Mumbai: Indian mutual fund industry’s average assets under management have eroded by one-third since May to about Rs4.02 trillion in November, an 18-month low. Redemptions have contributed to this. To make matters worse, equity funds are not seeing any fresh inflow. The capital markets regulator has recently tightened norms for the fixed maturity plans (FMPs) but retail investors are still shying away from putting money in mutual funds.
In an interview, A.P. Kurian, who recently completed his 10th year as chairman of industry lobby group Association of Mutual Funds in India (Amfi), dissects the problem and offers some solutions. Edited excerpts:
Suggestion: Kurian says once the sentiment turns around, people will invest; those with a long-term perspective will certainly start now. Abhijit Bhatlekar / Mint
Is this the biggest crisis Indian mutual fund industry has ever seen?
In a way, yes. But it has not been due to any problem within the industry. Due to a liquidity crunch in the market, the corporations wanted money to run their own businesses. As they were not getting enough credit from the market and other regular sources, they started withdrawing from mutual funds. But we were able to bounce back. That clearly shows the securities which these mutual funds held were top-class, investment-grade securities.
Are some of these papers illiquid?
There was illiquidity created out of lack of liquidity in the market. These were all CDs (certificates of deposits, issued by banks) and CPs (commercial papers, issued by companies). In respect of CPs, nearly 90-92% of them are top rated as on 30 September.
So, there was nothing to be anxious about from an investor’s point of view. The prices fell because of lack of liquidity and absence of buyers.
The industry was not prepared to meet the crisis.
There’s nothing to be prepared (for). What can we do? We had the best quality securities and a robust risk management system. Pricing (of bonds) is done by a third party. All this was going on smoothly. If these external things hadn’t happened, we would have had the same growth as before. We had reached Rs6 trillion (average assets under management) in May. Then it started coming down.
So even before the crisis, it started coming down?
That was because the equity market started falling. Therefore, what we require is inflow of fresh money. In debt (segment), inflows are coming in from November. But again in December, there will be a problem due to advance tax outflows.
There are almost no inflows in equities. Once the sentiment turns around and a fear of further fall is stopped, people will start coming in. Investors with a long-term perspective will certainly start investing now.
Why has Sebi (Securities and Exchange Board of India) asked Amfi for a paper on mutual funds?
The paper is only in respect of promoting mutual funds to retail investors. This crisis has thrown up unertain issues which are in a way welcome. Issues like FMPs (fixed maturity plans), the question of early exits and whether redemptions would hurt those who remain invested. Sebi wanted our views.
There is debate on introducing different share classes for mutual funds.
We have a committee that is examining the whole thing and we expect to complete the work by the next month. The committee is looking at the US and Europe—which have different share classes. Each class has its own characteristics. The committee is examining whether it is appropriate for us to have such different class shares.
We are always on the path of refining and updating the standards in every area. These are available in developed countries and we wanted to look at that.
The mutual fund industry lags behind banking and insurance...
We need to understand the mindset of people and their risk-averse nature. About 50-55% savings goes to banks. A mutual fund is something which does not promise a return; doesn’t even guarantee your capital. You look at the number of demat accounts. How many people are investing in the securities market? It is indeed a challenge. People talk of the US where every second person is a MF holder, but the industry there started in the 1930s.
All the 35 fund houses are opening new branches, establishing franchise system(s) and channel partners and we are continuously training people. Still, we have less than a lakh distributors against two million insurance agents.
Any serious plan to educate investors?
We have an educational programme and all members of Amfi are spreading this. All sales people and the mutual fund CEOs go around the country. They have regular meetings with distributors... About 90-95% of business is registered through distributors. They have to be updated, trained, talked to about different types of schemes. This is going on.
Any plan to increase retail participation?
The fund houses will have to do that. For instance, UTI Asset Management Co. Ltd is present in 450 out of 600 districts in the country. Reliance Capital Asset Management Co. Ltd is also doing it in a big way. Banks are coming into this now. Over the past three years, over 116 banks are registered with us. There are 150,000 post offices in India. Who will motivate them to sell? The fund houses are doing this.
Do you have any data on the investor base?
We are working on a market information bureau. We are examining what Amfi can as a body do to share more data. If we have the micro-data (on region-wise fund flow), it will help players in deciding on the location of branches.
We are also looking at standardizing the application forms and account statements that fund houses send (to the investors).
There is no uniformity as some give the number of units, some others costs, net asset value, market value, and so on. We are looking at whether this can be standardized so that the investors get essential information in a uniform manner across funds.