With low penetration levels coupled with climbing growth rates, the Indian mutual Fund industry is all set to unleash its true potential. by Manish K. Pandey
If you love drama, emotion, pathos, watching The Tragedy of the Moor of Venice – Othello – on Broadway could be an option; the other could be investing in the Indian mutual fund (MF) industry. It had it all packaged for you in 2009. From negative returns that saw several portfolios bleed to death to positive returns as high as 160% garnered by few schemes, from fund houses running for cover to banks at the start of the year (during 2008 fund houses had incurred heavy losses leaving the industry shattered with a huge liquidity crunch) to the same banks banking on them for profitability during the latter half of the year, the MF industry took investors on a roller-coaster ride in 2009 as the benchmark index Sensex oscillated between the 9,000 and 17,000 mark.
Apart from dramatic stock market performance, the year gone by was the year of reforms for MFs in India. The key changes included elimination of entry and exit loads on purchase of schemes and the government allowing MFs to be traded on the bourses. While some were in favour of investors, others pampered the industry. Whatever the situation may have been at the start of 2009, most investors definitely seemed relaxed and happy as the year approached its end.
But the question now is – how will the year 2010 unfold for this beleaguered industry that is still adjusting to the regulatory changes? Will the promise of growth sustain in the near future? Is the sector ready to bounce back? A quick look at numbers and one probably would get an impression that not many are interested in investing in the sector. In fact, the MF industry just saw its 5th consecutive month of net outflows. The net outflows in December 2009 were to the tune of Rs.1.57 trillion (though the net inflow for the year to date stood at Rs.1.41 trillion). What’s more? The profitability of the asset management companies (AMCs) that clocked an average of 23% in 2006 was down by about 28% to an average of 16.5% during 2009. But then, that’s just a narrow picture. A broader look at the macroeconomic scenario of the industry and you get it all right.
Driven by various favourable socio-economic factors such as rising income levels and the extending reach of AMCs, the Indian MF industry has grown considerably in the past few years (Indian MF industry grew at a 25% CAGR during 2004-2009 to reach an AUM of $150 billion in March 2009). However, despite clocking growth rates that are amongst the highest in the world, it continues to be a very small market comprising just 0.32% share of the global AUM of $20.34 trillion as of June 2009. Though the ratio of AUM to India’s GDP has gradually increased from 6% in 2005 to 11% in 2009, it’s still significantly lower than the ratio in developed countries, where AUM accounts for 20-70% of the GDP. And that’s what holds the key to its success going forward starting 2010.
If you love drama, emotion, pathos, watching The Tragedy of the Moor of Venice – Othello – on Broadway could be an option; the other could be investing in the Indian mutual fund (MF) industry. It had it all packaged for you in 2009. From negative returns that saw several portfolios bleed to death to positive returns as high as 160% garnered by few schemes, from fund houses running for cover to banks at the start of the year (during 2008 fund houses had incurred heavy losses leaving the industry shattered with a huge liquidity crunch) to the same banks banking on them for profitability during the latter half of the year, the MF industry took investors on a roller-coaster ride in 2009 as the benchmark index Sensex oscillated between the 9,000 and 17,000 mark.
Apart from dramatic stock market performance, the year gone by was the year of reforms for MFs in India. The key changes included elimination of entry and exit loads on purchase of schemes and the government allowing MFs to be traded on the bourses. While some were in favour of investors, others pampered the industry. Whatever the situation may have been at the start of 2009, most investors definitely seemed relaxed and happy as the year approached its end.
But the question now is – how will the year 2010 unfold for this beleaguered industry that is still adjusting to the regulatory changes? Will the promise of growth sustain in the near future? Is the sector ready to bounce back? A quick look at numbers and one probably would get an impression that not many are interested in investing in the sector. In fact, the MF industry just saw its 5th consecutive month of net outflows. The net outflows in December 2009 were to the tune of Rs.1.57 trillion (though the net inflow for the year to date stood at Rs.1.41 trillion). What’s more? The profitability of the asset management companies (AMCs) that clocked an average of 23% in 2006 was down by about 28% to an average of 16.5% during 2009. But then, that’s just a narrow picture. A broader look at the macroeconomic scenario of the industry and you get it all right.
Driven by various favourable socio-economic factors such as rising income levels and the extending reach of AMCs, the Indian MF industry has grown considerably in the past few years (Indian MF industry grew at a 25% CAGR during 2004-2009 to reach an AUM of $150 billion in March 2009). However, despite clocking growth rates that are amongst the highest in the world, it continues to be a very small market comprising just 0.32% share of the global AUM of $20.34 trillion as of June 2009. Though the ratio of AUM to India’s GDP has gradually increased from 6% in 2005 to 11% in 2009, it’s still significantly lower than the ratio in developed countries, where AUM accounts for 20-70% of the GDP. And that’s what holds the key to its success going forward starting 2010.
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