Has the Securities and Exchange Board of India’s (Sebi) ban on “entry load” damaged the domestic mutual fund (MF) industry? The industry’s view is that loss of profitability on new fund offerings (NFOs) is hurting growth.
However, the evidence is a little different. It shows the MF industry is gaining more stability since the Sebi ban on entry load on NFOs. This is obvious from the falling turnover (gross buying + selling of equity MFs) in the domestic MF flows. The Sebi ban has not affected the relative position of the industry in the equity markets, as is apparent from the share of assets under management in market capitalization, which remains intact. And contrary to market belief that equity MFs witnessed inflows during 2004-08, the data suggest that existing schemes of domestic equity funds saw outflows during 2004-08.
Also See NFOs: Bane or Blessing? (PDF)
In 2010, despite the entry load ban, gross inflows in equity funds touched a three-year high. Over the past three months, equity MFs have seen the highest cumulative inflows since August 2009. This is distinctly surprising in the context of market volatility—usually market volatility causes reticence among MF investors. In our view, we could be at the cusp of a structural shift of significant organic growth in the MF industry in the coming years. The industry’s profit dynamics could also shift sustainable volume-driven performance.
Graphic by Yogesh Kumar/Mint