On a Roll

It's raining cash in mutual funds. The industry's assets under management (AUM) crossed a staggering Rs 4 lakh crore in May 2007 as investors, corporates and even banks parked their surplus into all types of funds. Though the mutual fund industry is about 17 years old, the growth has been particularly impressive in the last five years. From Rs 98,124 crore, the industry's corpus has more than quadrupled to a whopping Rs 4,14,171.61 crore.

R. Swaminathan VP, IDBI Capital: "The growth in the industry is inevitable with more and more retail investors coming on board"

The reasons for this growth are not too far to seek. New fund launches with new features and a host of fixed maturity plans launched in recent times are finding plenty of takers. "A simultaneous growth in debt and equity markets has led to this boom," says R. Swaminathan, Vice President, IDBI Capital. "

Generating interest in the debt market, particularly issuance of new debt in the fixed maturity plans and liquid funds plus the overall interest in the equity market, have helped the industry cross this Rs 4 lakh crore mark."

But the question is whether the growth is here to stay. In the short-term, it seems there could be some profit booking. Says Swaminathan: "In the coming days, there may be a blip in AUMs due to profit booking." Over the long haul though, there's plenty of room on the upside. "But the growth in the industry is inevitable with more and more retail investors coming on board," concurs Swaminathan. With the tax benefits on equity funds, and the lack of alternative investments for retail investors, players are confident that the interest in mutual funds will not wane.

The debt segment of the fund industry is not seeing as much action. Income funds have grown from Rs 58,000 crore in the last five years to Rs 1,26,097 crore, while liquid funds corpus has increased from Rs 20,314 crore to Rs 79,936 crore. But the biggest growth has come from the equity segment. aums of growth funds increased 10-fold from Rs 11,069 crore to Rs 1,17,047 crore, suggesting that investors are comfortable with more risky equity investing.

Last month, however, saw a spectacular jump in AUMs, mainly due to investments pouring into liquid, floaters and fixed maturity plans (FMPs), driven by the rising interest rates. Industry AUMs zoomed by 18 per cent or Rs 63,704.25 crore-this was the first time the industry witnessed such a big growth in AUMs. Over 70 new FMPs were launched last month, with 42 of them of 90-day duration and 18 of more than a year. This seems to suggest there's a relative attraction of fixed return products in a volatile market.

Liquid funds garnered huge subscriptions towards the end of the month as call rates fell to near zero and corporate and institutional investors, especially banks, rushed to park surplus funds with liquid funds that gave much higher returns than call money. Says Sameer Kamdar, Head (Mutual Funds), Mata Securities: "Mark to market gains of around Rs 7,000 crore in equity funds due to a 4.5 per cent jump in Sensex also helped to increase the AUMs of the industry."

On the other hand, the equity NFO market was quite subdued with two closed-end funds managing subscriptions of only Rs 1,815 crore. So far growth rates have been steady, but it remains to be seen how fast they can grow from here on.