Mutual Fund Industry in India: An Investor’s Perspective
Posted in Finance Articles, Total Reads: 2994
, Published on 04 December 2011
Among various financial instruments, i.e., shares, MFs, bonds and debentures, Mutual Fund is a special type of financial instrument that pools the funds of investors who seek to maximize ROI. Stocks provide high total returns with commensurate level of risk, while bonds may provide lower risks along with regular income. MFs presently offer a variety of options to investors such as income, balanced, liquid, gilt, index, exchange traded and sectoral funds. Today, there are 36 asset management companies covering Indian public sector, private sector and joint ventures with foreign players. These 36 mutual fund houses put together mobilized about Rs 6,70,937 Crores worthassets. The total resources mobilized by the private sector institutions is 91.04%, Public sectors institutions other than UTI is 8.49%. The variation occurred in mobilization of funds during various periods is very high with Private sector participations followed by the public sector excluding UTI, and by UTI.There is considerable competition between foreign and domestic owned bodies and within domestic owned bodies. According to the ASSOCHAM (Associated Chambers of Commerce and Industry of India) study, Asset Under Management (AUM) as percentage of GDP in India is 4.12% as against those of Australia 88.22%, Germany 10.54%, Japan 7.57%, UK 18.81%, USA 61.27%, Canada 34.33%, France 59.63%, Hong Kong 101.085 and Brazil 19.95%.
An Insight into the Investor’s mind:
In turbulent market conditions, MFs are the ‘most favoured instrument’ as they earn higher returns than the regular safe returns offered by bonds and bank deposits. In India, majority of the schemes are open-ended as investors can buy or sell units at NAV (Net Asset Value) related prices whenever they wish. The liquidity and flexibility attached to the open ended schemes is the main USP of MFs which is drawing investors.
Investors prefer MF to equity because MF provides the opportunity to participate in the market boom without proportionate amount of risk as the same gets spread among all the participants in an MF. Through MF, one takes advantage of volume buying and scientific data analysis, professional expertise and so on. Retail participation (investment in small amounts and not related to any company) in mutual funds, especially in the equity-oriented schemes is a ‘push product’ and not a ‘pull product’ which means that the MFs should advertise themselves wisely and differently for different investor profiles
Hurdles for Investing in Mutual Funds:
For an average Indian investor, the hurdles for investing in financial markets are many—lack of opportunity, lack of conceptual understanding and the influence of fixed income orientation in the Indian culture and huge popularity of ULIPs(Unit Linked Insurance Policies)which had a surge in popularity among small investors as they are seen as a proxy for MFs with insurance thrown in for good measure. Equity linked Savings Schemes (ELSS) which draws the investors can lose sheen after Direct Tax Code is implemented as they become irrelevant in terms of saving tax. A poor distribution network remains an Achilles heel for the industry even though MF investors are serviced by 60,000-odd independent financial advisers (IFA), who function as agents. There is no significant product differentiation in the MFs, for example Reliance mutual fund has almost same tax planning features as Birla sun life mutual fund. So perceiving product quality becomes more tiresome task for customer in this industry.
Steps taken to make MFs attractive:
1. In India, to reach a medium class investor who treats a well known insurance agent as his well wisher as he knows from the time of his father, exploring such traditional routes will give a significant advantage.
2. Due to intangibility of services, emphasis should be on promotion of corporate brand. A familiar and trust worthy name resonates well with the customers in the market, like ICICI Prudential (backed by ICICI bank) and SBI Mutual Funds(backed by SBI).
3. Need for reliability is more important for services with intangible nature of service act. It is well taken care of by SEBI in India’s each and every individual who wants to deal in mutual fund in any capacity either as employee or agent of any mutual fund company/corporate broker/sub broker, is supposed to qualify AMFI exam.
4. Spreading financial literacy through awareness campaigns and workshops is one area AMCs (Asset management Companies) in India are looking at to remain a lucrative destination for investors. According to AMFI, 4592 Investor Awareness Programs covering 173 cities and 126,969 participants has been completed by September 2011.
In the current situation of higher bank rates and lower interest rates, investors especially who have sufficient income to take risks are to be tapped by the MFs to increase their focus on such customers to be in the business.
This article has been authored by Ravali Sindhura Pfrom DMS, IIT Delhi.
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