FIIs are finding Indian mutual funds so attractive

Just as individual investors in India have started to accept mutual funds (MFs) as viable saving options, MFs have started warming up to an unorthodox category of bulk investor, the foreign institutional investor.

Several funds have announced discounted entry loads for FIIs. The FIIs find it convenient to step up exposure to companies where cumulative or individual FII holdings have hit the permitted ceiling.

FIIs are now believed to be routing their money into the stock markets through local mutual fund schemes and exchange traded funds. This interest of FIIs in local funds is being attributed, among other things, to their need to take indirect exposure to stocks that have already reached the maximum permissible FII investment limit. Domestic MFs seem to be running the assets under management (AUM) race. This growing relationship may not be very good news for the small investor.

The increasing interest of domestic funds in FII money is evident from the various addendums to the offer document filed by funds relating to loads for investment by FIIs and their sub-accounts. There is no firm estimate as to the proportion of FII money in total assets under management of the fund industry.

But, fund managers and industry watchers agree that the interest of FII and MFs in each other has picked up. ‘Some money has come in the last few months’ said the CEO of a fund not wanting to be named. ‘FIIs are looking at ETFs and other funds for investing money’ said Sanjay Sachdev, former CEO Principal PNB Asset Management and currently country manager India & regional manager, Shinsei Bank Group.

There is, however, no estimate to the scale of investment so far. ‘FII holding in fund AUM is less than 1%, but we will know better once figures are collated in March’ says A P Kurien, chairman AMFI. R Sukumar, CIO Franklin Templeton India too feels that the proportion is not very high. ‘it is highly unlikely to exceed 5%’ he says. Kurien also disputes that there is a sudden spurt and believes that the proportion is not much higher than before.

The question however is why FIIs are finding Indian mutual funds so attractive. The reasons are many and varied. While Sukumar feels that demand from India dedicated fund-of-funds (FoF) and offshore feeder funds too is technically being counted as FII money, Kurien avers that FIIs are finding Indian fund management at par with world standards.  While these reasons are valid, the more important reason seems to be the need to take further exposure to companies where FII investment limits have been reached. ‘FII investment in a ETF is not counted for the purposes of determining investment limits’ says Sachdev. ‘Indirect investment through funds enables FIIs to go beyond the limits.

This is also the reason why there has been an increase in FII interest in the derivatives segment’ says the fund CEO not willing to be named. Sukumar however feels that not all funds are permitting this. ‘Some second or third rung funds may be doing it, not the top rung ones. Moreover, investor tags are not important, there can be quality FII money too. But, we are not marketing our funds to FIIs ’ he says.

So, where does this leave the retail investor. A growing FII-MF relationship could be a cause for worry, condsidering how enamoured funds have been with corporate money for much of their history in India. Kurien disagrees, ‘corporates are investing, so what is wrong with FIIs investing in domestic funds’ he questions.
Sanjay Sachdev however feels that it is the race for assets which is driving funds to FIIs. Considering the renewed retail investor interest in mutual funds, it would be in the interest of the MF industry to keep the faith.

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