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Business News/ Money / No free fall in mutual fund inflows after entry load ban
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No free fall in mutual fund inflows after entry load ban

No free fall in mutual fund inflows after entry load ban

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Total inflows into equity schemes have averaged Rs4,162 crore between August and October, according to data collated and published by the Association of Mutual Funds in India.

In July, just before the ban was made effective, inflows stood at Rs8,737 crore, which suggests that inflows have fallen by at least 50%. But then inflows were unusually high in July. They included inflows of Rs2,394 crore from two new fund offerings, including Reliance Infrastructure Fund.

Cautious state: A file photo of brokers at the Bombay Stock Exchange. Many retail investors seem to be of the view that they have “missed the bus and would wait for a correction before returning. Prashanth Vishwanathan / Bloomberg

The average net outflow of about Rs2,000 crore in the past two months also seems to suggest that the entry load ban is affecting flows into equity mutual funds. But the net outflows are also because of a large increase in redemptions in the past two months.

Redemptions averaged Rs6,165 crore in the past two months, 50% higher compared with average redemptions of Rs4,100 crore in the preceding few months. Higher redemptions, which are the main reason for the net outflows from equity mutual funds in the past two months, have little to do with the entry load ban.

For perspective, the ban on entry loads results in a drop in commissions for mutual fund distributors. They would now need to depend on customers paying them a fee directly to compensate them for their services, rather than receiving the entry load from mutual fund firms.

Since this would result in a sharp drop in commissions, mutual fund distribution activity was expected to take a large hit. This in turn was estimated to lead to a sharp drop in gross inflows into equity schemes of mutual funds.

But the fact that they have fallen by about 25% from the normalized mean prior to the ban suggests that the going hasn’t been that bad. Besides, the drop in inflows may not be entirely because of the ban. Retail investors have been cautious about participating in this rally because of the harrowing experience of 2008. And the swiftness with which the markets rose from the lows in March caught most of them unawares.

Many retail investors seem to be of the view that they have “missed the bus" and would wait for a correction before returning in large numbers. The fact that the markets have been moving in a relatively narrow band since August hasn’t helped create demand in the past few months either.

With the market regulator now allowing the purchase of mutual fund units through stock brokers, reach would be wider.

Besides, a common online trading platform for mutual funds is expected to be available in less than six months. While these factors will improve access, flows will largely depend on how the market performs.

Write to us at marktomarket@livemint.com

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Published: 15 Nov 2009, 08:24 PM IST
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