Mumbai: The Rs7 trillion Indian mutual funds (MF) industry seems to be in a shambles despite recent efforts by the capital market regulator to revamp and streamline the sector.
Six months ago, the Securities and Exchange Board of India (Sebi) moved to ban entry load, or commission, on sales of MFs; capped charges on redemption; and allowed MF sales on exchange platforms.
However, distributors are loath to sell MFs in the absence of earlier incentives, volumes on the exchange platforms are at pitiful levels, investors are exiting in droves following volatile equity markets, and the regulator has been slow to clear new funds.
Graphic: Ahmed Raza Khan / Mint
In the five months since Sebi banned entry commissions, equity schemes of mutual funds have seen net outflows every month. From an innocuous Rs142 crore in August last year, outflows jumped to Rs2,185 crore in December.
The Association of Mutual Funds of India, an industry body, is yet to publish January 2010 data but fund managers already fear much higher outflows given market volatility in last month.
“This time we might see anywhere between Rs6,000 crore to Rs8,000 crore in outflows,” said a senior fund manager with a bank-owned mutual fund. He spoke on condition of anonymity.
Worse, the much-touted exchange platforms that were expected to give investors direct access to the MF market and boost subscriptions have failed to generate volumes.
According to the National Stock Exchange (NSE), India’s largest bourse, it had trades of a meagre Rs2.62 crore in its first month since launching on 30 November, a number that fell to Rs1.73 crore in January.
The BSE StarMF, the platform started by Asia’s oldest bourse Bombay Stock Exchange (BSE) on 4 December, has done marginally better. It recorded Rs11.6 crore in December, of which Rs8.44 crore came on the first day.
In January, it recorded inflows of Rs5.39 crore.
“We have seen some small town brokers coming forward to sell mutual funds through the platform. In January, we have seen the number of retail applications improving compared to December but it is difficult to say when the industry will see sales numbers pulling back,” said Sundeep Sikka, chief executive officer of Reliance Capital Asset Management Co. Ltd., which manages assets worth Rs1.17 trillion and is the biggest firm in the industry. “It is like trying to sell milk bottles in liquor shops saying its good for people’s health but how many will go there to buy milk?” said Nilesh Shah, deputy chief executive of ICICI Prudential Asset Management Co. Ltd, adding that exchanges cater to a different set of clientele.
In July, until when funds could charge an entry load on new investments, the industry floated new funds worth Rs2,394 crore. Such offers accounted for Rs1,137 crore, or less than half, in the next five months to December.
Nitin Rakesh, chief executive officer, Motilal Oswal Asset Management Co. Ltd, said more clarity was needed on the online distribution system. “Distributors are shifting from commission-based model to a fee-based model to sell mutual fund schemes along with other financial products for a certain yearly fee,” Rakesh said.
Karan Datta, national sales head at Axis Mutual Fund, said there were technical issues with the exchange platforms, too. “The exchange platform has all the potential to enhance sales but it is not clear as how the money flows from the clients to the brokers and then to the AMCs (asset management companies),” he said, but clarified that this was a temporary issue.
Another reason that distributors are going slow is that so-called netting or the practice of deducting charges before releasing funds after redemption of equities, is not valid for MFs any more.
“So when the investor redeems a fund, the money goes to his account and does not come to broker’s account,” said K. Venkitesh, national head, distribution, Geojit BNP Paribas Financial Services Ltd.
In such a scenario, an investor must pay extra upfront to allow for the broker’s commission.
Venkitesh also said the exchange platform will take any where between six months and one year to take off, adding that the investment focus for many distribution houses this tax season is on insurance instead of MFs.
And while others in the industry are also of the view that the stock exchange platform will take time to pick up, none of the six fund houses that Mint spoke with set a timeframe on when they expected this to happen.