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Govt Short on MF Insight

The Economic Survey not only failed to reflect reality, but was also way-off target

The Union Budget for 2009-2010 is easily the most eagerly anticipated one for at least a decade. Not since Dr Manmohan Singh’s history-defining budgets of the early 90s has there been so much expectancy. When Pranab Mukherjee rises to present the fourth Budget of his life, he will be feeling the weight of expectations on his shoulders as few Indian finance ministers ever have. Good or bad, hype or real, events since the general elections have primed us all for some sort of a miracle budget. I’m afraid we are all being set up for more than a little disappointment if Mr Mukherjee fails to pull out a metaphorical rabbit from his hat.

Anyhow, what we have in hand at the time of writing this article is the Economic Survey, which is released by the Finance Ministry a few days before the Budget. It is a document of variable importance. As it did this year, this document often expresses goals and intentions that are clearly not palatable politically. As such, I think it is safe to take the Survey as a statement of what the government would have done had there been no politics.

As such, the references that the Survey made to the mutual fund (MF) industry were short on insight. The survey’s chapter on financial markets begins its comments on mutual funds by making the following statement, “Assets under management (AUM) of mutual funds declined sharply from Rs 5,49,936 crore at the end of 2007 to Rs 4,13,365 crore at the end of 2008. A perceptible shift was noticed from growth-oriented schemes to income/debt oriented schemes. Assets under income-oriented schemes in 2008 were almost at their previous year’s level and accounted for 47.7 per cent of total AUM at the end of 2008. Assets under growth-oriented schemes were only Rs 99,081 crore at end-December 2008 as against Rs 1,92,129 crore at end-December 2007. The decline in assets was seen across the schemes, the exceptions being Gilt and Gold ETF schemes, which showed a larger AUM in 2008 (Table 5.20).” It then goes on to narrate the various major and minor regulatory changes that have been given effect to for MFs during the year.

The ‘perceptible shift’ that the survey sees in the figures doesn’t actually exist. The relative decline in equity AUM is a result of the fall in the market value of the assets and not of any shift in investments. As a matter of fact, throughout the financial crisis and its aftermath, actual redemptions were more in debt funds than in equity funds. All the tedious narration of fund data in the Survey reflects little more than the change in the market price of the underlying assets rather than any shift in the industry’s dynamics or investor behaviour. The Survey’s lack of connect with current realities is further underscored by the curious references to UTI as if it was still distinct from the rest of the funds. The table of AUM divides the industry into three categories, public sector, private sector and UTI.

Anyhow, beyond the usual exhortations to increase retail participation, the Survey betrays little vision of any larger role that MFs can be developed for. For a document that’s so forward-looking in many other aspects, this is a disappointment.