Mumbai: As many as 400,000 investors in the Rs8 trillion Indian mutual fund (MF) industry could have exited in April. Distributors’ lack of interest in selling MFs to investors and profit-booking by retail investors and financial institutions are the two reasons behind the exodus, say industry executives and analysts.
While poor sales effort can be attributed to the stock market regulator’s August 2009 decision to scrap commissions on the sale of funds, the profit- booking is a result of uncertainty in the market over the sustainability of the global economic recovery, especially given the recent events in Europe.
Investor accounts are folios with unique numbers that store details of the investment. Each investor can have multiple investor accounts. To be sure, the drop of 400,000 accounts doesn’t necessarily mean there were fewer investors in MFs at the end of April than at the beginning of the month. It is mathematically possible for, say 100,000 existing investors to exit from an average of five funds each—resulting in the extinguishing of 500,000 accounts—even as 100,000 new investors entered an average of one fund each, resulting in the creation of 100,000 accounts.
According to figures provided by industry body, Association of Mutual Funds in India (Amfi), the number of accounts fell from 46.9 million to 46.5 million and equity assets of around Rs1,300 crore were redeemed net of new sales in April. This is more than 10 times the drop in investor accounts between September 2009 and March. During that period, the number of accounts fell by 37,161.
“The folios have shown a sharp decline. This is an area of concern and we’re looking at ways to address this,” said H.N. Sinor, chief executive of Amfi, who spoke to Mint two weeks ago. He said folio numbers are a better gauge of the business than assets under management (AUM).
For May, Amfi reported average AUM of Rs8.03 trillion, compared with Rs7.7 trillion a month ago.
Amfi plans to conduct investor education programmes across the country to create awareness among investors about benefits of MFs.
Meanwhile, several fund houses launched new offers in May to bring fresh investors into the fold. Some have been successful, but not to the extent expected. The biggest of these offers, which was from from DSP BlackRock, collected Rs670 crore. “We received about 54,000 applications, of which roughly 80% would be retail and HNI (high networth individual) applications. We targeted much more. But given the volatile markets, we think this is reasonable,” said a senior official with the fund house requesting anonymity.
Birla Sun Life Asset Management Co. Ltd, SBI Funds Management Pvt. Ltd, Axis Asset Management Co. Ltd, IDFC Asset Management Co. Ltd and Mirae Asset Global are selling their new funds currently.
According to an executive at a fund house, the normal life of retail investors, who typically invest in equity funds, is 15 months. Every year, retail folios grow by 20-30%, inclusive of churning. For instance, between March 2009 and September 2009, the number of retail accounts grew from 46.3 million to 46.9 million.
“This year we’ve seen a fall because the number of retail investors exiting the industry is more than the number of new customers coming in. So the net growth in retail folios becomes negative,” said the chief executive of a large foreign bank-controlled asset management firm, on condition of anonymity. He puts the blame squarely on the lack of motivation for advisers.
“After Sebi (Securities and Exchange Board of India) scrapped entry loads, distributors are not really motivated to sell mutual fund schemes with the same aggression as earlier. If retail investors are not motivated to stay on, they are most likely to exit their investments completely once the equity markets go up,” he added. “For convincing the retail investors to stay invested for a long term, the distributors and agents need to motivate and educate them, which has almost stopped in the absence of incentives.”
In August, Sebi had banned entry loads. The move was intended to help retail investors, but the inability of asset managers to adjust to it and come up with a workable distribution model even after almost a year is resulting in this large-scale loss of retail assets, said an analyst.
According to Maju A. Nair, associate vice-president in charge of the MF business at Mumbai-based Sharekhan Ltd, small investor accounts that have investments under Rs10,000 are the worst hit. “Distributors incur time and money for serving the clients, small or big. But these guys are very sensitive to charges on advice. So, these are the ones who are left with no advice and often head for the exit door.”
According to Sebi, at the end of March, individual accounts, which accounted for 97% of investor accounts, contributed nearly Rs2.45 trillion, or 40%, of the Rs6.17 trillion AUM. Firms and institutions accounted for only 0.95% of the total investor accounts, but for Rs3.37 trillion, or 54.75%, of AUM.
Non-resident Indians and foreign institutional investors accounted for 1.9% of accounts and 5.47% of assets.