The Indian Mutual Fund Industry

A Comparative Analysis of Public vs Private Sector Performance

G. Sekhar

• Publisher: Palgrave Macmillan
• Year: 2014
• Print ISBN:
  9781137407986
• eBook ISBN:
  9781137407993
• Topic: Business
• Subtopic: Financial Services
• Index: Business

Dr. Sekhar offers comprehensive knowledge on the mutual fund industry in India and provides ready-made practical information for investors. He presents an overview of investment patterns for both public and private sector mutual funds, and analyses the performance of selected schemes using various measures of risk.

1

Introduction

1.0 Prologue

The concept of mutual funds has always been conceived as pooling the resources of small investors and deploying the same in the capital markets to help industrialization through participation in the equity and debt instruments. Mutual fund industry imparts formal identity and provides access to the payments system and to the savings safety net like deposit insurance. More recently, the focus of the Government of India is on establishing the basic right of every person to have access to affordable basic financial services offered by banking and non-banking companies.

Mutual funds are classified based on their tenure and investment objectives. They may be open ended or close ended according to the tenure of the offer. They may be equity oriented, debt oriented, balanced, sector specific, exchange traded and so on based on investment objectives. Thus, mutual funds can be categorized into public and private according to the institution by which they are offered.

To evaluate the mutual funds in the Indian financial market, first we should have a good idea about the Indian financial system, which comprises financial institutions, financial markets, financial instruments and financial services. Financial institutions may be classified as banking and non-banking institutions; financial markets as money and capital markets; financial instruments as equity and debt instruments; and financial services as individual and institutional services.

Generally, a fund manager will be an investment specialist, has to have an in-depth understanding of the capital markets so as to manage the funds in a professional manner. We are aware that the mutual funds are managed by asset management companies (AMCs), ideally a hub of business qualification and professional insight which manage the funds and its shareholders, and invest in a diversified portfolio, thereby reducing the risk of investing in a single security. This inherent diversification of portfolio that the investors can achieve by investing in a mutual fund, coupled with attraction of liquidity and transparency, have been major factors in the continuous growth of the mutual fund industry all over the world. The fundamental aim of a fund manager of AMCs of mutual fund organizations is to minimize the risk of investors. An investor has the option to select any scheme of the mutual funds, which facilitates liquidity of investment. However, the evaluation of performance of the fund manager depends on the performance of the schemes and portfolio. It is vital for both the investors and portfolio managers. In general, professional fund managers have expertise in managing investments to attract more investors. But they face challenges through redemptions, lower sales and fight for security. Recent developments have sown the seeds for players to proactively participate in fund management. It is therefore a good time for the mutual fund industry to introspect on the lessons learnt in the past and develop a route for success through a committed effort and dedication.

It is a known fact that the important objective of mutual fund organization is to provide income tax benefit to the small- and medium-size investors. Over medium- to long-term, mutual funds have the potential and objective to provide a higher return as they invest in a diversified basket of selected companies. The objective of mutual funds is to offer a variety of schemes to enable investors to take advantage of opportunities not only in the equity, debt and money markets but also in specific industries and sectors. But, using their ingenuity and expertise, the CEOs of any mutual fund organization think that this may not be the only example of mutual funds to cater to the corporate sector and individual investors. It is interesting to note that many of these schemes invest in a single security that matures at a particular date, and most single investor schemes are likely to be in this category. Such schemes are a negation of the very concept of mutual funds, where expert investment managers are supposed to hedge risk by investing in a basket of securities. Between schemes that have just one investor and inter-corporate deposits in the guise of mutual funds walking away with tax advantages, it is clear that the Securities Exchange Board of India (SEBI) rules need a serious re-look. SEBI may also try to figure out why retail investors are disinterested in mutual funds and examine persistent charges that many fund managers tend to front-run their investment decisions despite compliance rules.

Today, India’s mutual fund industry can be considered to be sound and stable compared with many other Asian countries. The Indian mutual fund industry is growing at an impressive pace: assets under management (AUM) have shown a 35% compounded annual growth rate (CAGR) in the past decade, that is, during 1999–2009 (see Chapter 5, Tables 5.1, 5.2 and 5.3 for further information). India could achieve this irrespective of the fact that the limited access to affordable financial services, such as savings, loan, remittance and insurance services, by the vast majority of the population in rural areas and unorganized sector is believed to be acting as a constraint to the growth impetus in the mutual fund industry.

In India, regulation of the financial sector has evolved as a product of planned development where mobilization of savings and the corresponding investments are done through public sector at predetermined prices.

It is impossible for an investor, or a trustee, to closely monitor the management of the fund. As monitoring inputs is infeasible, the only device through which control can be exercised is by monitoring performance. The investor could try to select managers who have exhibited the consistent returns in the past. A naïve comparison of returns across alternative funds, which is often done in India, is incorrect when there are differences in the levels of risk adopted by different funds. Scientific performance evaluation is necessary to examine this problem.

1.0.1 Need for the study

An all-India survey conducted by the New Delhi-based Society for Capital Markets Research Development on the investment preference of households, reports that a period of turmoil for investors translates into higher deposits going into banks and small savings schemes.¹ For instance, in 1997–1998, against the backdrop of the Asian financial crisis and prevailing uncertainty, bank deposits of an average Indian household shot up from 25.6% (the previous year) to 38.3% of the investible funds; and inflows into small savings schemes went up from 7% to 10.6%, while investments in Unit Trust India (UTI) and mutual funds went down from 2.7% to 0.06%.

UTI is losing its share in the market, whereas banking and private sector organizations are having higher growth rate than the UTI. The reasons may be lack of confidence in UTI or better returns provided by other bank-sponsored and private sector mutual funds. Besides this, several factors are expected to influence the mutual fund industry viz., volatility in stock market, FII investment, household saving habits and attitude to invest in mutual funds.

In this context, this study wants to examine four important dimensions: (1) Resource mobilization, (2) Investment practices, (3) Risk-return trade-off and performance of schemes and (4) Investor’s service. This study is useful for various stakeholders of mutual funds such as sponsors, trustees, AMCs, custodians and investors.

1.0.2 Objectives of the study

1. To trace the trends in the growth of mutual funds and changes in the regulatory measures of mutual fund industry in India.

2. To examine the factors influencing the resource mobilization patterns of mutual funds during post-liberalization period under private sector, public sector (other than UTI) and UTI and make projections up to 2020.

3. To examine the investment behaviour of mutual funds under the three sectors, with an object of assessing the distribution of funds in various debt-equity instruments.

4. To evaluate the performance of various schemes of the mutual funds in the three sectors by employing Sharpe, Treynor and Jenson models.

5. To elicit the opinions of investors in mutual funds pertaining to the promise and performance, problems and prospects of the funds.

6. To suggest suitable measures for the strengthening of the mutual funds in India.

1.0.3 Hypotheses

1. There is considerable impact of various factors like household savings in shares, debentures and mutual funds, volatility of BSE Sensex, FII investment on gross resource mobilization either in private sector or in public sector.

2. ‘Higher the risk, higher the returns’, this is valid both in the case of public sector and private sector mutual funds.

1.0.4 Scope of the study

This study examines the patterns of resource mobilization by private sector and public sector during the post-liberalization period during 1993–2009 and projections for the year 2020. This study presents an overview of investment patterns of public sector versus private sector mutual funds. Besides, it also undertakes the performance analysis of selected schemes of public and private sector organizations using various measures of risk. The results are classified on the basis of nature of schemes like (i) Balanced Fund, (ii) Equity, (iii) Floating Rate Income Schemes, (iv) Gilt Long-term, (v) Gilt Short-term, (vi) Income Fund, (vii) Liquid Fund, (viii) MIP, (ix) Sector Fund-FMCG, (x) Sector Fund-Pharma, (xi) Sector Fund-Infotech (xii) Short-term Income Scheme and (xiii) Tax Schemes.

1.0.5 Data analysis techniques

1. Tabular analysis technique is widely used.

2. Simple percentage analysis: It calculates various percentages in the customer’s profile, attitude and opinions of the investors.

3. Regression analysis, ANOVA, T-test, and multiple correlation were employed.

4. Statistical formulae like standard deviation, alpha, beta and so on were employed to find the intensity of risk.

5. Sharpe, Jensen and Treynor models were used to measure the performance of the various schemes of mutual funds.

1.0.6 Coverage of the study

Various mutual funds have been offering 1871 schemes up to the beginning of 2009. Out of these schemes, 182 schemes were launched during the past two-year period. Hence, such schemes are excluded from the study. The remaining 1689 schemes were the total population of the study, out of which around 20% of the schemes were chosen for the purpose of evaluation. The questionnaire is canvassed among the investors of mutu...

Table of contents

• Cover
• Title
• Copyright
• Contents
• List of Figures, Tables and Graphs
• Preface
• List of Abbreviations and Acronyms
• 1 Introduction
• 2 Review of Literature
• 3 Trends in Resource Mobilization
• 4 Investment and Investors’ Analysis
• 5 Performance of Mutual Funds
• 6 Investors’ Behaviour: Survey Findings
• Appendices
• Notes
• Glossary
• Bibliography
• Subject Index
• Author Index