MFs assets shrink further, but don't blame the entry load ban
MF folios have not reduced because of the ban alone. High deposit rates, a volatile, range-bound equity market, and uncertainty over ELSS funds due to the Direct Tax Code overhang is what has actually led to a fall in inflow in the last one year
Assets under management by Indian mutual fund houses breached the Rs 6 lakh crore mark in March 2012 on the downside, plunging to Rs 5,87,217 crore, whileinvestor folios registered a decline of 7.2 lakh over the September 2011 -March 2012 period, according to data released by the Association of Mutual Funds in India.
Many in the mutual fund industry have blamed Sebi's 2009 ban on entry loads - the charge deducted from your investment to pay for distribution costs - as the prime reason for this shrinkage. With little incentive to push mutual funds, sales of new units have fallen.
According to Crisil Research, mutual funds have lost close to eight lakh folios in the last fiscal. Many retail investors stopped their systematic investment plans (SIPs) and have redeemed their fund investments as the equity market declined over 11 percent last year. The Reserve Bank order restricting bank investments in mutual funds to 10 percent (of their respective net worth) resulted in a 77 percent drop in bank folios, said the report.
Against this backdrop, the industry is hoping Sebi will reintroduce the entry load. A Mint article list three reasons for entertaining this hope:
"First, the industry claims MF folios have reduced, indicating that investors have moved out. Second, asset management companies (AMCs) aren't making enough money and Fidelity Worldwide Investment's sale of its Indian arm is being seen as some sort of endorsement to what they claim has made the MF industry unviable. And third, MFs claim that inflows have fallen, which means that investors simply aren't investing in MFs, especially equity funds."
But can the blame for the industry's recent woes be laid at the door of a single investor-friendly reform measure?
Many experts believe that restoring the industry's fortunes by bringing back the entry load could be a miscalculation. The end of entry loads (which could go upto 2.25 percent) improved the investible corpus and initial net asset values of investors. If marketed well, this should have got mutual funds more investors, not less.
The example of no-commission airline ticketing is illustrative. "Take the example of Air Asia, which is doing phenomenally well even without middlemen and agencies like makemytrip.com or yatra.com. A few years ago travel agents were fat cats, getting a lot of commission for tickets. Then came e-commerce and now tickets are mostly booked on the net wherein commission is cut out and tickets are priced cheaper. The mutual fund industry works the same way. Cut out the middleman's charges and the business will still flourish," an investment advisor told Firstpost.
Agents should be compensated for marketing and distribution through a system called high trail commission. For example, if an investor holds a fund for 10 years, then the agent should be credited by the fund for holding on to that client folio. This Trail Commission ensures that agents provide service on a long-term basis to investors, which discourages fly-by-night operators whose basic intention is to sell a product on a one-time basis to earn higher commission, explained a broker, on condition of anonymity.
To resume entry loads will surely be seen as a retrograde step that eats into investors' savings and fattens the wallets of AMCs and their distributors. However, the ban should have been carried out in a phased manner. HN Sinor, chief executive of the Association of Mutual Funds in India, recently said that Sebi made a mistake by implementing the entry load ban in a 'cut-and-dried manner.'
Moreover, MF folios have not fallen only because of the entry-load ban. High bank deposit rates, a volatile, range-bound equity market, and uncertainties over ELSS ( equity-linked-saving scheme) funds due to the Direct Tax Code overhang is what has actually led to a fall in inflows in the last one year. Further, tax-free infrastructure bonds, which offer assured returns at a fixed rate, turned out to be a major draw, attracting inflows from investors as opposed to ELSS schemes.
"Based on returns and uncertainty in the global and local markets, investors have switched from equity to debt and gold- all mostly with plans with the mutual industry itself. The current diminishing assets under management are mirroring global uncertainty," an ICICI Bank wealth manager told Firstpost.
Also the mutual funds sector saw high net worth individuals (HNIs) pulling their money out of the equity schemes of mutual funds in 2011-12 due to the bear market scenario. Clearly when the market goes down, high net worth investors (HNIs) shift money to safer havens like tax-free bonds and term deposits.These instruments bear a coupon rate exceeding 9-9.5 percent on an annualised basis, making them more attractive than equity funds.
And not just HNIs, even domestic institutional investors have opted to park money in gold funds ( these have gone up almost 30 percent in one year) as returns from equity have been negative for the last two years now. Hence, even if equity markets have fallen, retail investors have found solace in fixed maturity plans that usually give a positive return of 9 percent plus on an annual basis. According to this Mint study, FMPs have almost doubled since September 2009.
Many asset management companies that run mutual fund schemes merged their schemes last year, which was also one of the major reasons for decline in the number of folios. The mutual fund industry witnessed around 45 mergers in 2011-12 compared to only 58 mergers between 2006 and 2010.
Hence, a boost to the mutual fund industry can only come when equities start delivering superior, risk-adjusted returns. The current gloom suggests one might be better off holding on to cash, gold or property.