A check on India MF Industry

There was a lot of media coverage over a speech given by MS Sahoo, SEBI whole-time member. The speech has been included in SEBI’s May Bulletin and is a must read. You seldom across speeches by regulators who don’t agree to the practices of a certain market segment.

He looks at 5 issues:

  • Most MFs are top cities and urban centric.
  • MFs should cater to Retail investors but growth in assets comes from corporates (he says it nicely- the conclusion is  that the RIIs are also investors in the industry.)
  • Portfolios are churned highly leading to higher costs for investors
  • Too many types of MFs leading to confusion
  • MFs say they are doing educational awareness  campaigns but are actually marketing campaigns

Read the speech for details. It is an excellent check on Indian MF industry. This blog has made these points across various posts. So let’s hope SEBI does something for this.

What interested me most is the 4th point on too many choices:

The 1990s witnessed the emergence of a variety of funds. There are funds which invest in growth stocks, funds which specialise in stocks of a particular sector, funds which invest in debt instruments and funds which invest aggressively and funds which do not do all these. Thus, we have income funds, balanced funds, liquid funds, Gilt funds, index funds, sectoral funds and there are open-ended funds, close-ended funds and fund of funds – there is a fund for everybody and for every need. The number of schemes at the end of February 2009 was close to 1,000, equal to the number of securities listed on the NSEIL.

The small investor has no means to know which fund or scheme to choose. He likes choice, but in this case he is lost with too many choices. To complicate his life further, a scheme has sub-schemes, which has different plans (wholesale, deposit, institutional), different options (dividend, growth, bonus), option variants (quarterly, annual), different AMC fees, etc., 1,000 schemes may have in all about 5,000 products. A small investor earlier had problem in choosing out of 2,000 securities, now he has to choose out of 5,000 MF products and 2,000 securities.

He wanted relief from the deep sea, but ended up between the deep sea and the devil.

Somewhere down the line people in the financial industry do not appreciate the problems faced by an investor. I have talked to a couple of people on this (this is by now way the majority, but just an anecdote) and they believe an investor should be able to slect the fund. The more choices are a plus and not a minus. They even add we are not forcing the investor to invest!! If he has decided to invest in this fund he would have done his homework etc.

His solution for the problem:

Probably, the industry needs to provide a few simple standard products which suit the needs of the majority of the small investors. In addition, they may provide niche products of different complexities for those who can understand. The MF, which provides the simplest products, needs to be recognized.

This is the vanilla products which even US is contemplating to introduce. I had mentioned in this post that if developed countries need such products, developing need it all the more. It is great to know one of SEBI’s members is thinking about the problem.

The question that next comes is. Should SEBI let industry develop such products or intervene to ask MF industry to develop them? I don’t see former happening and can only see more and more MF products being added. It will be good if SEBI forms a committee with industry people as members and design such products.

3 Responses to “A check on India MF Industry”

  1. naraynan sethurao Says:

    Dear Sir,
    Can you help me view the SEBIMay bulletin..?
    I am no getting the link..opened..
    regards,
    naraynan

    • Amol Agrawal Says:

      I just checked the link. It is opening at my end. It is a heavy file, so you may try and save it first. Otherwise just go to SEBI website and download it directly from there.

  2. Mutual Funds to have a label like food products « Mostly Economics Says:

    […] disclosures like labels, they are of immediate application in developing economies. SEBI (see this as well) and PFRDA have already taken many lessons. They should be keenly looking at these […]

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