US-64: A survivor’s guide

A lifeline just about keeps investors afloat

A snapshot of the mutual fund industry

Indian mutual fund industry: A snapshot

Industry at a glance

The mutual fund industry in India has seen phenomenal growth since its inception in 1965 and particularly in the post reform period after 1993. The assets managed by the industry shot up from Rs 25 crore in 1965 to Rs 47,000 crore in 1993 to Rs 1,13,005 crore in 2000. Till 1986, UTI was the only mutual fund. That year bank sponsored funds made an entry, the first one being SBI and Canbank mutual funds. In 1993 the country saw the first private sector mutual fund, Morgan Stanley.

Today there are 35 mutual funds run by asset management companies and the total number of schemes has shot up to 393 as in March 2001. Among them, there are 8 bank/financial institution sponsored funds and 26 private sector funds. Of these private sector funds, 14 are joint ventures between Indian companies and foreign mutual funds. The industry has been growing at a Compounded Annual Growth Rate (CAGR) over 1989-2000 at 21.4% and over 1964-2000 at 25.6%.

The oldest fund, Unit Trust of India, with total assets of Rs 57,684 crore, leads the pack, followed by Prudential ICICI Mutual Fund with assets worth Rs 5,000 crore mark. Equity funds roughly comprise 18% of the industry, whereas income funds constitute 49%. There are 30 sector-specific schemes in the industry.

Regulations
Regulations in the mutual fund industry are comprehensive, sensitive and supportive. The relationship between SEBI and Association of Mutual Funds in India (AMFI) is that of partnership. While the industry is self-regulatory to a large extent, there are strict guidelines for entry and investment practices of mutual funds with yearly inspection. The guidelines specify that advertisements are supposed to depict a clear picture to the investors. The trustees have to issue quarterly compliance certificates - a rare phenomenon in other industries. Separate auditors are required for auditing the mutual fund as well as the asset management company.

Operational areas
The industry has undergone substantial improvement in operational areas. There is a uniform method of valuation of non-traded securities. The calculation of Net Asset Values (NAV) has been refined. Open-ended funds have to declare daily NAVs before 8 pm on their respective web sites. Regular newsletter has to be sent to investors and release of redemption cheques has to be made within 10 working days. Some funds, like Zurich, have also started automated trading in their units through the National Stock Exchange (NSE).

Problems of the industry
In the early days, assured return close-ended schemes sprouted all over. But these became a problem later on. Tech schemes were a fashion in the industry in the late 90s, which again became a problem in the early 2000s. Funds like LIC MF Tax Plan, with no exposure to software shares, have done well compared to other diversified schemes.

A crucial issue surrounding the industry is that of Non-Performing Assets (NPAs). Detailed guidelines exist on provisioning which have to be clearly revealed by mutual funds. AMFI has worked out a policy for recognition, provisioning and disclosure of NPAs. Many mutual funds have developed clear policies on segregation of NPAs. For instance, IDBI Principal Mutual Fund considers an investment as non-performing if it has failed to provide returns in the form of dividend for more than 2 years.

Another important issue that has cropped up is about the quality of distributors appointed by the funds in India. India lacks a proper screening procedure in place. Hence, AMFI has developed the Advanced Training Program for distributors. The UTI Institute of Capital Markets also arranges training for employees and distributors to enable them to take the test at the NSE center.

However, the post office network started by IDBI Principal Mutual Fund, which currently accounts for less than 1% of the total AMC sales, has a good potential in rural India too. SBI Mutual Fund also has forged a tie-up with the postal department recently.

Investor Education
It is mandatory for funds to prepare a standard offer document. AMFI has taken the initiative to position mutual funds in the proper perspective and to convey the correct image to the investors. It has brought out a guide called 'Making mutual funds work for you" and conducts regular education seminars. An investor should unfailingly check out the expense ratio, the portfolio turnover and the average brokerage commission per share, in order to protect themselves.

Print this page