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Evolving Uncertainties

There has been dissatisfaction expressed at the way the Indian mutual fund industry has evolved

Some weeks ago, the Reserve Bank of India (RBI) made several observations about the Indian mutual fund industry in its annual report. These comments pointed to an underlying desire to see mutual funds treated more like banks. Specifically, there was a suggestion that the total assets being managed by a mutual fund company with the number of schemes it can float. These views all represent different ways of expressing the same basic dissatisfaction with the way the industry has evolved.

Indian funds are primarily seen as a tool for serving corporate money management needs. Some 30-to-40 per cent of the assets being managed are from individuals, the rest are from businesses. This is seen as a deviation from what is perceived as the original, avowed purpose of fund industry, which was to provide professional fund management services to the retail investor. I think this line of thinking puts the cart before the horse. Given the regulatory and tax framework of the country, businesses often find it more attractive — returns-wise and taxation-wise, to park short-term money with mutual funds rather than with banks. And as it happens, businesses have more money which they invest with some planning and forethought.

Inevitably, this means that since mutual funds are in the business of managing money, they will end up managing more of corporate money than individual money. Moreover, individuals’ savings habits change very slowly. In my experience, they hardly change at all — just that a new generation of savers comes up who have grown up with familiarity with new kinds of investing. This situation is not going to change, given the regulatory and taxation framework, and the general savings culture in the country, this situation is not going to change. Tomorrow, if the laws are changed to make bank deposits as attractive for corporates, then this situation could change virtually overnight. The irony is that currently, banks themselves are parking tens of thousands of crores worth of funds there.

Analysing an isolated data point like the percentage of corporate money with funds actually doesn’t offer any useful insight and is in fact, quite misleading. Businesses operate in the context of the regulatory environment. Of course, they will always seek to maximise their growth and profits within that and that’s the way things should be. Over the last decade or so, the Securities and Exchange Board of India (SEBI) has done an admirable job of evolving the regulatory framework for mutual funds in a fairly quick-footed manner. Moreover, the direction of the regulations has always been unerringly towards furthering the interests of investors. Some of the bigger recent examples are the elimination of investors paying for issue expenses, the tightening of maturity limits for debt funds, the ongoing improvements in transparency of funds’ portfolios and of course the biggest one — the elimination of entry loads on all funds.

At the outset, many of the changes have appeared to be a burden (a phase that load-elimination is currently in), but eventually, each one has strengthened the whole business by nipping problems in the bud. From a regulatory and transparency perspective, Indian funds have come a long way and any remaining problems are decidedly minor in nature. In what proportion are funds used as a corporate finance tool or an individual saving vehicle is a product of the financial environment which will surely keep evolving as time goes by.