20 years of private mutual funds in India

It isn’t easy growing up. Especially, when you are under constant pressure to perform. The mutual fund industry is a perfect example.

In 1993, when Kothari Pioneer – the first private sector player in the mutual fund industry – entered, industry experts were convinced they would do well.

The reason: only traditional bank fixed deposits were competition. Converting even a fraction of bank savers would have meant high assets under management, and perhaps, profits as well. 

But even after 20 years, long-term assets continue to be a challenge. Around 80 per cent or Rs 5.6 lakh crore of the Rs 8.2 lakh crore of assets continue to be in pure debt funds. And 50 per cent of the debt assets, around Rs 2.5 lakh crore, are in liquid and short-term debt funds. 

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Worse still, around 37 per cent of retail investors exit  equity funds within two years, while 48 per cent of HNIs remain invested for over two years. The industry needs to convert many of these investors to longer-term investors. For that to happen, fund houses will have to show  improved performance. 

Says Waqar Naqvi, CEO, Taurus MF: “All energies should be directed to make it the product of the first choice for the masses. We have not bridged that gap. We need to make mutual fund a more reliable product and that requires more consistent performance.” 

The total assets under management of mutual funds were around 11 per cent of bank deposits in 2012. Similarly, profits have been elusive as well. Only eight of the 45 (private and public sector) players made profits of over Rs 50 crore (Rs 500 million)  in 2012.

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But private sector fund houses have much to celebrate as well. The top two asset management companies – HDFC Mutual Fund (assets of over Rs 1 lakh crore) and Reliance Mutual Fund (assets of Rs 95,000 crore) – are from the private sector.

Both these fund houses, with profits of over Rs 250 crore (Rs 2.5 billion) in 2012, were the top two in the profitable list. UTI Mutual Fund, the oldest fund house, had profits of Rs 134 crore (Rs 1.34 billion) in 2012. 

If one looks at the pecking order, private sector fund houses dominate. They ushered in better fund management. Says A Balasubramanian, chief executive officer, Birla Sun Life MF: “There's definitely a wider reach of products and product innovation. Fund management has also improved tremendously over the years.”

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With over 37 private sector fund houses, competition has increased and ensured that investors are receiving high quality service, in terms of information and buying/selling.

However, a lot of fund houses, including the first entrant Kothari Pioneer, have either merged or shut shop.

In fact, even global big-wigs such as Fidelity found the going tough. 

There are more than 40 different categories of funds, including dynamic funds and derivative-based funds, apart from traditional large-cap equity funds. 

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Bigger private sector mutual funds have been able to increase their penetration and garner more funds. The industry is now growing at 10 per cent per annum. The bigger companies with stronger distribution reach are at an advantage to garner more new funds, while smaller players are still trying to catch up. In the last five years, the growth of the industry slowed down due to the global crisis as investors turned risk-averse.  

The Securities and Exchange Board of India (Sebi) also came down heavily on mis-selling by the mutual fund industry by banning entry load in 2009, reining in fixed maturity plans by not allowing them to declare notional returns and even giving guidelines on the length of advertisements. 

Sebi’s rules resulted in almost 50 per cent of the distributors exiting the industry. That led to a slowdown in the mutual fund industry in the last few years. Critics say the reduction in the distribution force hurt the industry quite badly, as mutual funds are push products.

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The market regulator, under Chairman U K Sinha, has relaxed some of those rules by allowing fungibility of expenses, increasing the expense ratio for fund houses that seek to expand in smaller towns and making it cheaper for distributors to register.

Also, colour coding of schemes has been introduced to make it easier for investors to recognise the risk. 

Says a former fund CEO: “Mutual fund houses are seeking money from investors. However, as a 20-year old industry, with profits of just about Rs 1,000 crore, they have not performed well themselves.”

The Sensex has gone nowhere in the past five years and the industry has suffered. 

With the spotlight back on performance, more new investors will be attracted to mutual funds only if returns improve . 

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Balasubramanian is optimistic that mutual funds will at least be able to reach a size of around a third of bank deposits in the next 20 years. Naqvi too, is confident that mutual funds will do well in the next two decades. “We are in our youth and that is the best period of one's life.”

FUND FUNDAMENTALS

45 mutual fund houses

25 private sector, 12 foreign fund houses

18 fund houses are profitable

8 fund houses make profits of over Rs  50 crore

Rs  8.23 lakh crore of assets under management

Rs  5.6 lakh crore of debt assets

Rs  1.9 lakh crore of equity assets

*Profit figures as on March 2012,

* Assets figures as on March 2013