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The next decade

The mutual fund industry needs radical changes if it doesn't want to lose its importance in the coming years…

Is the glass half empty or is it half full? Generally, this question is asked in a rhetorical mode. The purpose is to signify that both phrases are factually correct but that it's better to look at the brighter side of things, be an optimist and say that the glass is half full. However, I think the right way to judge the fullness of glasses (and much else) would be to compare them to what could have been. If the glass could have been full to the brim, then even a quarter empty is not good enough. And vice-versa.

Unfortunately, what the Indian mutual fund industry has achieved in the past two decades is very much the story of glass half full. It's size and growth is impressive if one doesn't have to compare it to a benchmark, so to speak. But that's as useless as evaluating a fund's returns without a benchmark. Two decades ago, the fund industry was managing Rs 47,000 crore. Today, it's managing Rs 7,50,000crore. That's 16 times, and at an annualised growth rate of 16 percent. But the picture is murkier when one looks at equity investments, which are mostly what individual investors do.

Twenty years ago, almost all the assets were of individual investors. Today, that figure is about Rs 2,50,000 crore. That's 5.6 times larger. During the same time, the stock markets have grown to about 5.4 times what they used to be. So in a manner of speaking, you could say that there hasn't been any growth. Think of it this way. Had the original Rs 47,000 crore of investors' funds stayed invested in the markets, then they would have been around Rs 2,60,000 crore today. So where's the growth, then?

Of course, the purpose of pointing this out is not to pin blame but see what is the road ahead. Certainly, there's no single, simple cause. Parts of the blame lie with the government, with the fund industry and certainly with the dominant investing culture in India. If one were to map our investing preferences on a scale of risk and expected returns, we have crowds at both end of the scale with nothing in between. On one hand we have the bulk of people who prefer bank deposits and the various soverign -guaranteed savings schemes and on the other, the punters - people who are focussed on short-term trading on the stock markets.

The space in the middle, where mutual funds can give you high returns with manageable risk is sparsely occupied. It seems that reasonable risk with reasonably high returns doesn't attract people from either extreme. A big part is played by the apparent attractiveness of persistently high nominal interest rates, which in turn are related to high inflation. The industry's focus on fixed income funds hasn't helped either.

To borrow a word used recently in a different context, mutual funds in India have been underachievers. Can this change?

Maybe, but it won't happen by just an extension of what has been done over the past two decades. If there are no radical changes, then we'll pretty much move along this humdrum path. The proportion of savers who invest in funds will grow modestly and over time, their relative importance will decrease.

I don't know what that radical change could be and what could drive it, but without that, mutual funds will stay a niche choice.