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Prithvi Haldea: Mutual-fund data and the truth

Source : BUSINESS_STANDARD
Last Updated: Sat, Feb 15, 2014 19:00 hrs
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It is beyond debate that the raison d'etre for mutual funds is enabling the small investor to access the market in a diversified manner through a professional manager. Regrettably, not only has a focus on retail been missing in India, but the data presented to small investors and others on the industry as well as on the size of asset management companies or AMCs, are misleading.

The market regulator has worked at designing regulations to protect small investors, and has encouraged AMCs to extend their reach. On the other hand, there has been a need for better disclosures and transparency from the industry which would help in portraying the correct picture to investors. Sebi's recent decisions in this regard are in the right direction.



Industry-level data

Sadly, while the industry is facing huge challenges in mobilising the savings of retail investors, the aggregate data put out keep conveying an incorrect picture - of easy growth. The recent year-end media stories in this regard are illustrative of this.

Of course, there has been growth, though marginal, in assets under management or AUM. This increased from Rs 6.61 lakh crore on September 30, 2010 to Rs 7.45 lakh crore on September 30, 2013 - a growth of only 12 per cent over three years. Yet, what this data hides is that during this period, there was a huge fall of Rs 48,393 crore in equity assets and the growth came mainly courtesy liquid/debt assets. In fact, the share of equity has fallen from about 40 per cent of total AUM to only 22 per cent presently. No data tables produced by the Association of Mutual Funds of India (AMFI) show this. The problem is that we all love large numbers; reeling them out gives a sense of achievement. This is dangerous, as incorrect data often lead to wrong decisions.

Most significantly, what the data do not show is that nearly 50 per cent of industry AUM is from corporate investors, or that the share of retail investors is only 20 per cent, or that nearly 80 per cent of the AUM is non-equity. Indeed, we have a corporate money market fund industry rather than a mutual fund industry.

Furthermore, as AUM is marked to market, it may, without any effort, increase in case just the market value of holdings goes up and vice versa. AUM should, therefore, also be shown by number of units, as that will depict the real picture.

AMC-level data

The other problem is with regard to the rankings of AMCs. As is known, the size of the AMC is one of the deciding factors for investment by investors. This leads the AMCs to focus on the gross number, making them resort to chasing bulk investments from companies and banks - including from group companies of the AMCs. The only ranking of AMCs that is currently disseminated is based on the aggregate AUM of each AMC, irrespective of the category of schemes (equity, debt, liquid, etc.), class of investors (retail, corporate, etc.) or source of funds. This misleads investors.

The race for liquid-assets-driven AUM is facilitated by the tax benefits available on dividend income, and hence a lot of liquid money flows in. In this process, government is losing out on taxes, AMCs are not earning enough fees and small investors are losing out on the focus they deserve from the industry - a lose-lose situation for all.

There is also a need for a policy to cap allocation of assets to sister AMCs at, say, 20 per cent of the bank's total advised/distributed assets. In addition, mutual funds would now have to disclose AUMs mobilised through group distributors and through external distributors.

Number of investors

There is total misinformation on the number of investors in mutual funds; the figures being given out are those of folios. According to the latest data made available by AMFI, the number of mutual fund investor folios, as on September 30, 2013 was 41.3 million (incidentally down from 46.9 million three years ago). Folios ignore the multiplicity of investors within a scheme and across various schemes of a fund, and then across various schemes of various AMCs. At the very least, it is like 50 students in a class enrolled for five subjects being counted as 250 students! A few years ago, when US-64 had to redeem its units, it realised this and so used investors and not the folios - leading to the number of 'investors' falling from over 50 million to just about 10 million. There are also no data on the number of new investors who join this industry for the first time in any particular period.

All the above-stated data and rankings should not only be published by AMFI but all AMCs should carry these on their respective websites, fact sheets and other public documents.

The regulator's recent pronouncements, which also cover several other important measures, will hopefully make small investors, like the world over, increasingly prefer mutual funds as their investment vehicles. And in this journey, let the industry's data become more truthful and meaningful.

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