ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Mutual Funds

The article “Myopic Investment View of the Indian Mutual Fund Industry” (EPW, 26 June) deals with one of the most worthy yet neglected investment options available to individual investors. The authors have deftly dealt with data related to probably one of the most turbulent times in the short history of the Indian financial market. However, they have left some questions unanswered and have ignored a few facts, without which the article’s conclusions seem incomplete.

The article “Myopic Investment View of the Indian Mutual Fund Industry” (EPW, 26 June) deals with one of the most worthy yet neglected investment options available to individual investors. The authors have deftly dealt with data related to probably one of the most turbulent times in the short history of the Indian financial market. However, they have left some questions unanswered and have ignored a few facts, without which the article’s conclusions seem incomplete. Retail participation: Despite being more than three decades old, retail participation in mutual funds is abysmally low with individual investors accounting for less than 30% of total investments in various mutual fund schemes compared to the US where households account for 82% of the investments in mutual funds. Corporates, banks and other financial institutions are prominent investors in mutual funds in India. Investment instruments: Monthly data being released by Association of Mutual Fund Industry (AMFI) shows that out of approximately Rs 6 lakh crore of assets under management, only 28% is invested in pure equity funds, and 4% in equitylinked savings schemes, while liquid funds (money market funds) account for 12%, and income funds (which are predominantly debt funds) account for 58% of total investments, respectively. This indicates that more than two-thirds of the money managed by asset management companies are invested in debt securities. Retail investments in debt instruments: The authors have correctly pointed out that a majority of investments made by retail investors (72% as per the article) is in monthly income schemes (MIPs). The article, however, fails to point out that MIPs invest predominantly in debt instruments with only a small portion of assets allocated to equities. The equity component provides MIPs with just the edge it needs to outperform conventional debt funds. Portfolio churning: The article has dealt with the number of securities various funds buy or sell, without actually clarifying whether these are equity or debt instruments. The authors point out that the average number of securities held by mutual funds in 2009 was 188. On an average, the number of equity stocks traded on both NSE and BSE on a daily basis is approximately 1,000-1,200 (of which more than 80% of stocks have mutual funds as investors). Most of the churning in the mutual fund portfolio happens on the debt side where money market instruments having a maturity of between a few days and a few months get churned on a regular basis. On the equity side, the authors fail to explain if the number of securities traded means complete exit from those securities or trading a part of the entire holding.

While the mutual fund as an investment class is evolving in India, it would be unfair to classify them as having a myopic view on the equity market. We have to take into account the fact that the Indian equity market lacks width and breadth. It is not easy for the MFs to buy or sell equities at fairly regular intervals. Churning of the equity portfolio by mutual funds comes with its own liquidity and trading costs, etc.

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