Over the past few months, I have often written about the Securities & Exchange Board of India’s (Sebi’s) regulatory moves that have been made to make the Indian mutual fund industry more investor-friendly. The elimination of investors paying for issue expenses, the reining in of maturity limits for debt funds, the perennial improvements in the transparency of fund portfolios and the most recent – the biggest change – abolishment of entry loads are some of the regulatory changes that have been undertaken to further the interests of investors.
The heart of these changes is the fact that fund industry needs to evolve with time. Sebi’s commendable quick-footedness in incorporating changes has enabled quite a bit of dissatisfaction in the way funds are run to be stemmed. A few weeks back, the Reserve Bank of India also expressed some dissatisfaction pertaining to the fund industry in its annual report. The observations made by RBI pointed towards a desire to see mutual funds being treated like banks. One suggestion that caught my eye was that the total assets managed by a fund company should be based on the number of schemes it can float.
RBI’s observations and Sebi’s numerous corrections have come from the fact that the basic premise, the original purpose, of a mutual fund – to provide professional fund management services to retail investors – has gone awry. The reason being that mutual funds are now largely used by businesses to park their short-term money. Only about 30 to 40% of the fund industry’s assets come from individual investors. The rest comes from corporates that find mutual funds more attractive, returns-wise as well as tax-wise. Given the regulatory and tax framework of our country, this doesn’t really come as a surprise. The other factor is that businesses have more money than individuals to plan and invest.
As far as mutual funds are concerned, they are in the business of managing money and hence will accept funds from wherever they come. Another reason why they end up managing more corporate money than individual money is because a large number of people are still skeptical about investing in funds. Saving habits are hard to change, and in most cases they don’t ever change. The new generation might adopt new saving methods, but the older one will look at new modes of investing only from an arm’s length. India’s centuries old saving culture will prevent this situation from changing anytime soon, but SEBI’s regulatory moves will certainly make more investors think in that direction.
While many of the changes seem to appear to be a burden on the fund industry, in the long run, they will only strengthen the business of mutual funds. Over the past year or so, these changes have definitely helped in placating individual investors and the problems that still remain are quite minor in nature. And as far as funds managing more corporate money is concerned, well, maybe that would change if bank deposits are made more attractive. The irony about this is that currently banks themselves are using mutual funds to park crores of rupees.
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