a few years ago has left behind a proliferation of schemes, many with overlapping objectives and investments. There are about 160 equity schemes with less than R 100 crore AuM, more than 100 schemes with less than R 50 crore as AuM and about 42 schemes with less than R 10 crore as AuM. “Overlapping schemes may be analysed and the possibility of merging overlapping schemes, or discontinuing such schemes could be evaluated,” says Gautam Mehra, Leader-Asset Management, PwC.

Experts believe that while the Sebi had issued a circular in 2010 stating that consolidation or merger should not be seen as a change in the fundamental attributes of the surviving schemes if some conditions are met, the absence of an income-tax neutrality and the STT levy are dampeners which should be removed to facilitate merger of schemes.

Companies like IDFC MF, Franklin Templeton MF, UTI MF, Kotak AMC, ICICI Pru AMC, BNP Paribas and L&T MF have merged some of the schemes in the past. “There are schemes with just a few crore of assets under management. It is difficult for a fund manager to create a diversified portfolio through such a small asset size,” said Dhirendra Kumar, CEO, Value Research.

SILVER LINING

The volatile market conditions in the last two-three years have led to withdrawals by investors to the tune of R 49,000 crore in FY 2010-11 and R 22,023 crore FY 2011-12, leading to a further drop in AuM, in addition to the drop caused by adverse market movements. Despite so much volatility in the equity markets, many MFs were able to deliver much better returns than their benchmark indices. For example, if we look at annualised returns over last three years of some of the top performing schemes, ICICI Pru Discovery gave 23 per cent returns, IDFC Premier Equity gave 19.6 per cent returns and Tata Div Yield gave 19.32 per cent returns.

Sinha’s comments should come as a wake up call for the MF industry which has been deliberating on merger of schemes since last five years, but without much action. It would be good for the investors if the MF houses reduce their total number of funds and have a consolidated offering in each category. “We merged six equity schemes last year. That is the way forward for all asset management companies. The industry should move towards providing solutions to investors and not launch plethora of products,” said Sanjay Sachdev, President and CEO, Tata MF.

What’s the way forward? Consolidation and clear positioning of products might help rekindle the interest of investors — who turned their back towards equity markets in general and mutual funds in particular due to poor returns — in investing through mutual funds.

Source: http://www.indianexpress.com/news/wake-up-call-for-mf-industry/966205/0