Amit Trivedi of Karmayog Knowledge Academy asserts that notwithstanding the recent events, the MF industry is set to register further growth and the beneficiaries will be those who are ready to adapt.
“Crisis
in mutual fund industry”
“Mutual funds investments to turn expensive”
Many of you would have seen these somewhat alarming headlines recently. It seems that the financial year 2015-16 has started on a wrong note for the mutual fund industry with the mutual fund industry being in deep trouble. The negative publicity seems to be adding fuel to the fire.
Someone asked me the other day, “What is the future of the mutual fund industry?” I remember a similar question asked by someone else in 2009 after the entry load was banned by SEBI. My answer then and now remains the same, “Mutual fund industry has a bright future, but I am not sure about some people and organizations. These are major changes happening here and those who adapt to changes will thrive.”
At this juncture, it is important to have a relook at the various major problems we went through:
· Sub-prime crisis and subsequent global downturn of 2008-09
· Liquidity crisis in the second half of 2008
· Sovereign crisis a la Greece, Spain, etc.
· Drop in gold prices
· Rating downgrades of US and France
· Hike in short term interest rates by RBI leading to negative returns in liquid funds
- In fact, liquid funds gave negative returns on three occasions during the last 10 years; once in 2008 and twice in 2013
· Rupee depreciation against major global currencies
· Slowdown in India – reduction in GDP growth rate
· Government inaction – stalling of many major projects
· Major irregularities in allocation of natural resources – gas, coal, telecom spectrum, etc.
· Collapse of an apparently “safe institution” – NSEL
· Adverse changes in taxation of debt funds
· Removal of entry loads
Though the initial years during the period in question were very good for India, post-2008 period has been tough for the economy, markets and mutual fund industry.
With this background, let us look at some numbers indicating whether the industry has grown and how the growth or decline has been.
As on 31st March 2015, the mutual fund industry AUM was Rs. 11.88 lakh crores. Compare this with the industry AUM of Rs. 1.49 lakh crores 10 years ago, i.e. as on 31 March 2005. This translates into CAGR of 23%.
Just to put things into perspective, the entire industry AUM of Rs. 1.49 lakh crores is less than that of the largest AMC today. HDFC Mutual fund has assets under management worth Rs. 1.61 lakh crores. The second largest mutual fund – ICICI Prudential, is marginally smaller today (Rs. 1.48 lakh crores) than the entire industry in 2005.
In 2005, the largest mutual fund was UTI Mutual fund managing assets worth Rs. 20,740 crores across all asset categories. Today, a single scheme, HDFC Equity Fund is around 90% of that amount at Rs. 18,721 crores.
Two AMCs, ICICI Prudential and Birla Sun Life added total assets worth Rs. 23,579 crores in the last quarter of 2014-15 (Rs. 11,796 crores by I-Pru and Rs. 11,783 crores by Birla). In other words, in three months these two AMCs added more assets than the assets of the largest AMC in 2005.
In March-2005, there were 29 AMCs in India, of which only five AMCs were larger than Rs. 10,000 crores. In January-March-2015 quarter, four AMCs added AUMs in excess of Rs. 10,000 crores each!
This has happened despite the problems the industry has gone through.
There will always be skeptics. They will come up with their arguments.
“Well, this was past. Will the industry see a similar growth in future, too? You know, mutual funds always highlight that ‘past performance may or may not be sustained’.”
I do not know the future, but are there any indicators that point to higher AUMs in the future? For starters, some developments are positive for the growth of mutual funds:
The regulators have cracked down on the large chit fund companies and ponzi schemes. Saradha Chit fund, Sahara and PACL are some of the examples. Both RBI and SEBI have been quite active in this area.
Enormous amount of efforts are being put in for investor education. SEBI has mandated AMCs to spend 2 bps of their AUM per year. At Rs. 12 lakh crores, the industry’s budget for the current year should be around Rs. 240 crores.
In the last few years, fund houses, distributors and investors have started talking the language of goal-based investing. This may lead to investors staying with their investments for longer time horizons.
Debt and liquid funds have become popular even among the retail investors in the last few years. This means mutual funds may account for larger share of the investor’s wallet.
Given this, it is quite possible that mutual funds see further growth over the next decade. The question really is: are you well placed to participate in this growth?
This is where we go back to the remark – future of the mutual fund industry is bright, but one cannot say so for many players. A quick look at the names of the AMCs reveals that some of the bigger names continued to remain among the top AMCs (as measured by total AUM). However, there was a visible change in the names of players. While some domestic players made an entry into the industry, many foreign players exited and some new ones entered. Pioneer returned with a new partner. Fidelity came and went away and there are rumours of their re-entry.
I have taken the examples of AMCs, whereas the current issues seem to be impacting the distributors. My sense is, wherever you are in the value chain, you will survive as long as you provide value for money.
Mutual funds continue to remain one of the finest investment vehicles. Incidentally, hardly anything has changed for the investor. There will always be naysayers. Some of us blow things out of proportion when we are caught by changes which we had wished away. The rules of the game have changed.
When the rules of the game change, it is the players who need to adjust to the changes and change their own practices and habits. Very often, the most successful find it the most difficult to change since “it had always been that way and they were successful working that way”. The need to change is not felt till it is too late. When the more established players find it difficult to change, the smaller ones may look at these changes as too difficult. In the end, those who persevere – whether already established or not – will survive.
A quote attributed to Charles Darwin sums it up, “It is not the strongest of the species that survives, nor the most intelligent, but the one most responsive to change.”
Amit Trivedi can be reached at amit@karmayog-knowledge.com.
