7/27/2019 Vol 4 No. 21 August 05, 2013 - Trends in the Mutual Fund Industry in India

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d e v e l o p m e n t s t h a t m a t t e r i n f i n a n c i a l m a r k e t sVol 4 Ι No. 21 Ι August 05, 2013

INTERNATIONAL PROGRAMMEON EXCHANGE OPERATIONS ANDADMINISTRATION

August 26-30, 2013

MUMBAI

Trends in the Mutual Fund Industry in India

 This Week’s GraphsPenetration of Mutual Funds in Indiahe mutual fund industry in India, since its inception in 1964, has evolved into a high-growth and competitive

market comprising domestic and foreign players. However, the industry is witnessing negative growth sinceY2011 due to adverse global and local market conditions. This led to a slowdown in the penetration of mutualunds in India (as measured by the AUMs/GDP ratio) at 4.7 percent as compared to 77.0 percent in the US, 41.1ercent in Europe, and 33.6 percent in the UK.

Growing Challengeshe mutual fund industry witnessed decline in assets under management (AUMs) by 3.5 percent y-o-y to

` 5,922.5 billion in FY2011 and 0.8 percent y-o-y to ` 5872.2 billion in FY2012. The major reasons for the declineould be the changes in regulatory guidelines, ban on entry load, stringent Know Your Customer (KYC) norms,uidelines on transaction charges, tightening valuation, and advertisement norms. During this period, investors

n mutual funds preferred to book profits and exit from the schemes.

Mutual Funds in Household SavingsAround 50 percent of Indian household savings find their way into bank deposits, followed by insurance (20

ercent), pension funds (15 percent), and the rest (15 percent) is shared by various market-linked instrumentske shares, debentures, mutual funds and others.

During the FY2011 and FY2012, households’ gross financial assets held in the form of mutual funds registered aegative y-o-y change by 1.2 percent and 1.1 percent, respectively. One of the biggest roadblocks in channelizing

ousehold savings into mutual funds is the low awareness level and financial literacy among the general public.Despite this negative backdrop, the number of asset management companies (AMCs) increased from 32 to

6 over the last six years. The number of schemes also increased from 779 to 4,473 (counting various optionsf a single scheme as separate schemes) during the same period. Furthermore, 18 new entrants were addedhrough joint venture (JV) or acquisition, which include Nomura, KBC Bank, L&T Finance, Goldman Sachs, Natixis

Upcoming Programme:

For details, contact:Ms Maggie RodriguesMobile: +91 99302 68329maggie.rodrigues@ftkmc.com

Global AMC, T Rowe Price, and Pramerica. As of date, 46 AMCs(Source: AMFI) are operating in India.

Current TrendsThe concentration of AMCs is limited to only a few majorcities. They have shown a limited focus in tapping beyond thetop 15 cities, primarily due to limited distribution channelsand limited investor awareness beyond these cities. Thetop five metros—Mumbai, Delhi, Bangalore, Kolkata, and

Chennai—together contributed approximately 71.1 percentof the total AUMs of the mutual fund sector as of December2012. Mumbai accounted for about 43 percent of AUMs. Thefact that distributors are given less incentives to expandin small towns has resulted in mutual funds becoming aninvestment product in the hands of urban Indians.

Such challenges have led the Securities and Exchange Boardof India (SEBI) to allow AMCs to charge an additional totalexpense ratio (TER) up to 30 basis points, if 30 percent of their net sales or 15 percent of their AUMs (whichever ishigher) originates beyond the top 15 cities. In case inflowfrom beyond the top 15 cities is less than 30 percent of netsales or 15 percent of AUMs, the proportionate amount will be

allowed as additional TER. This ruling is expected to give theAMCs more scope to expand their geographical reach.

Events at FTKMC

India’s mutual fund industry would have to shed its despondency and the habit of looking for outsidesolutions if it wants to fully tap the immense market potential.

U K Sinha, Chairman, Securities and Exchange Board of India (SEBI)

Contributed by Pratyusha Nandy 

articipants of the ‘One-Day Programme on Jobbing—

rading in Integrated Market’ with lead faculty Mr

urendra Bohra (seated). The programme, which

ocused on trading strategies and techniques in equities,

ommodities, and currency markets and provided

ractical insight into intra-day trading, was held at

T Tower, Mumbai, on July 29, 2013.

Educating the InvestorIn a bid to enhance customer awareness towards mutual funds, SEBIhas mandated AMCs to set aside at least 2 basis points of their dailynet assets annually for the investor education campaign. AMCs shouldalso make disclosures on educating investors and enhancing theirawareness.

SEBI has advised AMCs to upload monthly portfolio disclosures andhalf-yearly financial results on their websites. AMCs are also instructed

to report additional annual disclosures such as gross inflow, netinflow, average AUM, and distributor-wise gross inflow on theirwebsites.

Strengthening Distribution NetworkThe regulatory panel should study regulatory provisions in some of theinternational jurisdictions such as the US and the UK to propose waysto increase inflow to mutual funds. Therefore, through relaxation of TER and charging service tax separately, fund houses are expected toimprove their reach and strengthen the distribution network.

With these initiatives and announcements, SEBI introduced measuresto boost growth in the mutual fund sector, but the industry is waitingfor tax incentives that will put this sector amongst the most preferred

instrument of investment.

 Source: RBI 

AUMs of Indian Mutual Funds ( ` bn)

5051.5

4173.0

6139.8 5922.5 5872.2

0

1000

20003000

4000

5000

6000

7000

FY08 FY09 FY10 FY11 FY12

AUMs to GDP Ratio in Select Countries, Europe,and the World in FY2011 (%)

77.00

41.10 40.3033.60

12.70 4.70 4.60

34.00

0.00

10.00

20.00

30.00

40.00

50.00

60.00

70.00

80.00

90.00

US Europe Brazil UK Japan India China World

 Source: Association of Mutual Funds of India (AMFI), ICI Factbook