What mutual fund industry can offer in coming months
The Indian mutual fund industry has grown at a breathtaking pace in the last five years. It has transformed the way retail investors benefit from India's economic boom. Here's what we can expect in the times to come.
The Indian mutual fund industry has grown at a breathtaking pace in the last five years. Not only have its assets under management (AUM) grown from Rs 3 lakh crore in September 2006 to Rs 7 lakh crore in September 2011, more than 1,150 schemes are on offer today compared to 600 in 2006. Further, investors have got access to new products such as exchange-traded funds (ETFs), fund of funds and international funds.
To protect investors and promote growth, the Securities and Exchange Board of India (Sebi) has changed many regulations in the last few years. Take, for instance, the removal of the provision of charging the initial issue expense from investors and its amortisation, and the ban on entry load.
"These steps were to ensure that small investors are not hurt,"? says Akshay Gupta, MD and CEO, Peerless Mutual Fund.
Special: Build MF portfolio that can withstand markets
Sebi also rationalised the fee for filing offer documents. It standardised AUM reporting, made rules for classifying and valuing debt funds, and issued strict norms for distributors. It also allowed holding of mutual fund units in demat form.
UNFINISHED AGENDA
Although investors have benefited from these moves, experts say more can be done. "We need stability in the fee structure so that the charges are clear to investors,? says Sanjay Sachdev, CEO, Tata Mutual Fund. "Due to lack of incentives, we have lost many financial advisors in the last two years, which has reduced the growth rate of the industry,? he says.
In fact, we are likely to see more changes in distribution norms and how investors are advised, says Gupta. Take the latest transaction charges on investments sourced by distributors. This fee is Rs 100 for existing investors and Rs 150 for first-timers. However, the distributor has the option of not charging this fee.
We are also likely to see more transparency and simpler products, says Anil Rego, CEO, Right Horizons. In fact, Sebi is already working with fund houses to simplify products and consolidate funds with similar goals.
Also, global products are likely to become popular among rich individuals, as the ongoing Euro zone crisis has lowered stock valuations in many countries. The movement of funds has become easier, encouraging people to invest in global funds, says Rego.
Further, introduction of the new direct taxes code (DTC) from the next financial year is likely to impact certain funds. The DTC proposes to remove tax benefits on equity-linked saving schemes and so there are chances that the fund houses may not launch such schemes, says Rego. The other change could be in debt mutual funds where the DTC proposes parity between fixed deposits and debt mutual funds.
NEW PRODUCTS
So far, the Indian mutual fund industry has been product-led and offers many products that are not relevant to investors' needs. Investors will start demanding more solution-based products, says Sachdev. Products that cater to specific life-stage needs such as education, marriage and housing may become popular. Child plans, for instance, can invest more in equity as investors can afford to take more risk given the long time frame to achieve the goal.
Over the next five years, we could also see mutual funds take over the management of pension funds. We are also likely to see the launch of many new AMCs.
Globally, we may see the launch of more commodity funds such as oil funds, metal funds or funds based on agricultural commodities, says Gupta. Investors have been eagerly awaiting real estate mutual funds and silver ETFs. Despite the introduction of regulations on real estate mutual funds in 2008, the market is still awaiting their launch. It seems valuations on the realty front are not attractive enough for the launch of real estate investment trusts at this point in time, says Rego.
However, analysts do not expect silver ETFs anytime soon as silver is much more voluminous than gold, making the custodian cost very high. Also, it is a corroding metal, unlike gold.
To protect investors and promote growth, the Securities and Exchange Board of India (Sebi) has changed many regulations in the last few years. Take, for instance, the removal of the provision of charging the initial issue expense from investors and its amortisation, and the ban on entry load.
"These steps were to ensure that small investors are not hurt,"? says Akshay Gupta, MD and CEO, Peerless Mutual Fund.
Special: Build MF portfolio that can withstand markets
Sebi also rationalised the fee for filing offer documents. It standardised AUM reporting, made rules for classifying and valuing debt funds, and issued strict norms for distributors. It also allowed holding of mutual fund units in demat form.
UNFINISHED AGENDA
Although investors have benefited from these moves, experts say more can be done. "We need stability in the fee structure so that the charges are clear to investors,? says Sanjay Sachdev, CEO, Tata Mutual Fund. "Due to lack of incentives, we have lost many financial advisors in the last two years, which has reduced the growth rate of the industry,? he says.
In fact, we are likely to see more changes in distribution norms and how investors are advised, says Gupta. Take the latest transaction charges on investments sourced by distributors. This fee is Rs 100 for existing investors and Rs 150 for first-timers. However, the distributor has the option of not charging this fee.
We are also likely to see more transparency and simpler products, says Anil Rego, CEO, Right Horizons. In fact, Sebi is already working with fund houses to simplify products and consolidate funds with similar goals.
Also, global products are likely to become popular among rich individuals, as the ongoing Euro zone crisis has lowered stock valuations in many countries. The movement of funds has become easier, encouraging people to invest in global funds, says Rego.
Further, introduction of the new direct taxes code (DTC) from the next financial year is likely to impact certain funds. The DTC proposes to remove tax benefits on equity-linked saving schemes and so there are chances that the fund houses may not launch such schemes, says Rego. The other change could be in debt mutual funds where the DTC proposes parity between fixed deposits and debt mutual funds.
NEW PRODUCTS
So far, the Indian mutual fund industry has been product-led and offers many products that are not relevant to investors' needs. Investors will start demanding more solution-based products, says Sachdev. Products that cater to specific life-stage needs such as education, marriage and housing may become popular. Child plans, for instance, can invest more in equity as investors can afford to take more risk given the long time frame to achieve the goal.
Over the next five years, we could also see mutual funds take over the management of pension funds. We are also likely to see the launch of many new AMCs.
Globally, we may see the launch of more commodity funds such as oil funds, metal funds or funds based on agricultural commodities, says Gupta. Investors have been eagerly awaiting real estate mutual funds and silver ETFs. Despite the introduction of regulations on real estate mutual funds in 2008, the market is still awaiting their launch. It seems valuations on the realty front are not attractive enough for the launch of real estate investment trusts at this point in time, says Rego.
However, analysts do not expect silver ETFs anytime soon as silver is much more voluminous than gold, making the custodian cost very high. Also, it is a corroding metal, unlike gold.
TAKING NOTE Mutual Funds Offer Wide Asset Options  SANDESH KIRKIRE Despite the decline, the performance of the Indian markets was relatively better vis-a -vis the international markets. The average monthly performance of 18 prominent global indices was -6.5%, with India being the 2nd-best performer. India's increasing integration with the global economy may contribute to intermittent volatility in the rupee, equity markets and sectors that depend on exports and foreign direct investment. However, the markets here seem to have factored in most of the news and are therefore responding in a more mitigated manner. The slowdown in the US, Europe, and China may lower international crude oil prices in the coming months. Also, a visibly good monsoon has raised hope of higher crop output and the associated decline in agri-commodity prices. The effect of these two may alleviate inflation concerns to some extent in the coming months. This may establish conditions for interest rates to fall and a more amenable growth atmosphere. For now, the trading sentiment remains sensitive to global market volatility and may continue to follow the unfolding events in Europe. In this context, we may expect key indices to trade in a broad range over the next few weeks. From the debt market point of view, the excess government borrowing in the second half of 2011-12 was largely anticipated. The quantum of Rs 56,000 crore did surprise the market, though. However, the underlying sentiment in the debt market continues to be positive due to a benign interest rate outlook. In such an extraordinarily complicated environment, the challenge of ensuring long-standing financial security, freedom and prosperity continues to be determined by the two invariable fundamentals of "optimal savings" and "prudent investments". Mutual funds play a significant role in addressing these requirements. Mutual fund, in its essential detail, is a pass-through vehicle through which a person can invest in professionally managed portfolios of disparate asset classes like domestic equities, gilt, corporate bonds, money market instruments, gold, overseas equities, etc. SANDESH KIRKIRE CEO, Kotak Mutual Fund (This is a sponsored article) |
