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No Place for Small Investors in MFs?

According to the recent data released by AMFI, MF industry is dominated by the rich and the powerful

Mutual fund industry is yet another case of the rich and influential hijacking an investment vehicle purposefully created for the general population of the country. Now, the industry has become a playground for rich individuals and corporates.

The mutual funds (MFs) industry was created to provide quality investment opportunities for small investors. The need was there and the numbers were right. While High Net-Worth Individuals (HNIs) and corporates could always afford the services of portfolio managers to handle their huge investments, small investors could not pay for this kind of personalized service. Hence, eyeing the gains that could be generated by servicing a huge number of individual investors through mass-scale mobilization of funds, the mutual fund (MFs) industry was conceptualized with the aim of pooling these small investors’ money and managing it to create profits for all concerned, thereby providing a service at affordable cost – truly an empowering agenda, if ever there was one.

This though was all in theory. And that is where it all remained, on the books. In reality, the concept has been turned on its head. Far from catering to the needs of the small- and medium-retail investors, the MF industry is being dominated by the very, very rich people and corporates.

According a report by the Association of Mutual Funds in India (AMFI), 77.56 per cent or Rs 324,784 crore of the total assets managed by the MF industry belongs to the corporates, banks, and HNIs. Fund houses manage just 21.27 per cent or Rs 89,070 crore of retail investors’ money. It also indicates that all the tax breaks allowed to MF investors are currently being enjoyed by a class of investors that was not supposed to do so.

Most of the money invested by retail investors is concentrated in equity and balanced funds. In these two categories retail investors are the dominant, the primary, contributors – in equity category 64.84 per cent and in balanced 68.21 per cent. Interestingly, most of this money was invested at a time when bulls were dominating the markets, i.e. at beginning of 2008 or earlier. That means retail investors have scarcely invested at the beginning of this recent bull run (starting March 9, 2009) and that indicates the gains of the rally have bypassed them entirely -- in the past one month less than 1.75 per cent of total retail investments have come into equity funds, ETFs and balanced funds.

As far as the debt segment is concerned, the corporates are in the undisputed No. 1 position. Nobody is even remotely near the investments made by them. Of the total assets in the category, 73.65 per cent (Rs 66,325 crore) of liquid funds, 64.75 per cent (Rs 1.2 trillion) of debt-oriented funds, 62.19 per cent (Rs 3,711 crore) of gilt funds belongs to corporates .

This is in spite of the fact that the overall share of corporates in these assets have fallen this year. According to the Securities and Exchange Board of India (SEBI), 56.55 per cent of the total assets belonged to coporates as of March 31, 2008, while this year it has come down to 50.92 per cent. Interestingly, most of the investments by corporates, banks and financial institutions have come in the past 3 months, including 48 per cent of the total corporate investments in debt and 68 per cent of the total investments by banks and financial institutions.

HNIs are the second-biggest investors (22.03 per cent) in mutual funds. They follow close behind the corporates in terms of their investments in debt and liquid funds -- they have a total investment of Rs 65,409.78 crore or 22.29 per cent of the total assets in Debt, Liquid and Gilt funds. But unlike corporates and banks, most of their money was invested earlier than 3 months ago -- about 45.77 per cent of their money was invested in a period between 3-to-12 months.

Another surprise that the data has thrown up is regarding foreign institutional investors (FIIs) – perhaps they prefer the direct route to buying stocks as it would not involve too much official paperwork, or perhaps they don’t trust Indian fund managers to deliver the kind of profits they would be interested in. While FIIs have dominated stock markets in recent years, causing them to rise to stratospheric heights and then crashing them down to sea-level by alternatively turning on and off the foreign money tap, their presence in mutual funds is scarcely worth noting. Though FIIs are allowed to invest in MFs, their actual contribution to the total assets is pretty much minimal. Only 1.17 per cent of foreign money is managed by fund houses. Their major investments are in just three categories – Debt (Rs 2,456.94 crore), Liquid (Rs 1,438.03 crore) and ETFs (Rs 179.80 crore).

This is the first time that AMFI has allowed the public to take a look, first-hand, at the MF industry data. Barring the curious case of FIIs, the information flow for the MF industry indicates that the retail investor has been pushed to the periphery while the big and powerful financial entities take centre-stage. Surely, the large power-houses interests are served before those of the small investors. This should be an eye-opener for authorities and must be taken as an occasion to take a re-look at the industry and to find out why it failed to attract the smaller investors.

Power Stakes
         Percentage Share
Category    AUM (Rs Cr)    Corporates    HNI*    Retail    Banks/FIs    FIIs
Debt Oriented   197453   64.8   28.6   4.1   1.4   1.2
Equity Oriented   109513   12.1   20.6   64.8   1.7   0.8
Liquid/Money Market   90059   73.7   7.9   0.8   16.2   1.6
Balanced   11650   9.1   22.2   68.2   0.5   0.0
Gilt   5967   62.2   32.1   3.9   1.8   0.0
Fund of Funds investing Overseas   2721   19.1   46.4   33.1   1.4   0.0
Gold ETF   743   49.1   24.4   23.4   3.0   0.0
ETFs (Other than Gold ETF)   660   31.2   31.9   9.0   0.7   27.3
*Investors investing above Rs 5 Lakh

Note: All the information about the assets are as of March 31, 2009.