VR Logo

Poor Asset Spread

The high-decibel marketing campaigns have meant a huge expansion of the fund business. But this is neither deep nor broad. Smaller investor from smaller places are not being reached

The Association of Mutual Funds of India (AMFI) has issued data that shows that the mutual funds business is doing very well. Apparently, the total amount of money that the industry is managing has gone up by 54 per cent during 2006-07 compared to the previous year. Equity assets being managed by funds have grown by around 40 per cent. This is very significant for fund companies' profitability as managing equity is a lot more profitable than managing duller asset types like debt. This additional 1.28 lakh crore of asset should roughly mean over Rs 5,000 crore additional management fees for fund companies. Of course how much of this is profit depends on how much they spend on fund management but that's another story. Anyhow, it's clear that this is a good time to be in the mutual funds business in India and everyone who is running an AMC or planning on starting one ought to be smiling.

The same data has some numbers that could provide some clues to the spread of fund investing in India. As it happens, no one really knows how many people in India have invested in mutual funds. When you invest, the fund company creates a new account (generally called folio) for you. If you fill in a previous folio number in your investment form then your investment is added to a previous folio but people don't actually do this very often. And of course each fund company whose funds you invest in has its own distinct set of folios. The upshot is that all that is known is the total number of folios and not the actual number of investors. The total number of folios (accounts) under which mutual fund investments have been made are said to have increased to around three crore. I could be wrong but my estimate is that the average number of folio numbers that a fund investor invests in is probably in the range of five to fifteen. That's the average. Based on my experience, I would think very few investors (except for those who have made their first investment in the previous few months) have one or two folios and many investors would have 30 or 40 or maybe even more. So the total number of fund investors in the country could be somewhere between 20 and 50 lakh. This is just my estimate. It could be a bit less but I'm pretty sure that it isn't much much more.

It's pretty clear that both the number of investors and the amount invested by each investor has grown sharply during the last year or two. This is a piece of good fortune for which the entire credit goes to the way the stock market rose sharply from 2002 to 2006 and then managed to more or less maintain it's level. The huge returns that were made on the markets by equity funds during the bull run and the high pressure marketing campaigns that new funds were launched with have meant a huge expansion of the fund business. However, this expansion is neither deep nor broad as yet. Let me explain what I mean by this.

It isn't broad yet because new kinds of investors-smaller investor from smaller places - are not being reached yet. And it isn't deep because many of the new investors who have been lured by fund distributors high on commissions do not have the conviction of being continuous, lifelong investors. They are trying out funds to see if they can get high returns. If they make any kind of gains, many of them will become committed fund investors but if the markets retreat and they lose money, then many first timers will be scared away.

What can mutual funds do to ensure that these new clients don't go away? Well, getting good returns for investors is the obvious thing but since that depends so much on the stock markets, perhaps prayer would be a good idea too.