Given that India’s market capitalisation jumped over R10 lakh crore in the year to March 2014 to R74 lakh crore and that the Sensex has been consistently clocking new highs since then, it’s little consolation that mutual fund equity schemes saw inflows, in May, of R2,020 crore, the highest since February 2011. Once again, small investors seem to be moving into the market at what could be the tail end of the rally, having sat it out on the sidelines for the most part. Indeed, it’s a crying shame the mutual fund industry’s assets under management (AUM) have crossed R10 lakh crore only now, two decades after the sector was thrown open to the private sector and with several of the world’s biggest players having been here for more than 10 years. While most developed markets have AUM/GDP ratios of close to 100%, the ratios for Asian economies range between 45% and 70%; the proportion for India is a shameful 10%.
Shameful because households aren’t putting away even a fraction of their savings in equities in a market about which foreign investors are so bullish; the equity corpus in MFs is just R2.17 lakh crore, much of it coming from a rise in stock prices rather than new contributions. In the last six years, net equity inflows have been negative in almost every year. For years now, MF schemes have been simply extended treasuries of companies who park their surpluses here, which is why more than half the AMCs are in the red; the average profitability for Indian AMCs is way lower than those for its Asia ex-Japan peers at 20-25 basis points, half the levels seen in China.
In its attempt to try and prevent misselling, by doing away with entry-loads, Sebi has ended up keeping investors away altogether, in a sense throwing out the baby with the bathwater. There is no way the industry can be rejuvenated without restoring the economics of the distributor because investors will not buy into schemes in meaningful amounts unless they are ‘pushed’ to do so. There’s also little point in incentivising AMCs to mobile savings in smaller towns when investors in the larger cities aren’t prompted to buy MF schemes. Bringing back loads is the only way out. Also, instead of pruning the securities transaction tax or tinkering with the short-term capital gains tax, the government might want to encourage households to give MF