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Mutual satisfaction in India

The Indian mutual fund industry started with the setting up of the erstwhile Unit Trust of India in 1963. Public sector banks and financial institutions were allowed to establish mutual funds in 1987. Since 1993, private sector and foreign institutions have been permitted to set up mutual funds. The industry is regulated by the Securities and Exchange Board of India (SEBI).

Total assets under management in the Indian mutual funds industry are forecast to show a compound annual growth rate (CAGR) of 27 per cent over the next five years, according to research and consulting firm Celent. For the time being, however, the Indian funds sector is highly concentrated, with the top seven asset management companies controlling 70 per cent of the market. Individual investors account for around 45 per cent of the assets under management; the high net worth individual sub-segment accounts for just over half of that (23 per cent).

A DECADE OF DEVELOPMENT

The Indian mutual funds sector has seen a variety of new products made available to investors over the last 10 years, including exchange traded funds (ETFs), capital protected funds, funds of funds (FOF) and quant funds. The first ETF in India, Benchmark Nifty Bees, opened for subscription on 12 December 2001 and listed on the National Stock Exchange (NSE) on 8 January 2002 while the first Gold ETF in India, Benchmark GETF, opened for subscription on 15 February 2007 and listed on the NSE on 17 April 2007.

Capital Protection Oriented Schemes are schemes that aim to protect the capital as the primary objective by investing in high quality fixed income securities and generate capital appreciation by investing in equity / equity related instruments as a secondary objective. The first Capital Protection Oriented Fund in India, Franklin Templeton Capital Protection Oriented Fund opened for subscription on 31 October 2006.

A Fund of Funds comprises only of units of other mutual fund schemes and cash / money market securities / short term deposits pending deployment. The first Indian FOF was launched by Franklin Templeton Mutual Fund on 17 October 2003.

A quantitative fund is an investment fund that selects securities based on quantitative analysis. The managers of such funds build computer-based models to determine whether or not an investment is attractive. In a pure "quant shop" the final decision to buy or sell is made by the model. However, there is a middle ground where the fund manager will use human judgment in addition to a quantitative model. The first quant-based mutual fund scheme in India, Lotus Agile Fund opened for subscription on 25 October 2007.

With the opening up of the economy, Indian mutual funds have also been permitted to invest in foreign securities / American Depository Receipts (ADRs) / Global Depository Receipts (GDRs). Some schemes are dedicated funds for investment abroad while others invest partly in foreign securities and partly in domestic securities.

Looking ahead, the Association of Mutual Funds in India (AMFI) is planning to launch a common platform for mutual funds in March 2010, designed to allow individual investors to trade and compare schemes online through a single window. It is intended that the platform will be accessible via mobile or online. It is possible that this common platform may even reduce the cost of investments for the investors because it provides a single window for all schemes. A tie-up of AMFI’s common platform with the terminals of the National Stock Exchange (NSE) of India may be a possibility in the future.

A DECADE OF DELIVERY

“The bellwether S&P CNX Nifty has only managed an 11.3 per cent compounded annual return (CAGR) over the past ten years; the 40-odd equity funds with a ten-year record have convincingly trounced the Nifty with an average return of 16.5 per cent,” said Aarati Krishnan, Head of Research for The Hindu Business Line.

“Return divergence between the best and worst performers did exist, but even so, eighty per cent of these funds outperformed the Nifty over the decade, no mean achievement given that it straddled two big boom-bust cycles in the market.

“The top performers notched up compounded annual returns of as high as 25 to 30 per cent.

“Equity funds apart, hybrid products too saw their share of innovation with asset allocation funds (such as the Franklin Templeton Life Stage Funds or Birla SunLife Asset Allocation Funds), dynamic funds (funds that re-balance based market valuations) and funds that combine several asset classes into one portfolio (Sundaram BNP Paribas Global Advantage).

“In the fixed-income funds space, fixed maturity plans, despite their shortcomings, have managed to neatly marry the advantages of fixed deposits with market-linked returns. Over the years, this category has also been minutely segmented into liquid, ultra-short term, short-term and long-term bond funds to suit every investor horizon as well as bond market price patterns.

“Active investing gets more challenging… active equity managers in India appear to be finding it increasingly difficult to beat the indices. Or at least that is what it appears from the return scorecard for funds over the past three years.

“If eight out of ten active equity funds managed to outperform the Sensex in the previous bull market of 2007, this number has dropped to five in 2009… 2009 would be one of the first recent instances where active managers have found it difficult to deliver better-than-index returns even in a bull market.

“…if equity funds trail the indices for yet another year, Indian investors may well have to re-evaluate their options and hedge their bets by adding exchange-traded funds to their portfolio.”

BNP’s NEW FUNDS

Towards the end of 2009 BNP Paribas Investment Partners (BNPP IP) launched two new private placement funds, invested in Indian equities. The funds are managed by Sundaram BNPP AM, the Indian equity specialist of BNPP IP. Through these two feeder funds, investors may gain direct access to Indian domestic equity funds, in which Sundaram BNPP AM’s best ideas are implemented. As these are domestic funds they do not fall under the same regulation rules as those imposed on foreign investments.

The funds are complementary, “The first one has a very concentrated approach, investing in 30 stocks we believe are best in class, while the other fund offers a very attractive access to Indian mid caps. They both concentrate our best investment ideas”, said TP Raman, head of Sundaram BNP Paribas Asset Management.

“We are positive on a number of sectors, mainly driven by private demand recovery and we think that India is one of the main drivers of emerging markets’ economies. India will definitely be one of the most rapidly growing countries in the next couple of years. So we are very happy to rely on Sundaram BNPP AM, our partner since 2005, to manage those innovative Indian funds,” said Vincent Camerlynck, Global Head of Business Development at BNPP IP.

UNITHOLDER RIGHTS

As a unitholder in a Mutual Fund scheme coming under the SEBI (Mutual Funds) Regulations, you are entitled to:

Receive unit certificates or statements of accounts confirming your title within 30 days from the date of closure of the subscription under open-ended schemes or within six weeks from the date your request for a unit certificate is received by the Mutual Fund.
Receive information about the investment policies, investment objectives, financial position and general affairs of the scheme.
Receive dividend within 30 days of their declaration and receive the redemption or repurchase proceeds within 10 working days from the date of redemption or repurchase.
Vote in accordance with the Regulations to: change the Asset Management Company; wind up the schemes.
Receive communication from the Trustees about change in the fundamental attributes of any scheme or any other changes which would modify the scheme and affect the interest of the unitholders and to have option to exit at prevailing Net Asset Value without any exit load in such cases.
Inspect the documents of the Mutual Funds specified in the scheme’s offer document.

In addition to your rights, you can expect the following from Mutual Funds:

To publish their NAV, in accordance with the regulations: daily, in case of open-ended schemes and once a week, in case of close-ended schemes.
To disclose your schemes’ entire portfolio twice a year, unaudited financial results half yearly and audited annual accounts once a year (In addition many mutual funds send out newsletters periodically).
To adhere to a Code of Ethics which require that investment decisions are taken in the best interest of the unitholders.

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