SPECIAL FEATURE: MAHARASHTRA

Flood of investment

VEENA VENUGOPAL

The surge of retail and institutional investments in the mutual fund industry makes it ready to chart a new growth trajectory.

BIJOY GHOSH

Innovative products in the Mutual Fund industry have led to a growth in retail investment.

THE mutual fund industry is seeing a surge of retail investments since the introduction of systematic investment plans (SIPs). Slotted in the class between low-risk, low-return bank deposits and high-risk, high-return equity investments, mutual funds are increasingly becoming the preferred vehicles of investment for institutional and retail investors. The industry, which started with the government-owned Unit Trust of India's US-64, now offers hundreds of fund options managed by over 30 asset management companies (AMC). In order to help retail investors dip a toe in the mutual fund industry and make low-risk assessment of investing in equity schemes, several AMCs have launched SIPs.

SIPs work pretty much like recurring deposits in banks. Investors can specify a certain sum of money that would get invested every month in a fund of their choice. SIPs in equity funds usually means that the returns on these investments are higher than bank deposits. Fund managers assert that any equity investment, over a long period of time (7-10 years), usually yields double-digit returns. AMCs say that a bulk of retail investments, especially in equity funds, is now coming through the SIP route.

"Investors do not have to make initial high-ticket investments to get started. At the end of a year, they are usually surprised by how much money they have invested through this route. Over a 7-8 year period, the investments and returns are substantially augmented," said Parag Shah, a Mumbai-based financial adviser. Although most funds charge an entry load (a percentage of the amount invested is charged as entry load, usually to pay brokerages to distributors) for the first investment, subsequent systematic investments are free of this load and the entire amount is invested.

AMCs are trying more and more innovative ways to rope in retail investors, and they see the growth in the number and size of retail investors' funds, primarily in equity funds, to be the key to the future of the mutual fund industry. Since April 2004, Assets Under Management (AUM) of the industry has been on a negative trend. The total AUM of the industry dipped by Rs.1,744 crores between April 2004 and January 2005. Currently, the industry manages Rs.1,52,280 crores of assets. The share of equity schemes in the total AUM of the industry has risen, albeit marginally. The figure now stands at Rs.31,834 crores.

Mutual funds have been big traders at the bourses. This is evident from the increased volumes logged in the Bombay Stock Exchange (BSE) by mutual funds. Part of the reason for the dip of the industry is the unpredictability of institutional money. Corporates and other institutions invest large sums of money for very short durations, sometimes only a few days. On the other hand, retail investors usually stay invested for longer durations. As most retail investments are usually in equity or equity-related hybrid products, AMCs are busy sprucing up their equity product offerings.

A favourite of AMCs has been dividend yield funds. These funds invest only in stocks of companies that declare dividends routinely. Birla Sun Life AMC launched its dividend yield fund early on, and in the past few months both Tata Mutual Fund and Principal Punjab National Bank AMC have launched their own versions of dividend yield funds. Mid cap companies have been the darlings of the bourses in the past year. Taking a leaf out of this, mutual fund houses have been quick to launch mid-cap funds. While several AMCs have funds solely dedicated to mid-cap stocks, others have flexible cap options. Franklin Templeton concluded recently the initial public offer of the Franklin India flexi-cap fund, with collections of Rs.1,950 crores.

In Union Budget 2005, Finance Minister P. Chidambaram announced the launch of gold exchange traded funds. This implies that now investors can buy or sell gold in the form of units for as little as Rs.100.The mutual fund industry has made a concerted effort in the past year to try and introduce mutual fund products that would invest in commodities instead of equity or debt. This effort just got a shot in the arm with the Finance Minister's announcement, and mutual funds can now sell units with gold as the underlying asset. AMCs are expected to announce their products in this category shortly.

Among hybrid products, monthly income plans were also targeted at retail investors as they were positioned as funds that would help investors with dividends every month. These funds typically are debt funds with an "equity kicker" added to it. The equity kicker is usually between 15 and 25 per cent. However, as debt funds went into a slump in the last six months, these funds have been unable to deliver dividends month on month. Financial advisers, however, caution against illogical investments in IPOs. As IPOs are usually sold at par, investors feel that it provides them with a cheap valuation as against investing according to the NAV after the close of the IPO.

According to mutual fund distributors, AMCs are tapping the same set of investors, which results in very little "new money" flowing into schemes. As distributors and financial advisers are compensated very highly for promoting and selling the latest IPOs of fund houses, they tend to make their margins by asking customers to switch from one fund to another. The complexity of products that are being launched now also makes it difficult for retail investors to ascertain whether the product is appropriate for their investment needs. Several foreign fund houses are setting up shop in India, reiterating the potential of the Indian mutual fund market.

Fidelity, the world's largest mutual fund house, recently got its approval from the Securities and Exchange Board of India. The company plans to use the expertise that it has gathered from running fund houses in various markets in the West, across various functions and areas. Their globally successful investment strategy of "bottom-up stock picking" is expected to help them have well-performing funds in India, as well. According to company officials. they would also use their experience in training staff in countries such as Germany and Japan and implement these best practices here. The industry, which has been on a consolidation phase in the last few years, now looks all set to chart a new growth trajectory.

Printer friendly page  
Send this article to Friends by E-Mail