Tuesday, December 28, 2010

What is wrong with the Mutual Funds industry in India?

A few cynics may say that everything is wrong with the Mutual Funds industry in India. They may even ask: What is right about the Mutual Funds industry? I’m not one of them. Neither do I believe that all is well.

As per recent reports, 65 fund managers have left the Mutual Funds business over the past two years – including some with ranks of CEO or CIO. Well-known stalwarts of the industry, like Ved Chaturvedi, CEO of Tata Asset Management, Nilesh Shah, Dy. MD of ICICI Prudential Asset Management and Madhu Kela, Head of Equities at Reliance Capital Asset Management, have left their jobs (though the last-named remains with the Reliance ADAG group).

One of the most famous fund managers of all time, Peter Lynch, spent the major part of his career with a single fund house (Fidelity). Anthony Bolton, another famous fund manager, also spent practically his entire career at the same fund house. There is a certain amount of stability and investor trust that builds up when the same fund manager stays at a fund house for a long period. Why are Indian fund managers leaving in droves?

Stringent regulations introduced by SEBI over the past few years have taken a lot of the ‘fun’ out of fund management. Entry loads are gone. Along with it went the fancy agency commissions. Confusing the public with a rash of New Fund Offers (NFOs) with esoteric names is a thing of the past. Not only have inflows reduced, outflows have increased as a large number of new funds promised the moon but failed to reach even the tree top.

Trying to produce results under strong regulatory scrutiny in an environment where fund inflows were drying up must be very stressful. Opportunities of earning fat performance bonuses have reduced. Lucrative opportunities in less-regulated areas of hedge funds,  private portfolio management services and investment banking may be bigger attractions for fund managers.

Anecdotal evidence from a few established distributors of mutual funds point to a shift in emphasis to selling specially packaged insurance products – particularly those with an added equity element – where day-to-day market fluctuations do not affect the investment outcome too much. Commissions are also higher. It is diverting cash that would have flown into fund houses.

But these are really secondary causes. The primary reason for the current state of affairs in the mutual funds industry is the maturity of the industry. Thanks to the barrage of information available from the pink papers, business TV channels and web sites, Indian investors can no longer be taken for a ride. They can’t be induced to part with cash with the promise of ‘dividends’ that are not dividends at all but a return of a portion of the invested funds. That means fewer opportunities for making easy money.

Is the mutual fund industry over-regulated? Some may say ‘Yes’. I think the balance has been shifted towards investors, which is good. Fund managers are realising that they should try to help investors become rich, instead of becoming rich at the expense of investors.

What do you think? Have the regulators gone overboard and started the decline of the mutual fund industry, or have they levelled the playing field in favour of investors?


Rajib said...

Nice article / analysis dada ...

But even with all these some of the old houses still performing well. I believe some of it because today's house are able to capture some part of the 'art' into science. Still I think it's premature to call this industry 'mature'. Only that with more retail participation and even the state-run banks promoting this as an investment instrument forced even the rural India to come out of NSC and FD to MF. And India, after all ifs and buts, still is the greatest pro-people democracy that regulates the people's interest at the best.

Unknown said...

Regulations are a must for any industry to have a sustainable growth . But it should not be dumped on a single day. starting aug 09 to now the industry got screwed down by the regulators on various parameters . This post shows about the persons who already pocketed a good money , we actually need to have a discussion on how to improve the intermediaries who lost their life with all this regulations .

This is my personal opinion .

Suresh said...

Dear Subhankar ji

I believe the Regulators have taken too rigid an approach with regard to Mutual Fund industry and tilted the balance away from MF. Unless others in the fund management industry ie Insurance, PMS etc introduce similar rules, MF will always be at a dis-advantage.

Initially the Distributors abandoned it and now it is the turn of the Managers! In a country where equity exposure is so low, equal priority should have been given to enahance the participation. To expect Distributors to do a sales job by paying them relatively less remuneration vis-a-vis other financial products, is expecting too much. Sames goes for Managers as well.

The big lesson for our Regulators is to formulate policy that suits India rather than copying West.


Bharath said...

Yes, I do agree with you Dada, Most often I feel , its not about MF Industries more regulation, its about Fund houses gets business lureing customers with false promises. Some times I feel ULIP or products which allows switches between debt - equity can do much better returns than MFs.