Indias MF industry: Holds promise

• HDFC securities
• 07 Jun 2018
• Knowledge Centre

India has a comparatively lower investment in financial assets as compared to other developed economies. However, present circumstances like the lowering of property prices and returns from gold being range-bound, have resulted in the divergence of investor interest to this asset class.

 

This is expected to lead to a spurt of investment in the mutual fund industry, which comprises professionally-managed investment schemes. Here, money from several investors is pooled by an asset management company (AMC) and invested into different instruments such as debt, equity, and money market securities.

 

Data from the industry’s regulator – the Association of Mutual Fund in India (AMFI) – supports this fact. It states that there have been investments worth Rs 1.4 lakh cr in the mutual fund industry in April 2018, which has resulted in an increase in the industry’s asset base by 9% to Rs 23.25lakh cr from Rs 21.36 lakh cr in March-end.

 

Data from AMFI also reveals that assets under management (AUM) have jumped from Rs 7.01 lakh cr on 31st March 2013 to Rs 21.36 lakh cr on 31st March 2018, a notable increase in a span of five years.

 

Over ten years, the industry’s AUM increased from Rs 5.05 lakh cr as on 31st March 2008 to Rs 21.36 lakh cr on 31st March 2018. This uptrend is expected to continue, and a study reveals that the industry’s AUM is expected to touch Rs 1.1lakh cr by 2025. The AMFI places the total number of accounts (or folios as per mutual fund parlance) as on 31st March 2018 at 7.13 cr.

 

Regulator’s Support

 

AMFI has recently devised certain norms in the form of new guidelines on categorization and rationalization of schemes. Effective 1st May 2018, the market regulator has asked MFs to rationalize all their schemes and categorize them as equity, debt, hybrid and others. This directive implies that MFs should have only one scheme per category, with the exception of index funds, fund of funds and sector or thematic schemes.

 

Managing various schemes has posed problems not only for the AMC but also for the retail investor. This move is aimed at easing the comparison of schemes, as the number of similar schemes would lessen by mergers.

 

Impact of Budget 2018

 

The Budget, presented by Finance Minister Arun Jaitley, was expected to impact inflows to this industry negatively. It proposed a 10% Dividend Distribution Tax (DDT) on dividend options of equity funds, with an aim to bring them at par with growth schemes. This move was also expected to garner revenue of Rs 20,000 cr for the Government this year.

 

Talking about the impact of DDT on inflows, both from FIIs as well as domestic investors, Mr. Deepak Jasani, Head Retail Research, HDFC Securities Ltd said, “Local Investors should be concerned with post-tax returns earned from Indian equities over their time horizon, as compared with other alternative avenues. For FIIs, the expected trend in the USD/INR rate is also important, as that could impact dollar returns.”

 

“What is relevant for investors in mutual funds is the net return earned on their investments. Even after the introduction of DDT, if the expected net return from these funds is higher than other alternatives on a post-tax basis, they could continue to invest in these schemes (preferably in the SIP mode). However, if expectations are not high or are uncertain, they could stay in fixed income alternatives till there is more clarity on expected returns,” he concluded.

 

With the prospect of future inflows – both domestic and overseas – looking bright, the future of the mutual fund industry in India promises to be one of healthy growth.