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Mutual Funds face crisis of confidence: 1 cr equity folios wiped out since March 2009

The number of equity folios touched its peak of 4.11 crore on March 2009.

Written by Ashley Coutinho | Mumbai |
November 7, 2013 2:58:18 am

Nearly a crore equity folios have closed in the last four-and-a-half years,signalling a worrying trend for the mutual fund industry. The number of equity folio closures since March 2009 now stands at 99.6 lakh,Sebi data show. The actual number of investors exiting could be much lower than the number of folios as there’s a duplication of an estimated 20-25% of folios. Equity folios,as a percentage of the total number of folios in the industry,have fallen to 75.4% at the end of September 2013 from 86.2% at the end of March 2008. The number of equity folios touched its peak of 4.11 crore on March 2009.

“Participation in equity MFs is a function of how the market performs. Indian equities have been volatile in the past few years and there’s been no secular gains in equity funds,” said Deepak Chatterjee,MD & CEO,SBI MF.

The Sensex has gained 116% in the past five years and,finally,regained the levels it touched in January 2008,but it’s been a rough ride,characterised by volatility and lack of clear direction. For most part,the market has been trading below the levels touched in January in 2008.

The last one-and-a-half years have been particularly tough: Nearly 45 lakh equity folios closed in FY13 at an average of 3.34 lakh folio closures a month,the highest in the last nine fiscals. This was despite the gains of 8% logged by the Sensex during the year. The pace of folio closures shows no signs of abating,with 20 lakh folio closures in the six months to September this year,at an average of 3.34 lakh folio closures every month.

“The quantum of folio closures is not surprising; if you just look around,you will find that everyone is displeased with equities as an asset class,” said Dhirendra Kumar,CEO of Value Research,a mutual fund tracker.

“Closure of a large number of equity folios is a cause for concern as it increases the concentration risk. It is always better to have 50,000 rather than just 5000 investors,even if all the 5,000 happen to be large-ticket investors,” said Debashish Mallick,MD & CEO,IDBI MF.

“Any consumer-focused industry thrives on numbers. The more the participation,the greater the growth. It is shameful that today India’s largest insurance firm (LIC) has more than five times the number of customers than the entire mutual fund industry,” added a fund official,on condition of anonymity. As per its website,LIC has about 25 crore customers.

Equity folio closures have been a regular feature every single year since FY10. The financial years from FY05 to FY09 had seen a net creation of folios,with FY08 seeing about 34,000 folios created per day,the most in a financial year. FY06 to FY08 saw 2.8 crore folios equity folios added even as the Sensex gained about 141% during the period. However,the global financial crisis of 2008 put the brakes on folio additions. The financial meltdown,together with the spate of regulatory changes such as abolition of entry loads in 2009 and Sebi’s subsequent clampdown on NFOs with similar themes,also weighed. Fund managers have been advising investors to continue their SIP portfolios even in tough times,but long-term investors who entered the market in 2007 and early 2008 have been particularly keen on exiting during market upmoves.

“The industry is trying its best to educate investors about the benefits of long-term investment through SIPs,but it may take many years to bring about a meaningful change in investors’ behavioural pattern,” said Chatterjee. However,Kumar says that investor education could yet prove futile if the equity market does not get back on track. “No amount of investor education will be able to convert the investors who have had a bad experience or have burnt their fingers investing in equities.”

Some experts believe that the industry should also take some of the blame. “Fund houses,especially the bigger players,should have behaved more responsibly during the good times. Instead,they went about indiscriminately launching NFOs,charging high fees and luring investors by weaving fictitious stories around their products,” said Kumar. The silver lining has been the addition of debt folios. In FY13,nearly 8.9 lakh folios have been added as robust returns in most debt categories and falling interest rates prompted investors to flock to debt schemes. Overall,since March 2009,32 lakh debt folios have been added.

However,not all fund officials are enthused by the increase in debt assets. “Debt schemes are yet to gain the kind of popularity enjoyed by equity funds during the boom period,” said Mallick.

What’s more,equity assets are a lot stickier than debt assets and can generate higher revenues for fund houses. Fund houses take in asset management fees of anywhere between 100 bps and 150 bps for equity schemes. In contrast,while fees on long tenure bond funds can be as high as 50-100 bps,fees for the most commonly sold products such as FMPs and liquid funds are much lower and vary between 5-20 bps.

Besides,the volatility seen in debt products in the past few months has unnerved debt investors as well. Investors,who had put in money in duration products in the middle of the year,are sitting on losses even today,according to fund officials.

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