The Indian mutual fund industry boasted of the highest Assets Under Management (AUM) in the month of April 2008, with almost Rs 6 tn of assets, as against almost Rs 1 tn of assets at the end of year 2000, thereby growing six times. By the end of November 2008, the AUM shrunk to around Rs 4 tn, a whopping fall of around 30% in just six months. This, when read with the fact that the industry grew at a pace of 50% over the last three years, sounds shocking. Was the growth too fast which got moderated now? Or, can we term the fall too steep which requires immediate attention?
Mutual fund investments are exposed to market risks, and if the AUM has diminished purely because of this factor with healthy growth of investors, it is not a bad sign. However, if a few set or group of investors dictate the growth of industry, it is indeed a bad omen. It is as good as dictating terms against the wishes of a majority of genuine investors. The funds and the regulator need to get down to work to correct this imbalance.
The genesis of the mutual fund industry in India can be traced to the setting up of the Unit Trust of India (UTI) by the Government of India in 1964. The industry was opened up for wider participation in 1987, when public sector banks and insurance companies were permitted to set up mutual funds. Securities Exchange Board of India (Sebi) formulated the Mutual Fund (Regulation) 1993, which for the first time established a comprehensive regulatory framework for the mutual fund industry. Since then several mutual funds have been set up by the private and joint sectors. As of March 2008, 33 Asset Management Companies (AMCs) managed 956 schemes. The Indian mutual funds industry experienced unprecedented growth from 2005 to 2007, with year-on-year growth of 32%, 62%, and 68%, respectively. The Indian mutual fund industry, during the last 10-year period, has grown at nearly 22% CAGR. This is a testimony to the fact that investors have confidence in the Indian financial system and the regulation of the mutual fund industry.
Currently, more than 80% of mutual fund money is said to be managed by private sector Asset Management Companies (AMCs). Estimates show that individual investors make up more than 95% of the total number of investor accounts, but contribute only around 35% of the net assets under management. This rapid growth is resulting from huge spending on infrastructure, increase in personal financial assets, and rise in foreign participation. With the growing risk appetite, rising income, high savings rate, comprehensive regulatory framework, favorable tax policies, savvy products, role of distributors, investor education and increasing awareness, mutual funds are indeed a favored destination. With better performance record, mutual funds in India are becoming a preferred investment option compared to other popular savings avenues like the fixed deposits and postal savings that are considered safe but give comparatively low returns.
The economic uncertainty of 2008 has stifled the stupendous growth of the mutual fund industry. The global financial crisis, coupled with the liquidity crunch in India, has brought a sudden reversal in the fortunes, as one can see from the steep fall in the AUM figures.
Equities form almost one-third of the total AUM of the mutual fund industry. Equities have corrected significantly during the year. The equity AUM has shrunk mostly owing to market risks. Debts form the balance two-thirds of total mutual fund AUM. The October 2008 liquidity crisis, which catalyzed the steep fall in debt AUM, has brought to the fore several other risks of investing in the mutual funds.
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