Personal Finance Outlook 2013: Mutual Funds - Overcoming hurdles
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The year saw continuous outflow from the equity portfolio. The commission structure did not appear to be very attractive to distributors. New valuation norms were introduced by Securities and Exchange Board of India (Sebi), fund houses were permitted to launch corporate repo and credit default swaps as also infrastructure debt funds (IDF) as mutual fund products.
Further, Sebi came out with a new set of regulations, which could have a profound impact on the industry and its fortunes. On the other hand, this was a year when all the fundamental asset classes — equity, gold and debt — performed well at some point of time or the other. Investors with prudent allocation between the three assets benefited from the market movements, with some estimates putting the returns from such multi-asset allocation at decent double-digit figures.
The aforesaid events in the industry could be viewed from two perspectives (a) actual on-ground happenings; and (b) regulatory changes. The regulatory changes, in essence, could make the industry more vibrant and less risk-prone. The new valuation norms mandate portfolio valuation on a daily mark-to-market basis, making the returns in tune with actual market realities and, thereby, less prone to fluctuations.
Sebi, through its recently published guidelines, which are still being discussed and debated on, has brought forth the need of the industry to go more retail, diversify marketing network and penetrate into newer markets. The proposed regulatory changes could bring a larger number of customers to the market and, eventually, give rise to a fast growing diversified mutual fund industry, which can, then, meet the needs of the ambitious India growth story. Introduction of infrastructure debt fund as a mutual fund product, permission for launching corporate repo and credit default swaps, etc., by mutual funds could have a synergistic impact on development and deepening of Corporate Debt market. It will be some time before the policy changes unfold at the operational level. Their beneficial impact, therefore, would take time to take effect.
The Indian MF industry has a relatively narrow base, in terms of number and geographical spread of investors, compared to banks and insurance companies. In addition to its deficient spread, the industry lacks significant reach of its own, and relies more on third-party distribution. Retail investors have viewed MFs more as a surrogate to the equity market, and not as a patient wealth generation exercise through prudent asset allocation.
The retail investor has largely remained oblivious to the opportunities in the debt market, which the MF industry could generate. Debt-oriented MFs performed well in 2012, but the concentration of retail investors continued in equity schemes. Though there is an all-round expectation of rate cut, the retail investor's engagement with the MF industry continues to be through equity. In a situation of continuing uncertainty and wide fluctuations, retail investors exited equity schemes; now, they maybe missing out on an impending rally. The foremost challenge is one of customer engagement and investor education, which could make investors aware of the benefit of asset allocation and ensure continuation.
It is necessary to pursue strategy to increase and widen the investor base and spread for healthy growth. The industry continues to remain confined to a relatively small number of investors in a limited geographical base. Large parts of the country have not yet been penetrated. It is no wonder that the limited diversification of investors has resulted in more homogeneous behaviour, and made the industry extremely vulnerable. It is necessary to access new customers, and spread the distribution network through innovative means. The existing distribution network has serviced the industry well in its formative days. The industry would have to find ways to grow this network by expanding, diversifying and supplementing it. India has one of the lowest penetrations of the MF industry. As the unpenetrated market remains extremely large, there would be meaningful business opportunity for everyone, if pursued systematically. An important challenge is to find resources for meeting the huge sunk cost towards market development expenditure.
In view of the various policy measures introduced by the government, the outlook of the industry for FY13 is positive, with a bias towards equity. Debt is also likely to perform well. If the market shows positive movements, the MF industry can look forward to overcoming the gloom. The Indian growth story is one of ambitious pursuit, financing of which would necessitate growth of a healthy secondary debt market, and a deeper equity market. The MF industry becomes a very important institutional arrangement in such a transition of the financial sector. The happenings of the year passed by is a transitory phase, notwithstanding the large redemptions and exit by some of the reputed players. The industry will have to reorganise and reorient in a meaningful manner to remain relevant.
he author is MD & CEO, IDBI Mutual Fund
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