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Idea Transcript


CHAPTER - SEVEN

PROBLEMS AND PROSPECTS OF MUTUAL FUNDS IN INDIA Mutual funds are the greatest innovation for mobilising the savings of the society and channelising them into productive assets. In US, mutual funds have already taken over banks and financial institutions in offering the most optimum returns on a set of diversified portfolios. The trend in India is looking much the same with many mutual fund schemes gaining the confidence of investing populace so much that the public sector banks and financial institutions have started their own mutual funds owing to the fear of global trend. But, this does not mean that mutual funds are full of benefits or virtues. They have their own set of problems regarding costs, services, regulations, performance, profitability, decline of Net Asset Values (NAVs) below the issue prices, financial instability and others, which have been causing big concern to investors. The growing realisation on such issues is adversely affecting the investors’ stake in mutual funds industry in India. But, fostering economic variables in the country are giving faith for its vividness. It will be useful to examine the factors responsible for this contradictory state of mutual funds in India so as to throw light on its future prospects.

7.1 Problems of Mutual Funds Mutual funds industry in India has emerged as one of the major constituents of Indian financial system. It has completed more than forty five years of its presence. In this short period, it grew fast and also suffered from equally fast decline. It became sick in its formative years. It has witnessed noticeable structural transformation, quantitative growth, qualitative and quantitative decline and perhaps the revival, which may put the industry back on track. The decline in mutual funds industry had been attributed to the factors such as a) Prolonged bearish trends and scams in Indian stock market that killed the investors’ interest in equities and units b) The fall of UTI broke the investors’ faith and confidence c) Unattractive returns on mutual fund schemes. Although, good performance of debt funds helped the industry for some time, the continuous reduction in interest rates in the economy has adversely affected the growth momentous of mutual funds industry again d) Sluggish trends and sickness

in corporate sector after 1980s e) Inefficiency and corruptibility in mutual funds management f) Withdrawal of tax benefits under Section 80 M of Income Tax Act g) Poor performance of mutual fund schemes h) Series of crisis, scandals and frauds. The above-mentioned factors have created supplementary flaws and setbacks for the mutual funds industry at various points of time and have been among the major causes of the decline in mutual funds industry. The major weaknesses and problems of the Indian mutual funds industry are examined below. 7.1.1 Low Level of Awareness The awareness of investors determines the success of mutual funds industry. In India, low investors awareness/ information level and financial literacy have been causing biggest threats to mutual funds industry in channelising the household savings into mutual funds. According to the Invest India Market Solutions Report (2007) “Just one out of seven people with savings in 2007 were aware of mutual fund opportunities”.1 Low awareness level among retail investors has a direct bearing on the low mutual funds off take in the retail segment. Due to this, investors in India still prefer bank deposits to mutual funds. The Karvy Private Wealth Report (2010) reveals that “more than 40 percent of Indian household savings find their way into bank deposits. Only 3.8 percent of their savings go to mutual funds”.2 The majority of new investors do not understand the concept, operations and advantages of investment in mutual funds. The lack of understanding about mutual fund products is more pervasive in semi-urban and rural areas. Majority of people in these areas find it difficult to differentiate between mutual funds and direct stock market investments. A large number of retail investors do not understand the concept of risk-return, asset allocation and portfolio diversification. Moreover, less understanding of Systematic Investment Plans (SIPs) in mutual funds has caused investors to invest in a lump-sum manner. One of the worst drawbacks of such lack of information or understanding of mutual funds is that investors remain unaware of what mutual funds are doing to their

1 2

Invest India Market Solutions (IIMS) Dataworks. (2007). Invest Indian Income and Savings Survey. New Delhi: IIMS. Karrvy Private Ltd. (2010, September). Karvy Private Wealth’s India Wealth Report – Where do Indian Individuals Invest their Wealth? Key Trends. Hyderabad: Karrvy Private Ltd., p.10.

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money. Besides, mutual fund companies are not making any concerted efforts to address this issue. It has been noticed, that some investors have a poor opinion about the investment efficiency of mutual funds. Mutual funds are often viewed as momentum chasers rather than true professional investment managers. Mutual funds follow the wide disparity in sales and repurchase price of certain schemes. A case in this regard is UTI US-64 scheme, in which UTI repurchased its units at Rs. 14.85 in 1992 when its NAV was Rs. 28.63.3 Mutual funds also fall short of expectations in meeting investors’ requirements at the time of economic uncertainty and market volatility. They have become the trading instruments of high-class investors rather than that of small investors. Besides this, the practice of frequent miscalculation of returns and premature closure of schemes is quite prevalent in industry. It is also found that mutual fund offer documents are issued only to Non Resident Indian (NRI) investors and High Net worth Investors (HNI). It is provided to general investors on their demand only. The mutual fund schemes are designed keeping in mind the preferences of the investors, changes in stock/ capital market, returns on various instruments and changing profile of the investors. The schemes are framed and conceptualised by the top management of the mutual fund companies and marketed by their branches and the agents. The agents and the sales executives of the mutual fund companies assure higher returns to the investors and paint a rosy picture about the mutual funds while marketing the schemes. The agents or distributors of mutual funds are more concerned about their commissions and incentives and thus do not explain the risk involved in the investment owing to the fear that it may discourage the investors to invest. The ignorance of the investors about mutual funds coupled with aggressive selling by promising higher returns to the investors have resulted into loss of investors’ confidence.

3

Bhole, L, & Mahakud, Jitendra. (2009), Financial Institutions and Markets. New Delhi: Tata McGraw Hill, p. 12.39.

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The mutual funds in our country have quite wrongly been promoted as an alternative to investment. The investors who invest in growth or equity schemes consider it as an alternative to stock market investment and the investors who invest in debt schemes expect returns higher than on nationalized banks’ fixed deposits. They get dissatisfied when they do not receive the expected returns. The dissatisfaction of investors results into poor demand for such schemes. The NAV of such schemes decline on listing and trading due to poor sentiments of investors. Thus, investors’ low level of awareness is the major problem of mutual funds industry. 7.1.2

Regulatory Problems A strong regulatory framework is the key to success for any business

environment and so is the case for Indian mutual funds industry. The level of competition in the industry has continuously been going up. So, it needs to perform a more dynamic and vibrant role to meet the tests of time. We have observed some areas in mutual fund regulations which are to be addressed soon so as to make it more competitive and transparent. 1.

The first level regulation of mutual funds in the country rest with the trustee. The actions taken by the trustee are deemed to be the actions of the mutual funds. The trustee is supposed to perform many duties like – approve the appointment of the director of asset management company, obtain periodic reports from the asset management company about the fund operations, monitoring security dealings of key personnel of the asset management company, review of contracts, file periodic reports to the regulator, discipline the asset management company etc. These duties are considerable in magnitude and call for significant expertise and devotion of time. But, the regulations in India do not mandate that the trustee company (and its directors) be provided with adequate administrative support for discharging their responsibilities. Further, SEBI requires at least four trustees in a mutual fund and 2/3 of them must be independent from AMC. However, their functions in fund management are not demarcated in the regulations. Trustees are usually drawn from diverse background. They are generally experienced bankers,

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eminent lawyers, ex-judges and renowned charted accountants. So, it would be unrealistic to expect them to possess a high level of mutual fund expertise. This situation is not conducive to the exercise of competence. The directors of the trustee company receive sitting fees when they attend the board meetings. This amount is moderate and perhaps not commensurate with the level of responsibilities expected to be discharged by them. Inadequate compensation may result in a superficial trusteeship function. 2.

SEBI has comprehensive provisions to deal with violation of mutual fund regulations. The defiance of norms for registration, information, application, submission, cooperation, code of conduct, trade practices, investor complaints and obligation for mutual fund, AMC and trustees are subject to penal provisions of SEBI as given in chapter IX in SEBI (Mutual Fund) Regulations, 1996. The accused party is dealt in the manner as specified under SEBI Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market Regulations, 1995 and SEBI Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty Regulations, 2002. These regulations state the minor and major penalties for mutual funds which among others include the debarring of a branch as well as of whole time director for six months and the suspension/ cancellation of registration for three months etc. But, there is no mention of any penal provisions against the officers, employees, key personnel, fund managers of an AMC and fund custodian who are found guilty of violating regulations. The absence of adequate regulations against such erring persons in mutual funds cannot be said to secure the rights of investors properly. Further, SEBI provides the penalty of Rs. 1 lakh to Rs. 1 crore whichever is higher, if mutual funds fail to comply with the SEBI (Mutual Fund) Regulations, 1996. Whereas in US, if any person who wilfully violates the rules and regulations of Investment Company Act 1940, is liable to pay a fine of $10,000 (maximum) or may get imprisonment of up to five years or both. In China, if a fund manager or fund custodian violates any provisions of Law of the People’s Republic of China on Funds for Investment in Securities, then in addition to charging the fine of not less than 30,000 Yuan

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and not more than 300,000 Yuan, these parties are given disciplinary warning or suspended/ disqualified from dealing in fund management business or fund custody. Same procedure is adopted for an employee of fund manager or special fund custodian department. Looking at the provisions in other countries, we find that the punishment imposed by SEBI on mutual funds violating its regulations is very small. In fact, it encourages them to go for bigger scams. It is therefore suggested that the amount of penalty should be suitably enhanced and prison term should also be added to it. The fund managers, fund custodian, employees and staff should also be brought under the penal provisions as in US and China. 3.

The mutual fund regulations do not prescribe any qualification for the fund manager. So anybody can become fund manager irrespective of his/ her qualifications. Contrary to that, a mutual funds distributor/ advisor is required to pass the ‘National Institute of Securities Market’s (NISM) Mutual Fund Distributors Certification Examination’ so as to become eligible to do his/her work. The fund manager performs a very responsible and risky task. So, we feel that there ought to be some qualification for them also. In China, fund managers are stipulated to have a professional qualification for dealing in fund business. They should also have at least three years' working experience as Manager or Senior Managers in a firm dealing with fund management. UK Financial Service Authority (FSA) has laid down the qualification for all entities dealing in investment business. Fund/ Investment managers in UK are required to obtain the Certificate in Investment Management/ Certified International Wealth Managers Diploma (CIWM)/ MSc in Investment Analysis/ Masters of Wealth Management/ Investment Advice Certificate for engaging in investment management activities. On the same pattern, some guidelines relating to fund manager’s qualifications may be prescribed by SEBI. This will lead to better utilisation of investors’ money and enhance their confidence that their money is in good hands. SEBI is also silent about the qualification of trustee in mutual funds. Whereas in UK, the trustee/ depository is required to have a Certificate in Collective Investment Scheme

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Administration/ Investment Management Certificate/ Certificate in Corporate Finance/ Client Service Management Certificate to be a trustee of mutual fund. Trustee is the main entity for keeping track of the mutual fund activities and its development. So, SEBI should also consider the educational qualification of trustees in mutual funds and make it a necessary stipulation 4.

The mutual fund distributors are out of the regulatory purview of SEBI. There are no separate regulations framed by SEBI for them. In US, distributors are registered under the Securities Exchange Act of 1934 as broker-dealers. They are regulated by Securities Industries and Financial Markets Associations and are required to pass broker-dealer exam for selling mutual fund units. Similarly, Financial Service Authority (FSA) in UK spells out the responsibilities for distributors in ‘The Responsibilities of Providers and Distributors for the Fair Treatment of Customers’ (RPPD). Such regulatory norms for distributors are yet to be framed in India. Recently, SEBI has taken a few steps in this regard. It has directed AMCs to regulate the distributors by carrying out due diligence process. We feel that giving responsibility to AMCs to regulate distributors is not enough to secure the interest of investors. SEBI should frame separate and more comprehensive regulations for distributors so as to regulate their activities properly. Besides, SEBI should set up a separate governing body to look into the activities of mutual fund distributors as in UK.

5.

Fund managers are bound to invest funds according to the investment objectives of schemes stated in the offer documents. They do not have choice to invest in other good performing securities. This mandate sometimes, restricts the mutual funds to perform effectively in the market.

6.

SEBI regulations regarding transparency in mutual fund product names and definitions are not comprehensive in nature. Mutual fund products are used to have hazy names like T.I.G.E.R (The Infrastructure Growth and Economic Reforms), S.M.I.L.E (Small and Medium Indian Leading Equities) and C.U.B. (Competitive Upcoming Businesses) etc. The equity funds are vaguely defined such as ‘opportunities funds’ and ‘multi-cap’ funds. Because of this, investors

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do not understand how diversified funds are different from ‘opportunities funds’ and ‘multi-cap’ funds. Owing to this, investors do not get the real picture about where the fund will be invested and what kind of risk it will take. To tackle this problem, SEBI is trying to evolve a fund labelling system which can help investors to some extent. It is a good step and it will certainly boost up the investors’ confidence in the market. 7.

The ban on entry load in 2009 reduced the ability of distributors to sell mutual funds in the market. Earlier, distributors were paid Rs. 2.25 (per hundred rupees) as compensation by AMCs, which was deducted as the entry load from scheme’s amount. The average commission paid to distributors was 1.78 percent in 2008, which came down to 0.98 percent in 2010. The entry load ban not only lowered the distributors’ commission but also compelled large number of distributors to go out of the mutual funds business. As a result, the participation of households in mutual funds has declined. Also, from June 30, 2009 onwards, SEBI has enabled investors to pay commissions directly to the distributors depending on his/ her assessment of various factors, such as the quality of service rendered by distributors. But, we think that no investor will be interested to pay money separately for any kind of service received from distributors. It will raise a concern from distributors regarding the non-receipt of payment from investors, and may thereby lead to the conflict of interest between distributors and investors. These regulatory steps do not seem to be practical and may go against the distributors who are considered key to the success of the mutual funds industry.

7.1.3 Improper Investment Policy Disclosure Mutual funds are stipulated to have investment policy in written form. Investment policy links the investment objective of a fund, to a fund manager’s daily working strategy. The efficacy of the investment policy depends on the clarity of visions with which it is executed or achieved. Despite its stated importance, a study of selected offer documents of mutual fund schemes viz., Birla Sun Life, LIC Nomura, UTI and Sahara reveals that the Indian mutual funds have ambiguously described the

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risk factors and its controlling procedures while mobilising huge funds from investors. Mutual fund schemes have followed tough and vague language in writing their investment policies. These are written in a manner that the investor may get confused. Also, the investment objectives of schemes are found descriptive in nature and it is difficult to draw the generalisations out of them. The portfolio turnover rates of last five years of the schemes are also not mentioned in the offer documents. 7.1.4 Low Participation and Penetration Low retail participation is the biggest challenge posed before the Indian mutual funds industry regardless the availability of favourable retail environment and ample growth opportunities in the Indian economy. According to the Confederation of Indian Industry & PricewaterhouseCoopers Mutual Fund Summit Report (2010), “Indian mutual funds industry has experienced a marginal increase of 5.3 percent in retail participation from 21.3 percent in 2009 to 26.6 percent in March, 2010”.4 Dent of low retail participation is mainly attributed to the week distribution network and low transparency in client servicing. Moreover, mutual funds are popular mainly with the urban, high, and middle-income groups. The penetration of mutual funds is quite low beyond top 20 cities. According to the Klynveld Peat Marwick Goerdeler & Confederation of Indian Industry Report (2009), “the cities beyond top 20 contribute around 10 percent of the industry AUM”.5 The population living in Tier II & Tie III cities is not able to invest in mutual funds owing to the lack of proper distribution channels and client servicing. Mutual fund houses have largely concentrated on the distribution network in top 20 cities because the cost associated for penetration in Tier II, Tie III cities and rural areas is very high. However, some of the mutual fund companies have now started to focus on cities and areas beyond top 20 cities by increasing their branches and supporting the distribution reach. They have stepped up the number of branches in Tier II & Tier III cities but have failed to focus adequately on boosting retail business. The institutional segment has been given more weightage

4 5

CII 6th Mutual Fund Summit. (2010). Indian Mutual Fund Industry – Towards 2015: Sustaining Inclusive Growth – Evolving Business Models. Mumbai: PWC-CII, p. 7. KPMG-CII. (2009). Indian Mutual Fund Industry- Future in a Dynamic Environment: Outlook for 2015. Delhi: KPMG-CII, p.11.

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in garnering the Assets under Management (AUM) that comprises more than 60 percent of total AUM share in mutual funds.6 This is because of the mindset of current investment managers who think institutional money as the easiest route of having a big slice of cake in one go. The availability of tax arbitrage and large ticket volume to corporates on investing in money market mutual funds and the easy access of institutional investors in Tier I cities appear to be important factors responsible for this phenomenon. The focus on retail segment requires significant distribution capabilities, wide network and intense foot prints. It is noteworthy that Asset Management Companies (AMCs) have recently begun to focus on these aspects. 7.1.5 Limited Products The mutual funds industry in India offers limited products to meet the needs of investors. Unlike the US, UK and Japan, the Indian mutual funds industry is very slow in offering innovative products to investors. In US, different mutual funds are available for the entire life span of investors. Schemes, more than 10,000 in number, fit to every economic and social need of investors, be it a university admission (College Target Date Funds), retirement (Retirement Target Date Funds) or purchasing of the property. Likewise in the UK, there are over 2,000 different types of unit trusts and Open-ended Investment Companies (OEICs) available to investors, investing in over 30 sectors. These sectors have been categorised by the Investment Management Association (IMA) and are divided among the assets class (like funds investing equities, fixed interest, and property), geography (such as UK Equity, North America, Japan and Emerging Markets), sector type (like Technology and Telecoms) and investment style (such as Growth or Income). Compared to that in India, only about 1,200 mutual fund schemes are available in the market and most of which are either income, balanced, liquid or growth funds. The sector specific funds, commodity funds, index funds, funds of funds (FOFs) and exchange traded funds (ETFs) have recently been introduced in India. These funds have not gained adequate interest of investors yet. So, owing to few options, the investors in India are restricted to a limited range of mutual fund products. The lack of experience, traditional investment 6

KPMG-CII, p.12.

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practices, risk averse and conservative attitude of mutual funds appear to be the reasons for limited product offering in India. The products catering to the needs of investors require the development of funds related to education, marriage and housing etc. The industry is still to launch a variety of ETFs, college savings fund, e-funds, green funds, socially responsible financial instruments, fund of hedge funds, advanced money market funds, renewable and energy/ climate change funds, rural and urban development funds etc. The industry does not offer the capital guarantee schemes for the investors who are risk averse. It has not introduced schemes suitable for farmers, small entrepreneurs and merchant to tap the savings in the rural segment. The product restructuring to tap the target customers is also not very good. 7.1.6 Stagnant Fee and High Cost The fee structure in Indian mutual funds industry is stiff in nature as compared to developed countries. In developed countries, the fee structure is based on several factors such as the investment objective of fund, fund assets allocation, fund performance, the nature and number of services that a fund offers etc. It is not so in India, as a result, while the expenses have continuously been rising; the management fees have remained the same. The distributors were paid fixed percentage of client commissions by AMCs before 2009. After the abolition of entry load in August 2009, investors are now directly responsible for paying client commission to the distributors but still their commission is fixed. High cost of mutual funds is an important problem of mutual funds industry in India which appears mainly in the form of high fees and commissions. For instance, the index fund in US costs investors just 0.25-0.27 percent while, the same fund in India costs between 1 to 2.5 percent which makes them four to ten times more expensive than the US index fund. Higher sales and marketing costs are a dent to the profits of Indian mutual fund houses. According to the Financial Express Bureau (2010), the sales and marketing expenses comprise around 50 percent of total costs of

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AMC. While in the Western Europe, sales and marketing expenses constitute only 2 percent of overall costs. During 2000-10, sales and marketing expenses for the entire mutual funds industry has been over Rs. 2,000 crore. The brokerage charges has a lion’s share in it. Reliance Mutual Fund in 2009 approximately spent Rs. 75 crore as marketing expenses out of which Rs. 66 crore was brokerage fees. Similarly, HDFC Mutual Fund spent Rs. 55 crore as marketing expenses, out of which Rs. 44 crore was towards brokerage fees.7 Thus, rising cost is a big problem in mutual funds and special efforts are needed to cut down this cost so as to boost the future prospects of the industry. 7.1.7 Low Engagement and Misselling In the absence of a comprehensive framework to regulate distributors, both the distributors and mutual fund houses have generally been not very enthusiastic in offering post sales services to investors. This is in spite of the fact that they are paid high commissions in the form of upfront and trail fees. Owing to low engagement, there have been frequent and rising instances of misselling of fund units to investors. We would like to quote one such case mentioned in Moneylife which became public in April, 2010. The distributor (associated with Champion Advisory Services) collected cash and cheques worth Rs 2 crore for investing in mutual funds from numerous people in Jabalpur. He collected cheques from the investors and invested in his own name. People asked him for account statements but he used to keep telling them that they would receive it after some time. Investors have not got their money back yet. He fled with the money. He collected cash from people saying that he was new to the business and required money.8 It caused immense problem to other mutual fund distributors in Jabalpur. Association of Mutual Funds in India (AMFI) suspended the registration number of Champion Advisory Services and instituted an enquiry against it.

7 8

Sales, Marketing Costs Eat into Mutual Fund Profits. (2010, April 2). The Financial Express Bureau. Retrieved from http://www.financialexpress.com. Samalad, Ravi. (2010, July 7). Jabalpur Based Distributors Dupes Investors. Retrieved from http://www.moneylife.in.

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AMFI has suspended the AMFI Registration Number (ARN) of 13 distributors from May, 2006 to August, 2011. After the enquiry, it has finally terminated the ARN of 3 suspended distributors. The problem of misselling put a question mark on the competence, value and degree of commitment of mutual fund distributors to investors. 7.1.8 Lack of Satisfactory Performance Investors’ satisfaction depends on the good performance of mutual funds. Investors entrust their hard-earned savings to mutual fund managers for the effective management of their funds. Therefore, it becomes imperative on the part of mutual fund managers to provide satisfactory performance to investors. In order to find out the same, we have evaluated the performance of 46 sample public and private sector mutual funds schemes. The performance results show that mutual fund investors are unable to earn returns commensurate to the market returns. It means, little additional benefits of investment in mutual funds have been offered to investors. Earning minimum required return on mutual funds cannot be deemed enough to sustain the investors in mutual funds. Further, the main advantage of investing in mutual funds is that investors can enjoy the benefits of diversification. The impact of diversification on the fund returns is found quite low. It indicates that mutual fund schemes have not been properly diversified by their fund managers. The fund managers are also found to have low stock selectivity ability. Thus, on the basis of our results, it can be said that mutual fund managers have provided limited benefits of professionalism to the investors. 7.1.9 Rising Investors’ Complaints The Indian mutual funds industry has now more than four crore of investor accounts. Many of them are multiple accounts held by a single investor. After the provision of filing mutual fund complaints, investors’ complaints are rising in the industry. According to the AMFI Investor Complaints Report (2009-10), 39 mutual fund companies had 4.95 lakh investor complaints against them. Most of the complaints were pertaining to non-receipt of dividends, non-receipt of redemption proceeds and the non-updation of PAN (Permanent Account Number), bank details, nomination, etc. UTI Mutual Fund (MF), with over one crore folios, topped the list

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with 99,347 such issues. The country’s oldest fund house, had received more than 30,984 complaints relating to non-receipt of dividend units, 14,833 relating to nonreceipt of redemption proceeds, 16,700 relating to non-receipt of statement of accounts and another 36,446 regarding other issues. Birla Sun Life MF, which has more than 24.66 lakh investor folios, had received over 95,000 complaints. ICICI MF was hit by over 57,600 grievances while Reliance MF had about 10,200. HDFC MF received 7,673 complaints of which 5,600 were regarding discrepancies in statement of accounts. Table 7.1 Investor Complaints against Mutual Funds (Number of Complaints) Mutual Fund Company 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31.

Axis MF Franklin Templeton MF Baroda Pioneer MF SBI MF HDFC MF Birla Sun Life MF Canara Robeco MF UTI MF Reliance MF Kotak Mahindra MF LIC Nomura MF DSP Blackrock MF Tata MF Sundram MF L&T MF IDFC MF ICICI Prudential MF Sahara MF Deutsche MF Escorts MF Fidelity MF BOI Axa MF HSBC MF ING MF JM Financial MF JPMorgan MF Mirae Asset MF Morgan Stanley MF PRINCIPAL MF Quantum MF Religare MF

2009-10

2010-11

3702 28926 134 8174 7673 95438 37514 99347 10234 4532 1534 731 984 3327 377 3928 57644 156 124 13 2726 66 1846 193 1300 564 72 10190 11305 67 530

6579 13181 1362 3615 10199 904 1928 10774 25427 608 635 2240 796 3817 540 5106 941 145 130 8 34 30 1161 170 3368 0 61 3208 2014 182 206

Percentage Change +77.71 -54.43 +916.42 -55.77 +32.92 -99.05 -94.86 -89.16 +148.46 -86.58 -58.60 +206.43 -19.11 +14.73 +43.24 +29.99 -98.37 -7.05 +4.84 -38.46 -98.75 -54.55 -37.11 -11.92 +159.08 -100.00 -15.28 -68.52 -82.18 +171.64 -61.13

Source: Compiled from AMFI Investor Complaints Report 2009-10 & 2010-11

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The number of complaints filed by investors declined significantly in 2010-11. As per the AMFI Investor Complaints Report 2010-11, mutual fund companies received 3.94 lakh complaints in 2010-11 which was 20 percent less than that of the previous year. However, in 2010-11 also, most of the complaints were regarding nonreceipt of dividends and redemption proceeds, and non-updation of PAN, bank details, nomination etc. Mutual fund houses like UTI, Birla Sun Life, Kotak Mahindra, Franklin Templeton, Fidelity, SBI, Morgan Stanley and ICICI Prudential have witnessed sharp fall in their investor complaints. While the Axis, Baroda Pioneer, HDFC, Reliance, DSP Blackrock, Sundram, L&T, IDFC, Duetsche, JM Financial and Quantum mutual funds have received even more investor complaints in 2010-11. The country’s top fund house, Reliance MF has received over 25,000 complaints, which is 148 percent higher over the previous year. At the same time, the complaints against JPMorgan reduced to 0 from 564. 7.1.10 Malpractices in Trading Mutual funds are set up as trusts and thereby have a fiduciary duty towards their investors. They have the responsibility to ensure that the trading of mutual funds is aligned to the regulations and interests of investors are duly protected. Regulations have been devised to prevent fraudulent activities and digressions from deceptive and manipulative practices by insiders associated with personal securities transactions. Mutual funds involved in unfair trade practices are dealt with in the manner provided under the Securities and Exchange Board of India (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002. The nature of unfair trade practices were mostly that of market manipulation and price rigging. Some of the other irregularities are insider trading, takeover violations and violation of norms in capital issues, non-disclosures under SEBI regulations and illegal carry forwards. Figure 7.a shows the number of cases investigated by SEBI in the last two decades. With the growth of the mutual funds industry, several gaps and loopholes have also emerged which allowed various stakeholders to indulge in unfair trade practices. Although technology acts as a huge facilitator to efficient trading mechanisms, it also adds to the burden of fraudulent activities as newer methods are

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being used to violate laws and regulations. During the year 2010-11, about 54 percent of the cases taken up for investigation were regarding market manipulation and price rigging, as against about 62 percent of such cases in the previous year. It has been observed that the reason behind market manipulation is on most occasions a large network of front entities that trade with unfair means. Figure 7.a Investigation Cases by SEBI

Source: SEBI Annual Report 2010-11

SEBI issue warning and deficiency letters to mutual fund companies involved in fraudulent activities. In 2010-11, 30 warning letters were issued to 25 mutual fund companies on account of violations of SEBI regulations/ guidelines. Twenty-six deficiency letters were issued to 25 mutual fund companies. Out of the 26 deficiency letters issued, 25 letters were on observations from the inspection report made from the period of July 1, 2007 to June 30, 2009. This was done with the purpose to strengthen their systems and improve compliance standards. To protect the investors from unfair trading practices in market, there is a need to have a sound customer due diligence regime, comprehensive ‘in person’ verification process and ongoing

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monitoring of transactions by the registered intermediaries including mutual funds. In compliance to investor’s instructions to change his/ her distributors or trade directly, mutual funds are also needed to ease the No Objection Certificate requirement from existing distributors. 7.1.11 Other Problems 1.

Financial Literacy and Single Lingual Mechanism – The low level of financial literacy causes many problems to mutual funds investors. SEBI and mutual fund companies have recently taken a number of steps to educate the investors. The applicability of single lingual mechanism in the application forms/ offer documents is also an important problem especially for those who are unable to read/ write English.

2.

More Focus on Short-term Growth Strategy - Mutual fund companies in India are following short-term growth strategies by concentrating more on heavy advertising and high selling practices leaving sideways the performance, product innovation and customer services. This short-term growth strategy is not viable for the sustainable growth of the mutual fund business in the country.

3.

Herding Behaviour - Herding behaviour keeps investors unaware of the existing market trends and also creates hype and rumours among them regarding other good mutual funds. This has become one of the most serious problems of the mutual funds industry now.

4.

Secrecy in Documents – The documents of mutual funds are often not sound and their operations are characterised by secrecy, lack of accountability, unwillingness to furnish required information and so on. Notwithstanding many guidelines of SEBI, mutual funds are following little transparency in their working. Mutual funds are a good source of investment for small investors. They invest

their savings in numerous sectors of the economy thereby contributing to the

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economic development in our country. Investors have responded very enthusiastically to this financial instrument of savings, but a lot has to be done for its stabilisation and popularisation in the country. Thus, it is important to address the above-mentioned problems in a comprehensive way for the sustainable and rapid growth of the mutual funds industry.

7.2. Prospects of Mutual Funds The performance of Indian mutual funds industry has been quite encouraging over the years in spite of the several problems faced by the industry. This can be seen from the mounting growth of mutual funds AUM, its market participants, investor base and total number of schemes offered. Based on which, the industry is anticipated to sustain its encouraging trends in future also. Moreover, the country’s economic and financial health, its future prospects, sound regulatory framework and effective fund performance also play an important role in deciding the future of mutual funds industry in India. 7.2.1 An Overview of Indian Economy To take an overview of Indian economy, let us look at its economic growth since 1950s in general and the last decade in particular. Table 7.2 shows the movement of major economic growth indicators from 1950s to 2011. The Table shows that real GDP growth accelerated from 3.6 percent average annual rate in 1950s to 7.8 percent during 2009-11. It however, reached to an average annual rate of 8.9 percent during 2004-08 before being interrupted by the global financial crisis. The performance of agriculture sector has been very erratic. Its average share in GDP has declined from 53.4 percent in 1950s to 14.9 percent during 2009-11. The growth in industrial sector decelerated from 6.3 percent average annual rate in 1950s to 5.7 percent in 1990s. It improved during 2000s but declined again to 6.7 percent during 2009-11. However, its average share in GDP increased from 11.7 percent in 1950s to 20.1 percent during 2009-11. The manufacturing sector experienced a notable rise after 1990s as its growth has picked up from an average annual rate of 5.7 percent in 1990s to 10 percent during 2004-08. The performance of service sector has been very

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impressive especially after 1980s. The rate of growth in service sector jumped from an average annual rate of 4.5 percent in 1950s to 9.5 percent during 2009-11. The share of service sector in the Indian economy has now become more than 50 percent. Hence, Indian economy is now led by the service sector, which has been posting exciting growth since 1980s. Table 7.2 Indian Economy: 1950-2011 1950s

1960s

1. Real GDP 1. 1Agriculture

3.6 2.7

4.0 2.5

1.2 Industry

6.3

5.4

4.4

6.7

1.2.1 Manufacturing

5.8

5.9

4.3

1.3. Services

4.5

4.9

4.2

Economic Indicators

1970s

1980s

1991-00

2001-10

2004-08

2009-11

7.3 2.4

8.8 5.0

7.8 2.3

5.7

7.3

9.0

6.7

5.7

5.6

8.0

10.0

7.1

6.3

7.1

9.0

10.1

9.5

Percentage Change 2.9 5.6 5.7 1.3 4.4 3.2

Percentage Share 2. Share in GDP 2.1 Agriculture

53.4

45.6

40.8

35.04

28.4

19.4

18.0

14.9

2.2 Industry

11.7

15.02

16.7

18.6

20.1

20.0

20.1

20.1

2.3 Services

34.4

39.2

42.2

46.3

51.5

61.6

61.1

65.0

Source: RBI Handbook of Statistics on Indian Economy 2010-11

The key feature of India’s economic progress has been the continuously rising proportion of savings and investment in GDP. Table 7.3 shows that the average savings rate in the economy has increased from 23 percent of GDP in 1990s to close to 31 percent during 2001-10 with a high rate of over 33 percent during 2004-08. It reached to the peak average rate of 33.05 percent during 2009-11. Fiscal consolidation helped in picking up the overall savings rate in country owing to that the savings of public sector rose significantly during 2004-08. The average investment rate (nominal gross domestic capital formation (GDCF)) also rose sharply from 24.4 percent in 1990s to 31.2 percent during 2001-10. It became about 36 percent during 2009-11. The efficiency of capital utilisation also improved as the average Incremental Capital Output Ratio (ICOR) fell from 5 percent in 1990s to 3.7 percent during 2004-08. It, however, declined to 4.5 percent during 2009-11.

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Table 7.3 Savings and Investment Indicators

1991-2000

2001-10

2004-08

2009-11

As a Ratio to GDP at Current Market Prices 1. Gross Domestic Savings 1. Household Savings 1.1 Financial Assets 1.2 Physical Assets 2. Private Corporate Sector 3. Public Sector 2. Gross Domestic Capital Formation 3. Incremental Capital Output Ratio (ICOR)

23.0 17.7 9.9 7.8 3.8 1.5

30.7 23.1 11 12.1 6.3 1.3

33.4 23.4 11.3 12.1 7.2 2.9

33.05 24.1 11.4 12.6 8.05 0.95

24.4

31.2

34.3

35.8

5.0

4.4

3.7

4.5

Source: Ministry of Finance Annual Economic Survey 2010-11

The Wholesale Price Index (WPI) measures the dynamic movement of prices and serves as an important determinant of economic policy. The WPI (Wholesale Price Index) inflation went down from an average annual rate of 8.1 percent in the 1990s to 5.5 percent during 2004-08 (Table 7.4). The consumer price inflation also experienced a similar drop. However, in the post-financial crisis period the inflation trend has reversed as WPI inflation reached an average annual rate of over 7 percent and the consumer price inflation turned about twofold (10.6 percent) during 2009-11. The food price inflation was very high during 2009-11. Table 7.4 Inflation Indicators

1991-2000

2001- 2010

2004-2008

2009-2011

Annual Average Percentage Change 1. Wholesale Price Index (WPI) 1.1 Food Articles

8.1

5.4

5.5

7.1

10.2

5.8

5.2

13.3

1.2 Fuel Group

10.6

8.9

7.3

7.2

1.3 Non-Food Manufactured Products

6.8

4.0

5.0

4.0

2. Consumer Price Index (CPI)- Industrial Workers 2.1 CPI- Industrial Workers Food

9.5

5.9

5.0

10.6

9.8

6.2

5.5

12.5

Source: Compiled from the various issues of RBI Annual Report

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Table 7.5 Money and Credit Indicators

1991-2000

2001-2010

2004-2008

2009-2011

Percentage Change 1. Narrow Money (M1) 2. Broad Money (M3) 3. Non-food Bank Credit 4. Investment in Government Securities

15.6 17.2 15.4 20.9

16.0 17.5 22.4 17.7

19.6 18.6 26.7 13.3

12.3 17.4 18.7 16.2

39.5 74.3

49.7 84.6

Ratio 5. Credit-GDP Ratio 6. Broad Money-GDP Ratio

20.6 49.9

37.7 73.6

Source: Compiled from the various issues of RBI Annual Report and Ministry of Finance Annual Economic Survey

During 1991-2011, the financial deepening of Indian economy has significantly increased. The broad money (M3) to GDP ratio has jumped from an average of 50 percent in 1990s to about 85 percent during 2009-11 (Table 7.5). The credit-GDP ratio has also increased from an average of 20.6 percent in 1990s to around 50 percent during 2009-11. The non-food bank credit (bank credit to private sector) rose from an average of 20.9 percent per annum in 1990s to 26.7 percent during 2004-08 but declined to 18.7 percent during the period of 2009-11. This happened because the bank’s investment in government securities declined from an average of 21 percent per annum in 1990s to 16.2 percent during 2004-08 and increased thereafter owing to global financial crisis. Further, the process of fiscal consolidation in the country also created the space for private credit expansion. The Indian economy has experienced a dramatic increase in its openness during the last two decades. Its exports and imports of goods and services as a proportion of GDP have more than doubled from 22.9 percent in 1990s to 49.8 percent during the period of 2009-11 (Table 7.6). Its openness in terms of both trade flows and capital flows together as a proportion of GDP shows a spectacular growth from 41.9 percent in 1990s to about 106.5 percent during 2009-11. The increasing openness of Indian economy indicates its increasing integration with world economies. The net capital inflows as a percentage of GDP rose from 2.2 percent in 1990s to 4.6 during 2004-08 though declined in the recent period of 2009-11 (Table

215

7.7). Due to the global financial crisis, both trade and capital flows grew moderately during 2009-11. The debt-GDP ratio fell from 29 percent in 1990s to 18.6 percent during 2009-11. The debt-service ratio has also turned down from 25 percent to 4.7 percent during the said period. Table 7.6 Openness Indicators (As a Percent to GDP) Indicators

1991-2000

2000-10

2004-08

2009-11

1. Exports Plus Imports of Goods & Services

22.9

39.2

40.8

49.8

2. Current Receipts & Payments plus Capital Receipts & Payments

41.9

78.7

83.5

106.5

Source: Compiled from the various issues of RBI Annual Report and Ministry of Finance Annual Economic Survey

Table 7.7 External Sector Indicators 1. Balance of Payments 1.1 Merchandise Exports (percent change)

1991-2000

2001- 2010

2004-08

2009-11

8.6

17.7

25.4

15.8

1.2 Merchandise Imports (percent change)

9.6

19.5

32.3

14.6

1.3 Trade Balance/GDP (percent)

-2.8

-5.3

-5.4

-8.6

1.4 Invisible Balance/GDP (percent)

1.6

4.8

5.1

6.1

1.5 Current Account Balance/GDP (percent)

-1.3

-0.5

-0.3

-2.6

1.6 Net Capital Flows / GDP (percent)

2.2

3.4

4.6

2.7

1.7 FDI to India (USD billions)

1.6

16.3

15.3

31.4

-3.3

-22.9

-40.3

-2.1

2.1 Debt-GDP Ratio (percent)

29.0

19.0

17.7

18.6

2.2 Debt-Service Ratio (percent)

24.9

8.8

8.3

4.7

1.8 Reserve Changes (BOP basis) (USD billions) [(Increase (-)/Decrease (+)] 2. External Debt Indicators

Source: Compiled from the various issues of RBI Annual Report and Ministry of Finance Annual Economic Survey

The openness in economy has also been accompanied with the rise in India’s outward Foreign Direct Investment (FDI). It has risen sharply from USD 759 million in 2000-01 to USD 16,524 million in 2010-11 (Table 7.8). The outward FDI has also

216

grown from 18.8 percent of inward FDI to about 60 percent during the same period. The net FDI to India has increased from USD 3,270 million in 2000-01 to USD 11,305 million by the end of 2010-11. It shows that the Indian economy has become a favourable investment destination for global investors. In the ATKearney FDI Confidence Index 2010, India is ranked 2nd in Asia and 3rd in the world.9 Table 7.8 Foreign Direct Investments (USD million) Year

Inward

Outward

Net FDI

Outward/

FDI

FDI

to India

Inward (%)

2000-01

4029

759

3270

18.84

2001-02

6125

1391

4734

22.71

2002-03

4976

1819

3157

36.56

2003-04

4322

1934

2388

44.75

2004-05

5986

2274

3712

37.99

2005-06

8900

5867

3033

65.92

2006-07

22739

15046

7693

66.17

2007-08

34727

18836

15891

54.24

2008-09

41707

19364

22343

46.43

2009-10

33108

15143

17965

45.74

2010-11

27829

16524

11305

59.38

Source: RBI Handbook of Statistics on Indian Economy 2010-11

The total unemployment rate in the economy came down from 8.3 percent in 2004-05 to 6.6 percent in 2009-10. The unemployment was at an all time low in 200910. Noticeable feature of the employment structure has been that in spite of the large employment in agriculture, though with shrinking share, the absolute share of workforce in agriculture declined for the first time in later half of 2000s. In 2009-10, the contribution of agriculture to total employment declined by approximately 5 percent as compared to that in 2004-05 (Table 7.9). However, the share of industry increased from 15.55 percent in 1993-94 to 21.50 percent in 2009-10, basically because of the spectacular growth in the construction sector. The share of the

9

A.T. Kearney Inc. (2010). Investing in a Rebound: The 2010 ATKearney FDI Confidence Index. U.S.A: A.T. Kearney Inc, p.10

217

manufacturing sector marginally declined in 2009-10 as compared to that in 2004-05. The share of the service sector in total employment increased from less than 20 percent in 1993-94 to more than 25 percent in 2009-10. The increase in the share of service sector between 2004-05 and 2009-10 was 2 percent, from 23.4 percent in 2004-05 to 25.3 percent in 2009-10. The share of service sector in total employment has significantly increased in the recent years and it is likely to play an important role in creating new employment opportunities in the coming years but agriculture and allied activities are also going to play an important role in tackling poverty and unemployment in future. Table 7.9 Sectoral Distribution of Workers (% Distribution of Workers) Sectors

1. Agriculture Sub-Total

2. Industry 2.1 Mining & quarrying 2.2 Manufacturing 2.3 Utilities 2.4 Construction Sub-Total

3. Service 3.1 Hotels, restaurants & trade 3.2 Transport, storage & communication 3.3 Financing & real estate 3.4 Public administration & community services Sub-Total Total

1993-94

1999-2000

2004-05

2009-10

64.75 64.75

59.84 59.84

58.44 58.44

53.20 53.20

0.72 11.35 0.36 3.12 15.55

0.57 12.09 0.32 4.44 17.42

0.6 11.69 0.3 5.59 18.18

0.6 11.00 0.3 9.60 21.50

7.42

9.40

10.29

10.80

2.76 0.94

3.70 1.27

3.80 1.50

4.30 2.10

8.58 19.70 100.0

8.36 22.73 100.0

7.79 23.38 100.0

8.10 25.30 100.0

Source: Ministry of Labour and Employment Second Annual Report to the People on Employment 2011

Today, India has emerged as one of the fastest growing economies of the world. The country has made significant economic progress over the last two decades. Its industrial environment has become more competitive and open, and infrastructural gaps have been sought to be bridged up through the public-private partnership initiatives with both domestic and foreign source of funding. Current account has

218

become fully convertible while capital account is virtually free for non-residents. Moreover, the interest rates were deregulated and banks gained operational autonomy for commercial lending. As a result, the per capita income of India has doubled in the last 15 years and is likely to double again in 10 years by 2017-18.10 It has also emerged as the leader in Asia in terms of financial deepening.11 If India is able to maintain the current pace of growth then it will lift million out of poverty and enrich the global economy. While India has come a long way, maintaining the current pace would itself be challenging and require continued reforms efforts. 7.2.2 Growth in Indian Capital Market The Indian capital market has been one of the best performing markets in the world over last few years.12 The strong economic growth, large inflows of foreign investments, development of stock exchange and derivatives market have delivered a truly impressive growth to Indian capital market. During the last decade, the Indian capital market has witnessed rapid growth on almost all the fronts. It can be seen from the trends of annual turnover on Bombay Stock Exchange (BSE) (Figure 7.b). It increased from Rs. 36,011 crore in 1990-91 to the impressive figure of Rs. 10,00,032 crore in 2000-01 and afterwards, crossed the level of Rs. 15,78,856 crore by the end of 2008. The volume due to the impact of global financial crisis declined in 2009 to Rs. 11,00,074 crore. The situation, however, improved in 2010 and the annual trading volume at BSE rose to Rs. 13,78,809 crore. But, the annual turnover on BSE declined to Rs. 11,03,467 crore in 2010-11 owing to the dampening effects of Euro zone, Middle East and North African Crisis. In spite of the crisis, the primary and derivatives (mainly NSE) segments of the capital market have experienced buoyant activities in 2010-11. Trends indicate that the investment by foreign institutional investors, mutual funds and other parties in Indian stock have been rising especially since 2001-02. 10 11 12

Mohanty, Deepak. (2011). Indian Economy: Progress and Prospects. Speeches Section, RBI, p. 1, Retrieved from http://rbidocs.rbi.org.in. Chakrabarti, Rajesh. (2010). Financial Development in India: Issues and Challenges, p. 1, Retrieved from http://www.icffr.org. Allen, Franklin., Chakrabarti, Rajesh & De, Shankar. (2007) India’s Financial System, p. 22, Retrieved from http://finance.wharton.upenn.edu.

219

Figure 7.b Annual Turnover at BSE (Rs. Crore)

Source: RBI Handbook of Statistics on Indian Economy 2010-11

Table 7.10 Select Ratios Relating to Stock Market

Year 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11

BSE Market Capitalisation to GDP Ratio (%) 43.4 54.3 84.4 85.5 109.5 55.3 94.1 89.1

NSE Market Capitalisation to GDP Ratio (%) 40.5 50.7 78.6 81.2 103.6 51.9 91.7 87.3

Total Turnover to GDP Ratio (%) Cash Derivatives Segment Segment (All India) (BSE+NSE) 58.7 77.6 53.4 2.1 66.8 134.7 70 178.9 109.3 284.9 69 197.4 84.2 269.7 61.1 381.1

Source: SEBI Annual Report 2010-11

The market capitalisation to GDP ratio indicates the liquidity of market and it is an important indicator of stock market development. Table 7.10 gives the ratio of traded value of shares to GDP on BSE and NSE (National Stock Exchange). It shows that the BSE market capitalisation to GDP ratio has improved from 43.4 percent in 2003-04 percent to 94.1 percent in 2009-10 though reduced to 89.1 percent in 2010-

220

11 due to uncertainties in global financial market. Similarly, over the same period, the ratio of NSE increased from 40.5 percent to 91.7 percent but declined to 87.3 percent. The total turnover to GDP ratio has been higher under the derivatives segment (381.1 percent) as compared to the cash segment (61.1 percent) in 2010-11. The improving market liquidity on NSE and BSE except for the year 2010-11 indicates the increasing depth and resilience of the Indian capital market. Table 7.11 Total Derivates Turnover Since Inception (Rs. Crore) Year 2000-01

NSE 2,365

BSE 1,673

Total 4,038

2001-02

1,01,927

1,917

1,03,844

2002-03

4,39,864

2,475

4,42,339

2003-04

21,30,649

12,074

21,42,723

2004-05

25,47,053

16,112

25,63,165

2005-06

48,24,250

9

48,24,259

2006-07

73,56,271

59,007

74,15,278

2007-08

1,30,90,478

2,42,308

1,33,32,786

2008-09

1,10,10,482

11,775

1,10,22,257

2009-10 2010-11 CGR C.V

1,76,63,665 2,92,48,221 110.9 113.9

234 154 -7.4 227.6

1,76,63,899 2,92,48,375 105.7 113.6

Source: Various Issues of SEBI Annual Report, CGR and C.V is calculated by the Researcher

Over the last 17 years, one of the biggest developments in the Indian capital market has been the introduction of the derivatives market. It enhanced the maturity of Indian capital market and raised its liquidity. Derivatives trading began in 2000 with trading in stock index future. NSE alone now accounts for around 99 percent of derivatives trading in Indian markets. The derivatives turnover at NSE and BSE segment since their inception can be seen from Table 7.11. It shows that the value of NSE derivatives market was Rs. 2,365 crore in 2000-01 which rose to Rs. 2,92,48,221 crore in 2010-11. Likewise, the turnover on BSE has increased from Rs. 1,673 crore in 2000-01 to Rs. 2,42,308 crore in 2007-08 but declined to Rs. 154 crore in 2010-11. The total derivatives turnover on NSE & BSE has grown to the tune of Rs. 2,92,48,375 crore in 2010-11 from Rs. 4,038 crore in 2000-01 registering the

221

compound annual growth of 105.7 percent. However, the variation in turnover was quite high about 105.7 percent during the said period. The product wise turnover shows that index futures followed by index options are the most popular products in derivatives (Table 7.12). The impressive growth of derivatives has encouraged the retail investors in market. Hence, derivatives have quickly become the major part of Indian capital market. Table 7.12 Product Wise Equity Derivates Turnover on NSE (Rs. Crore) Index Futures

Stock Futures

Index Options

Future Options

Jun-00 to Mar-01

2,365

-

Call -

Put -

Call -

Put -

2001-02 2002-03

21,482 43,951

51,516 2,86,532

2,466 5,670

1,300 3,577

18,780 69,644

6,383 30,489

413 1,752

2003-04 2004-05 2005-06 2006-07 2007-08 2008-09

5,54,462 7,72,174 15,13,791 25,39,575 38,20,667 35,70,111

13,05,949 14,84,067 27,91,721 38,30,972 75,48,563 34,79,642

31,801 69,373 1,68,632 3,98,219 6,68,816 20,02,544

21,022 52,581 1,69,837 3,93,693 6,93,295 17,28,957

1,68,174 1,32,066 1,43,752 1,61,902 3,08,443 1,71,843

49,038 36,792 36,518 31,909 50,693 57,384

8,388 10,067 19,220 29,543 52,153 45,311

2009-10 2010-11 CGR C.V

39,34,389 43,56,755 100.07 91.46

51,95,247 54,95,757 55.09 113.78

40,49,266 90,90,702 145.6 174.35

39,78,699 92,74,664 163.04 181.43

3,89,158 7,77,109 34.02 119.58

1,16,907 2,53,235 30.67 117.41

72,392 1,15,150 108.8 186.58

Month/Year

Average Daily Trading Volume 12

Source: NSE Fact Book 2010-11, CGR and C.V is calculated by the Researcher

The Foreign Institutional Investors (FIIs) play an important role in the Indian capital market. Since their entry in 1993, foreign institutional investment has continuously been growing with the exception of few years. Moving with stock market boom and a sound global economic scenario, investments by FIIs have been quite high in last few years mainly since 2003-04. The FIIs made a record investment in the Indian equities in 2010-11. The net investments by FIIs have increased from USD 2,159 million in 2000-01 to USD 32,226 million in 2010-11 (Figure 7.c). The continuously rising investment by FIIs indicates their level of confidence in the Indian capital market and sound growth potential of Indian economy.

222

Figure 7.c Net Investment of FIIs (USD Million)

Source: RBI Handbook of Statistics on Indian Economy 2010-11

The role of primary market (also known as new issue market) has been crucial to the growth of capital market. In the last two decades, one of the major factors responsible for boosting the growth of primary market has been shift in the private sector corporates financing from debt financing to equity financing. Further, the all India financial institutions (FIs), which were earlier dependent on the government and other FIs for cheap financing have also turned towards the primary market for raising capital. The total amount of resources raised from the primary market has grown at a compound annual rate of 2.47 percent during 1990-91 –2010-11 while the growth of corporate securities and government securities have been about 14.46 percent and 19.40 percent per annum respectively. If we look at a period-wise growth in the total resource mobilisation from primary market, it has been relatively higher during the period of 2000-11 as compared to 1990-00 (Table 7.13). The variation in total resource mobilisation is also higher during 2000-11 probably due to the global financial crisis.

223

Table 7.13 Resources Mobilisation from Primary Market (Rs. Crore) Year

Corporate Securities

Government Securities

Total

1990-91

14,219

11,558

25,777

1991-92

16,366

12,284

28,650

1992-93

23,537

17,690

41,227

1993-94

44,498

54,533

99,031

1994-95

48,084

43,231

91,315

1995-96

36,689

46,783

83,472

1996-97

37,147

42,688

79,835

1997-98

42,125

67,386

1,09,511

1998-99

60,192

1,06,067

1,66,259

1999-00

72,450

1,13,336

1,85,786

2000-01

78,396

1,28,483

20,688

2001-02

74,403

1,52,508

22,691

2002-03

75,241

1,81,979

25,722

2003-04

74,850

1,98,157

27,301

2004-05

1,08,650

1,45,602

25,425

2005-06

1,34,765

1,81,747

31,651

2006-07

1,94,958

2,00,198

39,516

2007-08

1,16,266

2,55,984

37,225

2008-09

2,22,204

4,36,688

65,889

2009-10 2010-11

3,83,891 27,26,65

6,23,619 58,35,21

1,00,751 8,56,186

CGR (1990-00)

16.97

28.73

23.05

C.V (1990-00)

46.66

69.36

58.84

CGR (2001-11)

17.25

16.35

29.53

C.V (2001-11)

63.82

64.20

217.13

Source: Compiled from various issues of Indian Securities Market Review, NSE (Mumbai), CGR and C.V is calculated by the Researcher

Table 7.14 highlights the growth in terms of the number of participants in different segments of the Indian securities market. It shows that the number of FIIs have tripled from 506 in 2000 to 1,722 by 2011. During the same period, the total number of portfolio managers have risen six fold from mere 23 to 267 and the number of mutual funds from 37 to 51. Venture capital funds have made their appearance in the market and witnessed a sound growth. These funds have increased from 27 in 2000 to 184 in 2011. We can see the performance of Indian securities market through the trend of various parameters as given in Table 7.15. The table shows that during

224

2001-10, the all India equity derivatives turnover grew at a compound annual rate of 132.19 percent. The net investments by mutual funds grew at a compound annual rate of 54.07 percent. The turnover in the cash market has nearly doubled over the decade. The mobilisation through euro issues and FIIs also increased manifold. Similarly, the resource mobilisation from primary market grew up to five fold and the all India market capitalisation to eight fold. The entire securities market has, therefore, undergone tremendous growth during 2000-01 – 2010-11. Table 7.14 Market Participants in the Indian Securities Market Market Participants

2000

2011

Securities Appellate Tribunal

1

1

Regulator (DCA*, DEA**, SEBI, RBI)

4

4

Depositories (NSDL, CSDL)

2

2

With Equity Trading

23

19

With Debt Market Segment

1

2

With Derivatives Trading

2

2

With Currency Derivatives

-

4

Brokers (Cash Segment)

-

10,203

Corporate Brokers (Cash Segment)

-

4,774

Brokers (Equity Derivatives)

-

2,111

Brokers (Currency Derivatives)

-

2,008

5,675

83,808

FIIs

506

1,722

Portfolios Managers

23

267

Custodians

14

17

Registrar to an Issue & Share Transfer Agents

242

73

Primary Dealers

15

21

Merchant Bankers

186

192

Bankers to an Issue

68

55

Stock Exchanges

Sub-brokers

-

29

Underwriters

42

3

Venture Capital Funds

27

184

Foreign Venture Capital Investors

-

153

Mutual Funds

37

51

Collective Investment Schemes

37

1

Debenture Trustees

Source: Indian Securities Market Review 2000-01 & 2010-11, *Department of Company Affaires **Department of Economic Affairs

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Table 7.15 Key Performance Indicators of Securities Market (2000-10) Parameters Resource Mobilisation in Primary Market Resource Mobilisation through Euro Issues All India Market Capitalisation All India Equity Market Turnover All India Equity Derivative Turnover Assets under Management of Mutual Funds Net Investments by Foreign Institutional Investors (FIIs) Net Investments by Mutual Funds Returns on Nifty 50 Returns on BSE Sensex

Compound Annual Growth Rate (%) 17.15 43.89 23.15 19.94 132.19 18.99 30.53 54.07 13.13 25.42

Source: Indian Securities Market Review 2010

According to the Financial Development Report 2011 of the World Economic Forum, India ranks 36 (37 last year) in terms of financial development among 60 countries. While in terms of financial stability, India’s rank is 47. The report further says that “India’s particular strength lies in its non-banking financial services (5th), with Initial Public Offerings (IPO) activity (5th), Insurance (7th) and securitisation (4th) being the primary drivers of the pillar’s high score. India’s strong financial intermediation is further bolstered by robust results in its foreign exchange (15th) and derivatives market (20th). However, a low level of financial sector liberalisation (56th), an inability to enforce contracts (57th), an underdeveloped infrastructure (56th), and a high cost of doing business (55th) all contribute to a weak institutional and business environment (both ranked 54th). Weakness in financial access (47th) is a reflection of India’s lack of retail access to capital (41st)”. 13 The weak areas are really the areas of concern and need proper attention for embarking upon the future financial development of country. The foregoing discussion clearly brings out the economic & financial health of Indian economy. It indicates that India has attained significant growth in the last two decades driven by several economic and demographic factors such as rising income, savings & investment rates, growing working age population and increasing openness

13

The Financial Development Report 2011, World Economic Forum USA Inc., p.20

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in the economy. The booming stock market, positive business environment, increasing reach of asset management companies (AMCs) and foreign investors’ participation furthermore drove the growth pace of the economy. Hence, being a part and parcel of the economy, the Indian mutual funds industry will also move with the growth of Indian economy in future. 7.2.3 Future Prospects The prospects of mutual funds industry in India is closely linked to the performance of economy in future. So, before discussing the prospects of mutual funds industry, we will underline the future prospects of Indian economy in brief. 7.2.3.1 Growth Prospects of Indian Economy India is home to 1.21 billion people, which is about 17.4 percent of the world population. However, it accounts for only 2.4 percent of world GDP in terms of US dollar terms and 5.5 percent in terms of purchasing power parity (PPP). Hence, there exists a huge potential for reaching to higher growth trajectory in future. According to Dun & Bradstreet (D&B), “India’s real GDP is expected to register an average growth of 9.2 percent during 2011-2020, on the back of increased infrastructure spending, substantial growth in investment activity, higher saving, strong growth in services sector, emerging of a large working age population and robust consumption demand. Strong GDP growth is expected to result in a considerable increase in real per capita income, which in turn would lead to significant reduction in the percentage of people living below the poverty line. With rising income levels, India is expected to move from a low-income country to a middle-income or upper-middle income country by 2020. In the journey during the current decade (2011-2020) as India traverses a high growth path, it is expected that India will become USD 5 trillion (at current market prices) economy by 2020”.14 Figure 7.d shows the growth pattern of the Indian economy. It exhibits that starting with 3.5 percent average annual growth rate during the first three decades, the economy is expected to grow at an average annual rate of 9.2 percent during the current decade. 14

Dun & Bradstreet (D&B). (2012). India’s Macro Economic Outlook 2020, p. 7. Retrieved from http://www.dnb.co.in.

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Figure 7.d Indian Economy: A Shift to High Growth Path (Growth in Real GDP)

Source: Dun & Bradstreet India’s Macroeconomic Outlook 2020

Dun & Bradstreet pointed out that with normal monsoon, “the agriculture is expected to record an average annual growth of 4.3 percent during 2011-2020 with an increase in investment in the agricultural infrastructure such as irrigation facilities, warehousing and cold storage”.15 The industrial sector is expected to grow at 9.5 percent per annum largely driven by the robust consumption demand, increase in exports, infrastructure development and the strong growth in domestic investments. Owing to the impressive growth of hotels, transport, communication and financial services, the growth in service sector is estimated at 10.1 percent per annum during 2011-2020. Figure 7.e shows the sectoral forecast of the Indian economy.

15

Dun & Bradstreet (D&B)., p.10.

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Figure 7.e Sectoral Forecast of Indian Economy

Source: Dun & Bradstreet India’s Macroeconomic Outlook 2020

The infrastructure sector has a huge untapped potential, which will be used as the main driving force for achieving higher economic growth in current decade. Growth in infrastructure sector will not only boost the investment and consumption activities but also increase the employment opportunities in the country. It is expected that gross domestic capital formation (GDCF) as a proportion of GDP will increase to 41.3 percent in 2020 from 35.1 percent in 2010-11. The major portion of investment will be funded by domestic savings, which means there will be less dependence on foreign capital. The rising per capita income will be the basic factor responsible for raising domestic savings. Savings rate is expected to surge to 38.8 percent in 2020 from 32.3 percent in 2010-11. The private final consumption expenditure is likely to increase at an average annual rate of 9.1 percent during 2011-2020. Further, with rapid industrialisation and development of Tier II and Tier III cities, the urban population as a percent of total population is expected to become more than 32 percent in 2020 from 31.1 percent in 2011. This will boost up the public expenditure in education, which is expected to rise to 3.9 percent of GDP in 2020 from 3 percent in 2011.

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According to the Report of the Technical Group of Population Projections constituted by the National Commission on Population (2006), “The population of India is expected to increase from 1029 million to 1400 million during the period 2001-2026 – an increase of 36 percent in twenty five years at the average annual rate of 1.2 percent. Out of the total population increase of 371 million between 2001 and 2026, the share of the workers in the age-group 15-59 years in this total increase is 83 percent”.16 The substantial rise in the working age population will result into a large supply of labour force for productive purposes and thus brighten the growth prospects of the economy. Table 7.16 Growth Prospects of Indian Economy: 2011-2021

Year GDP at Factor Cost Constant Prices (USD Billion) GDP at Factor Cost Constant Prices (Growth Rate) Population Billion Per Capita Income (USD) WPI Inflation (Average) (%) Gross Fiscal Deficit as % of GDP Current Account Deficit as % of GDP Exports of Goods and Services (USD Billion)

1990-91 to 2001-02 400 5.7 1.01 400 7.8 5.6 -1 60

2001-02 to 2010-11 1070 7.3 1.1 900 5.6 4.7 0.75 33

2011-12 to 2020-2021 2500 9.3 1.38 1800 5.6 3.4 < -1 1500

Source: PHDCCI Growth Prospects of the Indian Economy Report 2011

The Progress Harmony Development Chamber of Commerce and Industry (PHDCCI) Report (2011) on Growth Prospects of the Indian Economy says that “India’s real GDP growth is projected to reach a higher growth trajectory and estimated to achieve an average growth of 9.3 percent during the decade by 2021”. 17 The per capita income of India is expected to rise to USD 1800 during 2011-12 – 2020-21. It will push up India’s share in world consumption. The average wholesale price index (WPI) inflation is projected to remain within 5-6 percent. The gross fiscal deficit is expected to be within 3-5 percent of GDP. The exports of goods and services 16 Technical Group of Population Projections constituted by the National Commission on Population. (2006). Population Projection for India and States 2001-2026. New Delhi: Registrar General & Census Commissioner of India, p. vii-viii. 17 PHD Chamber of Commerce and Industry (PHDCII). (2011). Growth Prospects of the Indian Economy: Vision 2021 – Trillion Dollar Growth Opportunities. New Delhi: PHDCII, p. 56.

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are projected to expand enormously and the average current account deficit would be less than (-) 1 percent of GDP (Table 7.16). Table 7.17 Edelweiss Capital’s Forecast for Indian Economy Sectors

Projected Growth (2009-2020)

1.Banking Sector 2.Broking 3. Life Insurance Sector 4. Domestic Pharma and Health Care 5. Media and Entertainment 6. Education Sector 7. Premium Urban Housing Sector 8. Organised Retail Sector

5.3 times 4.7 times 4.7 times 6.0 times 5.0 times 5.7 times 6.5 times 6.3 times

Source: Edelweiss Capital India Today 2020 Report

The Edelweiss Capital Today India 2020 report predicts that “India’s GDP will become quadruple from 2009 level to INR 205 trillion (USD 4.5 trillion at the exchange rate of 46) by 2020 with nominal growth of 13 percent per annum”.18 During the same

period, the total private final consumption will grow from INR 30 trillion to INR 113 trillion and the key beneficiary sectors will be education, pharma & healthcare, media & entertainment, urban housing, organised retail and automobiles. The report estimated the infrastructure investment to grow from INR 21 trillion in XIth Plan (2007-12) to INR 62 trillion between 2010 and 2020. In infrastructure, significant growth sectors include the power, roads, railways, irrigation and water supply & sanitation. The process of urbanisation will be very fast during 2010-2020 as more than 3 million people are expected to migrate to urban areas every year, which means there will be huge demand for urban infrastructure in the coming years. In financial services, the total non-food bank credit is expected to reach INR 214 trillion by 2020 from INR 26 trillion in 2009. At the same time, the total asset management will grow from INR 7.2 trillion to INR 41 trillion. Edelweiss’s forecast for the Indian economy is given in Table 7.17.

18

Edelweiss Capital Ltd. (2011). Edelweiss Capital Today “India 2020” Report, p. 39. Retrieved from http://www.edelweiss.in/ IEReport.

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Thus, in the light of above estimates, it can be presumed that the average growth of Indian economy will be around 9 percent during 2011-12 to 2020-21. This growth would be achieved on the back of rising income levels, investment activities, consumption demand and increasing share of service and working age population in economy. However, to reach the high growth trajectory, India needs to lay emphasis on inclusive growth. Special efforts are needed to improve the level of education & health in the country. Without sufficient growth in agriculture and allied activities, significant dent on the problem of poverty and unemployment is not possible. Financing of infrastructure expenditure, lowering the costs of doing business, simplification of tax structure and making land available easily to industry would be critical to the rapid growth in future. The recent proposal for opening up of 51 percent FDI in multi-brand retail will alter the demand-supply dynamics of the economy and boost up the allocation of global financial capital in the future. So, the long-term growth prospects of Indian economy appear to be very good.

7.2.3.2 Prospects of Mutual Funds in India Mutual funds constitute a very important component of the capital market in developed countries and now, are also becoming the vibrant institutions in emerging markets like India. In the coming years, the mutual funds in India are likely to emerge as important players in the capital market for managing the funds of small investors. The country’s economic and financial health, regulatory framework, and the performance of the funds are likely to play an important role in deciding the future prospects of the industry. Despite some temporary disturbances, the overall country’s economic and financial growth scenario foretells the good future of mutual funds in India. This can be observed from the fact that with the continuously rising savings rate, the investment activities in mutual funds have also risen in the country. The share of mutual funds (net resources) in gross domestic savings (GDS) was 5.78 percent in 1990-91. It increased to 8.08 percent in 2007-08 but declined to 3.56 percent in 200910 owing to the global financial crisis. Similarly, the mutual funds share in gross household savings (GHS) increased from 7.17 percent in 1990-91 to 13.26 percent in

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2007-08 though, declined to 5.11 percent in 2009-10. The above trends show that in the coming years, mutual funds will tap the larger portion of domestic savings, especially household savings. The rising per capita income and savings will further increase the investment in mutual funds. Looking at the institutional segment of mutual funds, we observed that rising corporate earnings and maturing capital markets will play a key role in accelerating the growth of the mutual funds industry. Rapid stock market development as indicated by the increasing ratio of market capitalisation (on NSE & BSE) and GDP, and the growth of derivatives market will also foster the growth of mutual funds. In the coming years, more transparent disclosure standards and trading mechanism will fuel the growth of capital market in general and the mutual funds market in particular. The Indian mutual funds industry has mobilised the savings of millions of investors and supplied a huge amount of capital to different sectors of the economy since its inception in 1964. Starting with an asset base of Rs. 24.67 crore in 1964-65, the total assets of the industry has grown to Rs. 6,871 crore in 1987-88 registering an average annual rise of 27.81 percent (Table 7.18). The year 1987, is marked by the entry of public sector players in the industry, with which the growth of mutual funds had accelerated. The AUM of industry grew at an average annual rate of 49.9 percent during 1987-88 – 1992-93. During the same period, the number of schemes and players increased from 13 and 3 to 142 and 9 respectively. Another turnaround in the industry came in 1993, when private sector players (including foreign players) were given permission to start the mutual fund business. Total AUM of the industry increased from Rs. 62,430 crore in 1993-94 to Rs. 90,586 crore in 2000-01 with an average annual growth of 10.6 percent. Over the said period, the number of schemes increased to 393 from 167 and the number of players to 35 from 14. The growth of industry has been quite impressive after 2000-01 (the year of UTI Crisis). Its AUM grew from Rs. 1,00,594 crore in 2001-02 to Rs. 6,11,402 crore as on December, 2010-11 at an average annual rate of 22.98 percent. During this period, the number of schemes rose to 1,226 from 417 and the number players to 44 from 35. It is significant to note that the total investor base of mutual funds

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constituted 3.90 percent (4.72 crore) of the total population (121.02 crore) in 2011 which was merely 0.029 percent (1.32 lakh) of the total population (43.91 crore) in 1964. The growth trends of the mutual funds industry indicated that since 1964-65, the industry has grown in several folds in terms of assets, investor base, number of players and the total number of schemes offered. Looking at the ongoing trends and combining it with the past developments, we can say that the industry will maintain the same growth trend in coming years too and will achieve more exciting growth. Table 7.18 Growth of Mutual Funds Industry in India: 1964-2011

1964-65 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05

Assets Under Management (AUM) (Rs. Crore) 25 6871 13456 19131 23161 37973 47734 62430 72967 70497 72063 75368 68193 107946 90586 100594 109299 139616 149600

2005-06

231862

592

32

2006-07

326292

756

35

2007-08 2008-09 2009-10 2010-11 April11-Dec11 Compound Growth Rate (1964-65 to 2010-11)

505152 417300 613979 592250 611402

956 1,001 882 1,131 1,226

37 39 43 42 44

26.27

19.77

11.91

Year

No. of Mutual Fund Schemes

No. of Mutual Fund Players

1 13 21 47 83 116 142 167 178 168 196 235 277 337 393 417 382 403 451

1 3 5 7 8 9 9 14 21 26 32 30 32 32 35 35 33 31 29

Source: Compiled from various issues of AMFI quarterly reports and SEBI Annual Reports Compound growth is calculated by the Researcher

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Undoubtedly, SEBI has put in place a well-defined regulatory framework for mutual funds in India. The regulatory mechanism and supervisory control are strong and efficient enough to protect the interest of investors. Recently, SEBI has taken some regulatory steps to revive and energise the Indian mutual funds industry. Some of these major steps are allowance of higher expense ratio, removal of internal limits in expense ratio, crediting back of exit load to schemes, service charge on investors, option of direct selling, cash investment in mutual funds and the regulation of distributors. These steps will certainly improve the penetration of mutual funds and strengthen the distribution network in our country. The proposal to increase expense ratio up to 30 basis points (0.3 percent) on net assets of the scheme if the mutual funds are able to get 30 percent of the business beyond top 15 cities, will prove quite beneficial for the AMCs and distributors. It will directly increase their profits. The distributors will have to work hard to get more business because lower business means proportionately lower expense ratios. Under the approach, mutual funds have to disclose all the efforts taken by them to increase the geographical penetration and the details of the opening of new branches especially at locations other than the top 15 cities. This move will increase the reach of mutual funds to smaller towns and places in India and thus augment the growth of the industry in coming years. Another step that includes, the removal of internal limits on the expense ratio is a big change for the AMCs. Earlier, there was an allocation limit on AMCs regarding fund management and distribution in expense ratios. Now, the allocation limit is removed and the mutual funds are allowed to allocate their expense ratio according to their interest. With this move, the distributors will be able to get more commissions and AMCs to do more advertisements for selling of mutual funds. Further, investors can now prematurely exit the schemes without any exit load as SEBI has instructed mutual funds to credit back the exit load money to the scheme’s account, which will not be treated as AMCs profit. To compensate the AMCs loss, an equal amount of expense ratio is allowed by SEBI for inclusion in the expense ratio. The net effect of this move would be no gain and no loss to both the parties – AMCs and investors. Earlier, service tax was borne by the mutual funds themselves but now,

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it would be charged from the investors through the AUM of funds. In this way, the exemption from service tax will increase the profits of the AMCs. SEBI has also introduced the option of direct selling in mutual fund investment. It means that the investment will not be routed through agents or distributors. Such plans will save the investors from unnecessary distribution charges and commissions and thus, increase their returns on schemes. We believe that direct selling of mutual funds will go a long way in benefiting the long-term investors in mutual funds. Further, in order to enhance the reach of mutual funds among small investors, the cash investments to the extent of Rs. 20,000 per investor, per mutual fund and per financial year has been allowed by SEBI. This is for small investors who are not tax payers and do not have PAN/ bank accounts such as farmers, small traders/ businessman/ workers. Further, the announcement of regulations for distributors will lower the incidence of misselling in industry and thereby make the industry a safer investment avenue. Thus, the moves taken by SEBI will not only raise the participation of investors from small and medium cities but also, encourage those investors who had not invested in mutual funds because of the burden of unnecessary charges and commissions. Moreover, the permission to qualified foreign investors (QFIs) for investing in Indian mutual fund schemes will further boost up the growth of the industry. It would enable the Indian mutual funds to have direct access to foreign investors and widened the class of foreign investors in equity market. It would further raise the efficiency of mutual fund market participants. In addition, after global financial crisis in 2008, SEBI has now, assumed the role of a more responsible regulator. Along with the continuous monitoring of the market, it is also making consistent efforts to refine the working of capital market and mutual funds. All these would go a long way in boosting the growth of the industry in coming years. The future growth of mutual funds industry depends on the performance of its funds. Our results regarding the mutual funds performance suggest that majority of the sample schemes have offered above than risk-free asset returns to investors. Sample scheme have followed their risk & return investment objectives very well thereby, provided commensurate returns. However, most of the sample schemes have

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failed to offer returns higher than their representative market index. Also, the fund managers of our schemes are showed to have low stock selectivity and diversification skills. It indicates that mutual funds have provided limited benefits of professionalism to its investors. However, investors should not worry much as they are getting more than risk free returns on their investment. They are getting better returns than any traditional investment alternative such as bank deposits and post-office savings scheme etc. It is also noteworthy that during the global financial crisis, our mutual fund schemes provided positive returns to investors. The mutual funds industry in India is at a growing stage and in coming years we are likely to see more encouraging results. The Indian mutual funds industry has enough potential to outperform the market in future. When an economy experiences higher economic growth, mutual fund plays an important role in its wealth creation. This simplification is the outcome of the US experience where people convert their large amount of savings into mutual funds every day and now holding on the world’s largest mutual fund market. In spite of several problems, the same is expected from the mutual funds industry in India. The areas where industry is facing problems are actually the areas of its potential for achieving long-term growth. Some more factors that also point the good future of mutual funds can be listed as: 1.

The low penetration level of domestic AMCs and the continuous process of urbanisation, enhanced financial literacy and a huge young population with an increased risk appetite are also likely to be instrumental in the long-term growth of the retail segment of the mutual funds industry.

2.

Public sector banks and post-offices have a good network base. They have significant reach beyond the top 20 cities in semi-urban and rural areas and the potential to build a strong retail investors base. Public sector banks may play a crucial role in strengthening the mutual funds distribution system. However, they are not committed to do so but their role will provide the platform needed for mutual funds distribution.

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3.

With the entry of global players, competition for the domestic mutual funds is expected to increase. In view of the intense competition and shrinking margins, the industry is likely to witness some consolidation as AMCs will review business strategy and explore exit/ mergers in case of no significant competitive advantage. With this, only efficient players will stay in the industry.

4.

Mutual fund managers are required to upgrade their skills as in the coming years they will have to manage the pooled money of investors in a more professional way owing to the intense competition.

5.

The newly created Financial Stability and Development Council (FSDC) by the Ministry of Finance will act as a coordinator across multiple financial sector regulations in India. It will look into the matters relating to financial inclusion, financial development and literacy across the whole financial sector, which also includes mutual funds. The council will certainly boost up the prospects of the mutual funds industry in India by making people financially literate. Thus, on the basis of the above analysis, we can predict a very bright future

for the mutual funds industry in India. However, to be more competitive, the industry is suggested to take necessary steps with regard to regulations involving fund governance, penalty, education, distribution, fund names and investment policies disclosure provisions. Also, to boost up the confidence of investors, the problems and queries of investors are needed to be dealt with properly and promptly. With rising expectations of investors, operational costs also increase. Hence, check on operational costs is needed. After sales services is required to be sound. There is also a need to add variety into products marketed by mutual funds. Different types of ETFs, college savings fund, e-funds, green funds, socially responsible financial instruments, fund of hedge funds, advanced money market funds, renewable and energy/ climate change funds, rural and urban development funds etc. have to be developed to cater to the entire needs of investors and economy. Mutual fund companies are required to upgrade their skills, technology and cost management techniques.

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