MF assets decline 4.1% as banks pull out funds

With banks pulling out funds from mutual funds following a directive from the Reserve Bank of India,the mutual fund industry witnessed...

With banks pulling out funds from mutual funds following a directive from the Reserve Bank of India (RBI),the mutual fund industry witnessed a decline of Rs 32,853 crore,or 4.13 per cent,to Rs 7.61 lakh crore in the average assets under management (AUM) in January.

The combined average AUM of 37 fund houses fell for the second month in a row to Rs 7,61,632.26 crore at the end of January,according to a data released by the Association of Mutual Funds in India (AMFI). Reliance MF maintained its numero uno position as the countrys largest fund house with an AUM of Rs 1,17,248.56 crore during the month,despite losing Rs 2,733.22 crore from its assets. It was followed by the countrys second largest fund house HDFC MFs AUM that witnessed an erosion of Rs 2,386 to Rs 94,797.01 crore at January end. ICICI Prudential MF,the countrys third largest fund house,saw its AUM falling by Rs 4,059.86 crore during the month to Rs 78,372.38 crore.

According to mutual fund analysts,even as fresh sales came under pressure due to scrapping of entry load,commercial banks cut their investment in mutual funds by as much as 75% in early January from their peak levels last December. Their investment in mutual funds fell to Rs 42,428 crore as on January 1,2010,from Rs 1,69,236 crore as on December 4,2009,indicating a decline of 75 per cent.

Banks usually offload their investment near to the close of a quarter to book profits,which is corroborated by the RBI data given in the chart. But this sharpest fall seen in the third quarter also happened due to the stern message by the RBI to banks for pruning their excessive investment in mutual funds. There has been some circularity in the movement of funds between MFs and banks. Banks invest a part of their resources in MFs. The MFs also lend funds to banks through CBLO and market repo, the RBI had said in November and later asked banks to bring down this exposure.

Banks which witnessed a fall in credit growth also found it convenient to invest the surplus money in mutual fund schemes which were giving better returns. As mutual funds were putting this cash in the market and call money market for further lending where banks are the borrowers the banking regulator found this circular movement of funds somewhat risky.

Entry load removal on MF schemes caused destability,says Kurian

MUMBAI: Association of Mutual Funds in India (AMFI) chairman A P Kurian today said the removal of entry load for mutual fund schemes has resulted in destability in the industry. There is a 360 degree change in the way the distribution of mutual funds business is done. It (the removal of marketing and distribution charges to mutual fund distributors) has brought some destability in the industry, Kurian told reporters on the sidelines of a conference here. He said both the mutual fund (MF) industry and the distributor community were struggling to adjust to the new regulatory changes. Probably,we are going to face this situation for a few more months because it needs a complete change in the mindset of the distributor community and the investors. We are asking distributors across the country to re-engineer their business model, Kurian said. Sebi had last June removed entry load on all MF schemes which means that investors have to directly make payments to distributors instead of mutual fund companies deducting it from the investment made in any scheme. The move was aimed at bringing greater transparency,but distributors decried it saying the law hit sales. PTI