Wednesday, July 7, 2010

>Indian Mutual Fund Industry - Towards 2015

India is undoubtedly emerging as the next big investment destination, riding on a high savings and investment rate, as compared to other Asian economies. As per a report authored by PwC “The World in 2050”, the average real GDP growth in India was likely to be in the range of 5.8% between 2007-50, (the actual average GDP growth between 2007-10 has been 7.6%) with per
capita income rising to USD 20,000 from the current USD 2,932. Over 50 per cent of the population is less than 25 years of age, with the proportion of working population likely to increase significantly over the next decade. The trend of rising personal incomes has been
witnessed not only amongst the young population, but also the high net worth (HNI) segment, which have sizeable sums to invest. One estimate indicates that there are more than 120,000 dollar millionaires in India and the number is increasing. The house-hold segment therefore proffers immense scope for attracting investments. India has a strong middle class of 250-300
million, which is expected to double over the next two decades.

It is in the backdrop of some of these encouraging statistics that the Indian mutual fund industry has
fostered itself. Since the 1990’s when the mutual fund space opened up to the private sector, the industry has traversed a long path, adapting itself continuously, to the changes that have come along. Growth in Assets Under Management (AUM) experienced has been unprecedented, growing at a CAGR of 28% over the last four years, slowing down only over the last two years, as a fallout of the global economic slowdown and financial crisis. Although investor confidence was
significantly eroded and AUMs suffered a dent, the sale of mutual funds has revived over the last few quarters, which implies regained confidence of investors, striving to look at alternate investment opportunities and any attendant higher returns, though the markets continue to
be choppy.

In today’s volatile market environment, mutual funds are looked upon as a transparent and low cost investment vehicle, which attracts a fair share of investor attention helping spur the growth of the industry. Over time, inclusive growth across the financial sector, seems to have taken centre-stage, re-designing all business strategies around this sole objective. The mutual fund industry being no exception, various measures are being taken by fund houses and distributors to spread access and reach to the semi-urban and rural segments. Clearly, the role of technology as a growth enabler
has assumed enhanced responsibility in this respect, to enable improved reach, inclined towards efficient distribution.

The landscape of the financial sector in India is continuously evolving, accredited to regulatory changes being undertaken, which is leading market participants like the asset management companies (AMCs) and distributors to restructure their strategies and adopt business models which will yield sustainable benefits.

Some of the other trends which have emerged strongly over the past year are heavy outflows triggered by market volatility and partnering of asset management companies with banks, to increase the strength of distribution networks.

It is worthwhile at this point to take note of some of the business and regulatory trends taking shape across the global economies, which might cast a shadow on the Indian markets. Developments on aspects of entry load, management fees paid to asset management companies, regulation of distributors and taxation of mutual funds from the investor point of view, are some of the areas which deserve to be given attention. The road ahead for the mutual fund industry will be paved by the performance of the capital markets. But, more importantly, it remains to be seen, how fund
houses adapt themselves to changes in regulations, thereby shaping growth for the future. A continuously evolving regulatory framework makes it mandatory for the industry to elicit a clear growth path, making it easier to assess obstacles and tide over them with time. It remains to be seen, how the industry progresses towards achieving its growth vision for 2015.

High growth story envisaged for the mutual fund industry in 2015

Last year the summit ended on the note of a vision for 2015, stating a positive outlook for assets under management growing at 15%-25%, between 2010 and 2015, the pace of growth being matched by the GDP growth rate of the economy. Profitability of the industry though, may decline substantially, as a fall out of spiraling operating costs and lower revenues. Higher penetration levels were also estimated riding o n the back of the accelerated drive for investor awareness, increase in investible surplus and a younger population with the capacity to absorb higher risks (of market movements in NAVs). In addition, regulatory environment was expected to take a turn, towards an alignment of financial regulations across the financial services sector.

Where do we stand in 2010?
The Indian mutual fund industry is undergoing a metamorphosis, which inadvertently marks a point of inflection for the market participants. However, even amidst volatile market conditions, average assets under management indicated vibrant growth levels posting a y-o-y growth of 47% in 2009-10, and the total AUM stood at Rs 613,979 crore, as of March 31, 2010. Aggregate funds mobilized during the year also grew 84%, supplemented by around 174 new schemes launched during April 2009 to March 2010. The investor base has also steadily expanded and between
November 2009 to March 2010, there was an addition of 60,834 investors.

These statistics testify, that the Indian mutual fund industry has weathered the financial crisis, but it
cannot be denied that the industry still continues to deal with challenges of low retail participation and penetration levels.

To read the full report: MUTUAL FUND