VR Logo

It Happens Only in India. Not Quite!

Like other businesses, mutual funds fold up when there are no profits and times are bad. And its not only India where funds are considering the exit route, it has been happening in American fund industry since 2001

While the likes of HSBC and Deutsche Bank are enthusiastically storming the Indian mutual fund market, there are others who are in the process of giving up on the country. Recently, it has been reported that Zurich Financial Services Group was terminating the operations of its insurance subsidiary in India. Questions have been raised about the fate of the group's AMC business in the form of Zurich India AMC. Though till some time back, Alliance Capital India has also expressed its intention to wind up, but there was a change of mind at the eleventh hour. In the case of Dundee AMC things are much clearer. The fund has recently announced that it would be closing its operations in India.

After witnessing these events, one would think that it happens only in India. But this is not the case. According to Morningstar, more than 350 mutual funds in the Unites States have recently ceased their operations. If this looks bad, things have been worse. In 2001, 520 funds ceased to operate. This was the highest closure of mutual funds in the past seven years, preceding 2001. The main reason behind these closures has been that several funds have been too small to be profitable. Besides funds, which have closed down, several have also been merged. About 140 funds were merged into other funds this year. A large number of these have been technology funds, which have merged into more general funds. As compared to this, 549 funds were merged last year.

Another segment, which has been badly hit is that of money market funds. As interest rates have fallen, these funds have not been able to generate decent returns from ever diminishing coupon payments. The short-term nature of their holdings does not also generate any significant trading profits. According to iMoneyNet, a money market mutual fund tracker, many of these funds have been waving fees to keep yields at zero or above. It is expected that 83 of the largest 188 money market funds could be closed or merged.