The ministry of finance is keeping a close eye on the mutual fund industry and has nudged capital market regulator Sebi on the highly skewed investor pattern. Even though the assets under management have swelled to more than Rs 7.6 lakh crore, the net retail investment is hovering around Rs 14,000 crore — just 2 per cent of the total AUM.

“Sebi over the past few months has taken several initiatives in favour of retail investors. It is true that the industry is skewed towards institutional investors. We have informally told them to take care of this as well,” said officials in the ministry of finance. The mutual fund industry, for years, has concentrated on big-ticket investors like the institutional and corporate investors and seems to have ignored the retail ones. According to data collated through various players in the industry, net retail investment, as on March 31, 1995, stood at a meagre Rs 187.55 crore. The total number of retail investors was around 7 lakh.

By March 2000, the total count went up to 23 lakh and net investments to Rs 1,062.2 crore. The total AUM of the industry till this time swelled to Rs 1,13,005 crore. By the end of financial year 2005, retail participation to total AUM ratio increased to 2.56 per cent and by October 13, 2009, almost 2 crore retail investors are estimated to have made net investment of nearly Rs 13,900 crore.

The prime reason for this is tax arbitrage that works in the favour of institutional and corporate investors. Mutual funds are treated as pass through entities where appreciation of income is taxed at a much lower rate compared with other instruments. MFs generate income in two forms: dividend and capital appreciation. “Dividends from income funds are taxed at 15 per cent and 22 per cent in case of liquid funds. This is far less compared with the normal tax rate of 35 per cent. Due to this difference, institutional investors and corporates prefer parking their money in MFs,” said Dhirendra Kumar, chief executive officer, Value Research.

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