The growth rate of Mutual fund industry in india

As on September 30, 2006, the domestic mutual fund industry held assets under management of over Rs 290,000 crore (Rs 2,900 billion); a growth of nearly 46% over the last 12 months.

Other statistics reveal that a higher portion of investors' savings is now invested in market-linked avenues like mutual funds as compared to earlier times. Media reports suggest that a number of new fund houses will commence operations in the near future.

Hence investors will have an even wider range of products to choose from. Meanwhile the existing ones are keeping investors occupied by regularly launching new fund offers (NFOs).

In effect, one would be tempted to conclude that the domestic mutual fund industry has finally "come of age". However, we at Personalfn have a slightly different view on the state of affairs. Sure, the industry has grown in terms of asset size and Rs 300,000 crore (Rs 3,000 billion) could well be the next landmark. But that's hardly a reason to celebrate. More fund houses or funds don't make the industry, existence of the right ones does.

We believe that the mutual fund industry has only grown in terms of size or choices available, but is still a long distance from being regarded as a mature one. For example, for all the NFOs being launched incessantly, there are very few that can truly claim to be unique or have the ability to add value to investors' portfolios.

In fact, the industry's functioning style could well classify as a classic example of herd mentality at work. Products like monthly income plans (MIPs), mid cap funds, flexi cap funds and derivatives-based funds have found favour with various industry players at the same time.

Is it a case of all fund houses thinking alike? Similarly, the launch of NFOs has largely coincided with conducive market sentiments (read upswing in markets) and investor euphoria.

In the recent past, close-ended funds have emerged as the season's flavour. Fund houses have been quoted as saying that the close-ended nature promotes long-term investing and enables the fund manger to make investment decisions with a long-term perspective.

While we don't dispute this argument, the timing of launch of close-ended funds does make us curious. It coincides with a regulation issued by the markets regulator, the Securities and Exchange Board of India (Sebi), that only close-ended NFOs will be permitted to charge initial issue expenses.

Conversely, open-ended NFOs will be required to meet sales, marketing and other related expenses from the entry load and not through initial issue expenses. Weren't long-term investing and the other virtues of close-ended funds relevant earlier?

Another initiative which is conspicuous by its absence is investor education. It would be safe to say that most fund houses have done precious little to further the cause of investor education.

Mutual fund distributors who help fund houses garner monies continue to rule the roost. They have been lavished with attractive brokerage structures, regular NFO launches (read opportunity to make "big bucks") and other incentives.

In turn, these distributors have on numerous occasions been guilty of mis-selling and acting in their own interest, rather than the investor's. Despite this, the investor, who should be at the very core of every fund house's activity, has been left to fend for himself.

In recent times, Sebi has been forced (at an alarming frequency) to step in to aid the investor. For issues like lack of uniqueness in NFOs, method of declaring dividends, issue expenses on NFOs among others, when it seemed like the investor's interests are being compromised with, the regulator introduced measures to safeguard the investor.

This doesn't reflect too well on the mutual fund industry. Instead of playing "follow the regulator", one would expect the mutual fund industry to proactively take steps and act in the investor's interests.

Don't get us wrong, we aren't suggesting that every fund house is guilty of transgression, but most of them have erred on one front or the other. Sure some fund houses have been responsible and acted in a forthright manner; sadly, they are in a minority.

An asset size of Rs 300,000 crore shouldn't be seen as a milestone or even a reason to celebrate. Instead, fund houses should get their act in place and work towards revamping the mutual fund industry into a better and "mature" investment destination.

Mutual funds are a versatile investment avenue and hold the potential to emerge as preferred investment avenues for retail investors. Few would dispute the fact that a large section of the investing community remains untapped as far as mutual funds are concerned. Should this potential be tapped, fund houses (along with investors) stand to emerge as the biggest beneficiaries.

However, for this to happen, the mutual fund industry must finally come of age. And the onus for achieving this rests with the fund houses.

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