CHAPTER - SEVEN

PROBLEMS AND PROSPECTS OF MUTUAL FUNDS IN

INDIA

Mutual funds are the greatest innovation for mobilising the savings of the

society and channelising them into productive assets. In US, mutual funds have

already taken over banks and financial institutions in offering the most optimum

returns on a set of diversified portfolios. The trend in India is looking much the same

with many mutual fund schemes gaining the confidence of investing populace so

much that the public sector banks and financial institutions have started their own

mutual funds owing to the fear of global trend. But, this does not mean that mutual

funds are full of benefits or virtues. They have their own set of problems regarding

costs, services, regulations, performance, profitability, decline of Net Asset Values

(NAVs) below the issue prices, financial instability and others, which have been

causing big concern to investors. The growing realisation on such issues is adversely

affecting the investors’ stake in mutual funds industry in India. But, fostering

economic variables in the country are giving faith for its vividness. It will be useful to

examine the factors responsible for this contradictory state of mutual funds in India so

as to throw light on its future prospects.

7.1 Problems of Mutual Funds

Mutual funds industry in India has emerged as one of the major constituents of

Indian financial system. It has completed more than forty five years of its presence. In

this short period, it grew fast and also suffered from equally fast decline. It became

sick in its formative years. It has witnessed noticeable structural transformation,

quantitative growth, qualitative and quantitative decline and perhaps the revival,

which may put the industry back on track. The decline in mutual funds industry had

been attributed to the factors such as a) Prolonged bearish trends and scams in Indian

stock market that killed the investors’ interest in equities and units b) The fall of UTI

broke the investors’ faith and confidence c) Unattractive returns on mutual fund

schemes. Although, good performance of debt funds helped the industry for some

time, the continuous reduction in interest rates in the economy has adversely affected

the growth momentous of mutual funds industry again d) Sluggish trends and sickness

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in corporate sector after 1980s e) Inefficiency and corruptibility in mutual funds

management f) Withdrawal of tax benefits under Section 80 M of Income Tax Act g)

Poor performance of mutual fund schemes h) Series of crisis, scandals and frauds.

The above-mentioned factors have created supplementary flaws and setbacks for the

mutual funds industry at various points of time and have been among the major

causes of the decline in mutual funds industry. The major weaknesses and problems

of the Indian mutual funds industry are examined below.

7.1.1 Low Level of Awareness

The awareness of investors determines the success of mutual funds industry.

In India, low investors awareness/ information level and financial literacy have been

causing biggest threats to mutual funds industry in channelising the household savings

into mutual funds. According to the Invest India Market Solutions Report (2007) “Just

one out of seven people with savings in 2007 were aware of mutual fund

opportunities”.1 Low awareness level among retail investors has a direct bearing on

the low mutual funds off take in the retail segment. Due to this, investors in India still

prefer bank deposits to mutual funds. The Karvy Private Wealth Report (2010)

reveals that “more than 40 percent of Indian household savings find their way into

bank deposits. Only 3.8 percent of their savings go to mutual funds”.2 The majority of

new investors do not understand the concept, operations and advantages of investment

in mutual funds. The lack of understanding about mutual fund products is more

pervasive in semi-urban and rural areas. Majority of people in these areas find it

difficult to differentiate between mutual funds and direct stock market investments. A

large number of retail investors do not understand the concept of risk-return, asset

allocation and portfolio diversification. Moreover, less understanding of Systematic

Investment Plans (SIPs) in mutual funds has caused investors to invest in a lump-sum

manner. One of the worst drawbacks of such lack of information or understanding of

mutual funds is that investors remain unaware of what mutual funds are doing to their

1 Invest India Market Solutions (IIMS) Dataworks. (2007). Invest Indian Income and Savings

Survey. New Delhi: IIMS.

2 Karrvy Private Ltd. (2010, September). Karvy Private Wealth’s India Wealth Report – Where do

Indian Individuals Invest their Wealth? Key Trends. Hyderabad: Karrvy Private Ltd., p.10.

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money. Besides, mutual fund companies are not making any concerted efforts to

address this issue.

It has been noticed, that some investors have a poor opinion about the

investment efficiency of mutual funds. Mutual funds are often viewed as momentum

chasers rather than true professional investment managers. Mutual funds follow the

wide disparity in sales and repurchase price of certain schemes. A case in this regard

is UTI US-64 scheme, in which UTI repurchased its units at Rs. 14.85 in 1992 when

its NAV was Rs. 28.63.3 Mutual funds also fall short of expectations in meeting

investors’ requirements at the time of economic uncertainty and market volatility.

They have become the trading instruments of high-class investors rather than that of

small investors. Besides this, the practice of frequent miscalculation of returns and

premature closure of schemes is quite prevalent in industry. It is also found that

mutual fund offer documents are issued only to Non Resident Indian (NRI) investors

and High Net worth Investors (HNI). It is provided to general investors on their

demand only.

The mutual fund schemes are designed keeping in mind the preferences of the

investors, changes in stock/ capital market, returns on various instruments and

changing profile of the investors. The schemes are framed and conceptualised by the

top management of the mutual fund companies and marketed by their branches and

the agents. The agents and the sales executives of the mutual fund companies assure

higher returns to the investors and paint a rosy picture about the mutual funds while

marketing the schemes. The agents or distributors of mutual funds are more

concerned about their commissions and incentives and thus do not explain the risk

involved in the investment owing to the fear that it may discourage the investors to

invest. The ignorance of the investors about mutual funds coupled with aggressive

selling by promising higher returns to the investors have resulted into loss of

investors’ confidence.

3 Bhole, L, & Mahakud, Jitendra. (2009), Financial Institutions and Markets. New Delhi: Tata

McGraw Hill, p. 12.39.

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The mutual funds in our country have quite wrongly been promoted as an

alternative to investment. The investors who invest in growth or equity schemes

consider it as an alternative to stock market investment and the investors who invest

in debt schemes expect returns higher than on nationalized banks’ fixed deposits.

They get dissatisfied when they do not receive the expected returns. The

dissatisfaction of investors results into poor demand for such schemes. The NAV of

such schemes decline on listing and trading due to poor sentiments of investors. Thus,

investors’ low level of awareness is the major problem of mutual funds industry.

7.1.2 Regulatory Problems

A strong regulatory framework is the key to success for any business

environment and so is the case for Indian mutual funds industry. The level of

competition in the industry has continuously been going up. So, it needs to perform a

more dynamic and vibrant role to meet the tests of time. We have observed some

areas in mutual fund regulations which are to be addressed soon so as to make it more

competitive and transparent.

1. The first level regulation of mutual funds in the country rest with the trustee.

The actions taken by the trustee are deemed to be the actions of the mutual

funds. The trustee is supposed to perform many duties like – approve the

appointment of the director of asset management company, obtain periodic

reports from the asset management company about the fund operations,

monitoring security dealings of key personnel of the asset management

company, review of contracts, file periodic reports to the regulator, discipline

the asset management company etc. These duties are considerable in

magnitude and call for significant expertise and devotion of time. But, the

regulations in India do not mandate that the trustee company (and its directors)

be provided with adequate administrative support for discharging their

responsibilities. Further, SEBI requires at least four trustees in a mutual fund

and 2/3 of them must be independent from AMC. However, their functions in

fund management are not demarcated in the regulations. Trustees are usually

drawn from diverse background. They are generally experienced bankers,

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eminent lawyers, ex-judges and renowned charted accountants. So, it would be

unrealistic to expect them to possess a high level of mutual fund expertise.

This situation is not conducive to the exercise of competence. The directors of

the trustee company receive sitting fees when they attend the board meetings.

This amount is moderate and perhaps not commensurate with the level of

responsibilities expected to be discharged by them. Inadequate compensation

may result in a superficial trusteeship function.

2. SEBI has comprehensive provisions to deal with violation of mutual fund

regulations. The defiance of norms for registration, information, application,

submission, cooperation, code of conduct, trade practices, investor complaints

and obligation for mutual fund, AMC and trustees are subject to penal

provisions of SEBI as given in chapter IX in SEBI (Mutual Fund) Regulations,

1996. The accused party is dealt in the manner as specified under SEBI

Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities

Market Regulations, 1995 and SEBI Procedure for Holding Enquiry by

Enquiry Officer and Imposing Penalty Regulations, 2002. These regulations

state the minor and major penalties for mutual funds which among others

include the debarring of a branch as well as of whole time director for six

months and the suspension/ cancellation of registration for three months etc.

But, there is no mention of any penal provisions against the officers,

employees, key personnel, fund managers of an AMC and fund custodian who

are found guilty of violating regulations. The absence of adequate regulations

against such erring persons in mutual funds cannot be said to secure the rights

of investors properly. Further, SEBI provides the penalty of Rs. 1 lakh to Rs. 1

crore whichever is higher, if mutual funds fail to comply with the SEBI

(Mutual Fund) Regulations, 1996. Whereas in US, if any person who wilfully

violates the rules and regulations of Investment Company Act 1940, is liable

to pay a fine of $10,000 (maximum) or may get imprisonment of up to five

years or both. In China, if a fund manager or fund custodian violates any

provisions of Law of the People’s Republic of China on Funds for Investment

in Securities, then in addition to charging the fine of not less than 30,000 Yuan

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and not more than 300,000 Yuan, these parties are given disciplinary warning

or suspended/ disqualified from dealing in fund management business or fund

custody. Same procedure is adopted for an employee of fund manager or

special fund custodian department. Looking at the provisions in other

countries, we find that the punishment imposed by SEBI on mutual funds

violating its regulations is very small. In fact, it encourages them to go for

bigger scams. It is therefore suggested that the amount of penalty should be

suitably enhanced and prison term should also be added to it. The fund

managers, fund custodian, employees and staff should also be brought under

the penal provisions as in US and China.

3. The mutual fund regulations do not prescribe any qualification for the fund

manager. So anybody can become fund manager irrespective of his/ her

qualifications. Contrary to that, a mutual funds distributor/ advisor is required

to pass the ‘National Institute of Securities Market’s (NISM) Mutual Fund

Distributors Certification Examination’ so as to become eligible to do his/her

work. The fund manager performs a very responsible and risky task. So, we

feel that there ought to be some qualification for them also. In China, fund

managers are stipulated to have a professional qualification for dealing in fund

business. They should also have at least three years' working experience as

Manager or Senior Managers in a firm dealing with fund management. UK

Financial Service Authority (FSA) has laid down the qualification for all

entities dealing in investment business. Fund/ Investment managers in UK are

required to obtain the Certificate in Investment Management/ Certified

International Wealth Managers Diploma (CIWM)/ MSc in Investment

Analysis/ Masters of Wealth Management/ Investment Advice Certificate for

engaging in investment management activities. On the same pattern, some

guidelines relating to fund manager’s qualifications may be prescribed by

SEBI. This will lead to better utilisation of investors’ money and enhance their

confidence that their money is in good hands. SEBI is also silent about the

qualification of trustee in mutual funds. Whereas in UK, the trustee/

depository is required to have a Certificate in Collective Investment Scheme

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Administration/ Investment Management Certificate/ Certificate in Corporate

Finance/ Client Service Management Certificate to be a trustee of mutual fund.

Trustee is the main entity for keeping track of the mutual fund activities and

its development. So, SEBI should also consider the educational qualification

of trustees in mutual funds and make it a necessary stipulation

4. The mutual fund distributors are out of the regulatory purview of SEBI. There

are no separate regulations framed by SEBI for them. In US, distributors are

registered under the Securities Exchange Act of 1934 as broker-dealers. They

are regulated by Securities Industries and Financial Markets Associations and

are required to pass broker-dealer exam for selling mutual fund units.

Similarly, Financial Service Authority (FSA) in UK spells out the

responsibilities for distributors in ‘The Responsibilities of Providers and

Distributors for the Fair Treatment of Customers’ (RPPD). Such regulatory

norms for distributors are yet to be framed in India. Recently, SEBI has taken

a few steps in this regard. It has directed AMCs to regulate the distributors by

carrying out due diligence process. We feel that giving responsibility to AMCs

to regulate distributors is not enough to secure the interest of investors. SEBI

should frame separate and more comprehensive regulations for distributors so

as to regulate their activities properly. Besides, SEBI should set up a separate

governing body to look into the activities of mutual fund distributors as in UK.

5. Fund managers are bound to invest funds according to the investment

objectives of schemes stated in the offer documents. They do not have choice

to invest in other good performing securities. This mandate sometimes,

restricts the mutual funds to perform effectively in the market.

6. SEBI regulations regarding transparency in mutual fund product names and

definitions are not comprehensive in nature. Mutual fund products are used to

have hazy names like T.I.G.E.R (The Infrastructure Growth and Economic

Reforms), S.M.I.L.E (Small and Medium Indian Leading Equities) and C.U.B.

(Competitive Upcoming Businesses) etc. The equity funds are vaguely defined

such as ‘opportunities funds’ and ‘multi-cap’ funds. Because of this, investors

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do not understand how diversified funds are different from ‘opportunities

funds’ and ‘multi-cap’ funds. Owing to this, investors do not get the real

picture about where the fund will be invested and what kind of risk it will take.

To tackle this problem, SEBI is trying to evolve a fund labelling system which

can help investors to some extent. It is a good step and it will certainly boost

up the investors’ confidence in the market.

7. The ban on entry load in 2009 reduced the ability of distributors to sell mutual

funds in the market. Earlier, distributors were paid Rs. 2.25 (per hundred

rupees) as compensation by AMCs, which was deducted as the entry load from

scheme’s amount. The average commission paid to distributors was 1.78

percent in 2008, which came down to 0.98 percent in 2010. The entry load ban

not only lowered the distributors’ commission but also compelled large

number of distributors to go out of the mutual funds business. As a result, the

participation of households in mutual funds has declined. Also, from June 30,

2009 onwards, SEBI has enabled investors to pay commissions directly to the

distributors depending on his/ her assessment of various factors, such as the

quality of service rendered by distributors. But, we think that no investor will

be interested to pay money separately for any kind of service received from

distributors. It will raise a concern from distributors regarding the non-receipt

of payment from investors, and may thereby lead to the conflict of interest

between distributors and investors. These regulatory steps do not seem to be

practical and may go against the distributors who are considered key to the

success of the mutual funds industry.

7.1.3 Improper Investment Policy Disclosure

Mutual funds are stipulated to have investment policy in written form.

Investment policy links the investment objective of a fund, to a fund manager’s daily

working strategy. The efficacy of the investment policy depends on the clarity of

visions with which it is executed or achieved. Despite its stated importance, a study of

selected offer documents of mutual fund schemes viz., Birla Sun Life, LIC Nomura,

UTI and Sahara reveals that the Indian mutual funds have ambiguously described the

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risk factors and its controlling procedures while mobilising huge funds from investors.

Mutual fund schemes have followed tough and vague language in writing their

investment policies. These are written in a manner that the investor may get confused.

Also, the investment objectives of schemes are found descriptive in nature and it is

difficult to draw the generalisations out of them. The portfolio turnover rates of last

five years of the schemes are also not mentioned in the offer documents.

7.1.4 Low Participation and Penetration

Low retail participation is the biggest challenge posed before the Indian

mutual funds industry regardless the availability of favourable retail environment and

ample growth opportunities in the Indian economy. According to the Confederation of

Indian Industry & PricewaterhouseCoopers Mutual Fund Summit Report (2010),

“Indian mutual funds industry has experienced a marginal increase of 5.3 percent in

retail participation from 21.3 percent in 2009 to 26.6 percent in March, 2010”.4 Dent

of low retail participation is mainly attributed to the week distribution network and

low transparency in client servicing. Moreover, mutual funds are popular mainly with

the urban, high, and middle-income groups. The penetration of mutual funds is quite

low beyond top 20 cities. According to the Klynveld Peat Marwick Goerdeler &

Confederation of Indian Industry Report (2009), “the cities beyond top 20 contribute

around 10 percent of the industry AUM”.5 The population living in Tier II & Tie III

cities is not able to invest in mutual funds owing to the lack of proper distribution

channels and client servicing. Mutual fund houses have largely concentrated on the

distribution network in top 20 cities because the cost associated for penetration in Tier

II, Tie III cities and rural areas is very high. However, some of the mutual fund

companies have now started to focus on cities and areas beyond top 20 cities by

increasing their branches and supporting the distribution reach. They have stepped up

the number of branches in Tier II & Tier III cities but have failed to focus adequately

on boosting retail business. The institutional segment has been given more weightage

4 CII 6th Mutual Fund Summit. (2010). Indian Mutual Fund Industry – Towards 2015: Sustaining

Inclusive Growth – Evolving Business Models. Mumbai: PWC-CII, p. 7.

5 KPMG-CII. (2009). Indian Mutual Fund Industry- Future in a Dynamic Environment: Outlook

for 2015. Delhi: KPMG-CII, p.11.

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in garnering the Assets under Management (AUM) that comprises more than 60

percent of total AUM share in mutual funds.6 This is because of the mindset of current

investment managers who think institutional money as the easiest route of having a

big slice of cake in one go. The availability of tax arbitrage and large ticket volume to

corporates on investing in money market mutual funds and the easy access of

institutional investors in Tier I cities appear to be important factors responsible for

this phenomenon. The focus on retail segment requires significant distribution

capabilities, wide network and intense foot prints. It is noteworthy that Asset

Management Companies (AMCs) have recently begun to focus on these aspects.

7.1.5 Limited Products

The mutual funds industry in India offers limited products to meet the needs of

investors. Unlike the US, UK and Japan, the Indian mutual funds industry is very

slow in offering innovative products to investors. In US, different mutual funds are

available for the entire life span of investors. Schemes, more than 10,000 in number,

fit to every economic and social need of investors, be it a university admission

(College Target Date Funds), retirement (Retirement Target Date Funds) or

purchasing of the property. Likewise in the UK, there are over 2,000 different types of

unit trusts and Open-ended Investment Companies (OEICs) available to investors,

investing in over 30 sectors. These sectors have been categorised by the Investment

Management Association (IMA) and are divided among the assets class (like funds

investing equities, fixed interest, and property), geography (such as UK Equity, North

America, Japan and Emerging Markets), sector type (like Technology and Telecoms)

and investment style (such as Growth or Income). Compared to that in India, only

about 1,200 mutual fund schemes are available in the market and most of which are

either income, balanced, liquid or growth funds. The sector specific funds, commodity

funds, index funds, funds of funds (FOFs) and exchange traded funds (ETFs) have

recently been introduced in India. These funds have not gained adequate interest of

investors yet. So, owing to few options, the investors in India are restricted to a

limited range of mutual fund products. The lack of experience, traditional investment

6 KPMG-CII, p.12.

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practices, risk averse and conservative attitude of mutual funds appear to be the

reasons for limited product offering in India.

The products catering to the needs of investors require the development of

funds related to education, marriage and housing etc. The industry is still to launch a

variety of ETFs, college savings fund, e-funds, green funds, socially responsible

financial instruments, fund of hedge funds, advanced money market funds, renewable

and energy/ climate change funds, rural and urban development funds etc. The

industry does not offer the capital guarantee schemes for the investors who are risk

averse. It has not introduced schemes suitable for farmers, small entrepreneurs and

merchant to tap the savings in the rural segment. The product restructuring to tap the

target customers is also not very good.

7.1.6 Stagnant Fee and High Cost

The fee structure in Indian mutual funds industry is stiff in nature as compared

to developed countries. In developed countries, the fee structure is based on several

factors such as the investment objective of fund, fund assets allocation, fund

performance, the nature and number of services that a fund offers etc. It is not so in

India, as a result, while the expenses have continuously been rising; the management

fees have remained the same.

The distributors were paid fixed percentage of client commissions by AMCs

before 2009. After the abolition of entry load in August 2009, investors are now

directly responsible for paying client commission to the distributors but still their

commission is fixed.

High cost of mutual funds is an important problem of mutual funds industry in

India which appears mainly in the form of high fees and commissions. For instance,

the index fund in US costs investors just 0.25-0.27 percent while, the same fund in

India costs between 1 to 2.5 percent which makes them four to ten times more

expensive than the US index fund. Higher sales and marketing costs are a dent to the

profits of Indian mutual fund houses. According to the Financial Express Bureau

(2010), the sales and marketing expenses comprise around 50 percent of total costs of

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AMC. While in the Western Europe, sales and marketing expenses constitute only 2

percent of overall costs. During 2000-10, sales and marketing expenses for the entire

mutual funds industry has been over Rs. 2,000 crore. The brokerage charges has a

lion’s share in it. Reliance Mutual Fund in 2009 approximately spent Rs. 75 crore as

marketing expenses out of which Rs. 66 crore was brokerage fees. Similarly, HDFC

Mutual Fund spent Rs. 55 crore as marketing expenses, out of which Rs. 44 crore was

towards brokerage fees.7 Thus, rising cost is a big problem in mutual funds and

special efforts are needed to cut down this cost so as to boost the future prospects of

the industry.

7.1.7 Low Engagement and Misselling

In the absence of a comprehensive framework to regulate distributors, both

the distributors and mutual fund houses have generally been not very enthusiastic in

offering post sales services to investors. This is in spite of the fact that they are paid

high commissions in the form of upfront and trail fees. Owing to low engagement,

there have been frequent and rising instances of misselling of fund units to investors.

We would like to quote one such case mentioned in Moneylife which became public

in April, 2010. The distributor (associated with Champion Advisory Services)

collected cash and cheques worth Rs 2 crore for investing in mutual funds from

numerous people in Jabalpur. He collected cheques from the investors and invested in

his own name. People asked him for account statements but he used to keep telling

them that they would receive it after some time. Investors have not got their money

back yet. He fled with the money. He collected cash from people saying that he was

new to the business and required money.8 It caused immense problem to other mutual

fund distributors in Jabalpur. Association of Mutual Funds in India (AMFI) suspended

the registration number of Champion Advisory Services and instituted an enquiry

against it.

7 Sales, Marketing Costs Eat into Mutual Fund Profits. (2010, April 2). The Financial Express

Bureau. Retrieved from http://www.financialexpress.com.

8 Samalad, Ravi. (2010, July 7). Jabalpur Based Distributors Dupes Investors. Retrieved from

http://www.moneylife.in.

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AMFI has suspended the AMFI Registration Number (ARN) of 13 distributors

from May, 2006 to August, 2011. After the enquiry, it has finally terminated the ARN

of 3 suspended distributors. The problem of misselling put a question mark on the

competence, value and degree of commitment of mutual fund distributors to investors.

7.1.8 Lack of Satisfactory Performance

Investors’ satisfaction depends on the good performance of mutual funds.

Investors entrust their hard-earned savings to mutual fund managers for the effective

management of their funds. Therefore, it becomes imperative on the part of mutual

fund managers to provide satisfactory performance to investors. In order to find out

the same, we have evaluated the performance of 46 sample public and private sector

mutual funds schemes. The performance results show that mutual fund investors are

unable to earn returns commensurate to the market returns. It means, little additional

benefits of investment in mutual funds have been offered to investors. Earning

minimum required return on mutual funds cannot be deemed enough to sustain the

investors in mutual funds. Further, the main advantage of investing in mutual funds is

that investors can enjoy the benefits of diversification. The impact of diversification

on the fund returns is found quite low. It indicates that mutual fund schemes have not

been properly diversified by their fund managers. The fund managers are also found

to have low stock selectivity ability. Thus, on the basis of our results, it can be said

that mutual fund managers have provided limited benefits of professionalism to the

investors.

7.1.9 Rising Investors’ Complaints

The Indian mutual funds industry has now more than four crore of investor

accounts. Many of them are multiple accounts held by a single investor. After the

provision of filing mutual fund complaints, investors’ complaints are rising in the

industry. According to the AMFI Investor Complaints Report (2009-10), 39 mutual

fund companies had 4.95 lakh investor complaints against them. Most of the

complaints were pertaining to non-receipt of dividends, non-receipt of redemption

proceeds and the non-updation of PAN (Permanent Account Number), bank details,

nomination, etc. UTI Mutual Fund (MF), with over one crore folios, topped the list

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with 99,347 such issues. The country’s oldest fund house, had received more than

30,984 complaints relating to non-receipt of dividend units, 14,833 relating to non-

receipt of redemption proceeds, 16,700 relating to non-receipt of statement of

accounts and another 36,446 regarding other issues. Birla Sun Life MF, which has

more than 24.66 lakh investor folios, had received over 95,000 complaints. ICICI MF

was hit by over 57,600 grievances while Reliance MF had about 10,200. HDFC MF

received 7,673 complaints of which 5,600 were regarding discrepancies in statement

of accounts.

Table 7.1 Investor Complaints against Mutual Funds (Number of Complaints)

Mutual Fund Company 2009-10 2010-11 Percentage Change

1. Axis MF 3702 6579 +77.71

2. Franklin Templeton MF 28926 13181 -54.43

3. Baroda Pioneer MF 134 1362 +916.42

4. SBI MF 8174 3615 -55.77

5. HDFC MF 7673 10199 +32.92

6. Birla Sun Life MF 95438 904 -99.05

7. Canara Robeco MF 37514 1928 -94.86

8. UTI MF 99347 10774 -89.16

9. Reliance MF 10234 25427 +148.46

10. Kotak Mahindra MF 4532 608 -86.58

11. LIC Nomura MF 1534 635 -58.60

12. DSP Blackrock MF 731 2240 +206.43

13. Tata MF 984 796 -19.11

14. Sundram MF 3327 3817 +14.73

15. L&T MF 377 540 +43.24

16. IDFC MF 3928 5106 +29.99

17. ICICI Prudential MF 57644 941 -98.37

18. Sahara MF 156 145 -7.05

19. Deutsche MF 124 130 +4.84

20. Escorts MF 13 8 -38.46

21. Fidelity MF 2726 34 -98.75

22. BOI Axa MF 66 30 -54.55

23. HSBC MF 1846 1161 -37.11

24. ING MF 193 170 -11.92

25. JM Financial MF 1300 3368 +159.08

26. JPMorgan MF 564 0 -100.00

27. Mirae Asset MF 72 61 -15.28

28. Morgan Stanley MF 10190 3208 -68.52

29. PRINCIPAL MF 11305 2014 -82.18

30. Quantum MF 67 182 +171.64

31. Religare MF 530 206 -61.13

Source: Compiled from AMFI Investor Complaints Report 2009-10 & 2010-11

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The number of complaints filed by investors declined significantly in 2010-11.

As per the AMFI Investor Complaints Report 2010-11, mutual fund companies

received 3.94 lakh complaints in 2010-11 which was 20 percent less than that of the

previous year. However, in 2010-11 also, most of the complaints were regarding non-

receipt of dividends and redemption proceeds, and non-updation of PAN, bank

details, nomination etc. Mutual fund houses like UTI, Birla Sun Life, Kotak

Mahindra, Franklin Templeton, Fidelity, SBI, Morgan Stanley and ICICI Prudential

have witnessed sharp fall in their investor complaints. While the Axis, Baroda

Pioneer, HDFC, Reliance, DSP Blackrock, Sundram, L&T, IDFC, Duetsche, JM

Financial and Quantum mutual funds have received even more investor complaints in

2010-11. The country’s top fund house, Reliance MF has received over 25,000

complaints, which is 148 percent higher over the previous year. At the same time, the

complaints against JPMorgan reduced to 0 from 564.

7.1.10 Malpractices in Trading

Mutual funds are set up as trusts and thereby have a fiduciary duty towards

their investors. They have the responsibility to ensure that the trading of mutual funds

is aligned to the regulations and interests of investors are duly protected. Regulations

have been devised to prevent fraudulent activities and digressions from deceptive and

manipulative practices by insiders associated with personal securities transactions.

Mutual funds involved in unfair trade practices are dealt with in the manner provided

under the Securities and Exchange Board of India (Procedure for Holding Enquiry by

Enquiry Officer and Imposing Penalty) Regulations, 2002. The nature of unfair trade

practices were mostly that of market manipulation and price rigging. Some of the

other irregularities are insider trading, takeover violations and violation of norms in

capital issues, non-disclosures under SEBI regulations and illegal carry forwards.

Figure 7.a shows the number of cases investigated by SEBI in the last two

decades. With the growth of the mutual funds industry, several gaps and loopholes

have also emerged which allowed various stakeholders to indulge in unfair trade

practices. Although technology acts as a huge facilitator to efficient trading

mechanisms, it also adds to the burden of fraudulent activities as newer methods are

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being used to violate laws and regulations. During the year 2010-11, about 54 percent

of the cases taken up for investigation were regarding market manipulation and price

rigging, as against about 62 percent of such cases in the previous year. It has been

observed that the reason behind market manipulation is on most occasions a large

network of front entities that trade with unfair means.

Figure 7.a Investigation Cases by SEBI

Source: SEBI Annual Report 2010-11

SEBI issue warning and deficiency letters to mutual fund companies involved

in fraudulent activities. In 2010-11, 30 warning letters were issued to 25 mutual fund

companies on account of violations of SEBI regulations/ guidelines. Twenty-six

deficiency letters were issued to 25 mutual fund companies. Out of the 26 deficiency

letters issued, 25 letters were on observations from the inspection report made from

the period of July 1, 2007 to June 30, 2009. This was done with the purpose to

strengthen their systems and improve compliance standards. To protect the investors

from unfair trading practices in market, there is a need to have a sound customer due

diligence regime, comprehensive ‘in person’ verification process and ongoing

211

monitoring of transactions by the registered intermediaries including mutual funds. In

compliance to investor’s instructions to change his/ her distributors or trade directly,

mutual funds are also needed to ease the No Objection Certificate requirement from

existing distributors.

7.1.11 Other Problems

1. Financial Literacy and Single Lingual Mechanism – The low level of

financial literacy causes many problems to mutual funds investors. SEBI and

mutual fund companies have recently taken a number of steps to educate the

investors. The applicability of single lingual mechanism in the application

forms/ offer documents is also an important problem especially for those who

are unable to read/ write English.

2. More Focus on Short-term Growth Strategy - Mutual fund companies in

India are following short-term growth strategies by concentrating more on

heavy advertising and high selling practices leaving sideways the

performance, product innovation and customer services. This short-term

growth strategy is not viable for the sustainable growth of the mutual fund

business in the country.

3. Herding Behaviour - Herding behaviour keeps investors unaware of the

existing market trends and also creates hype and rumours among them

regarding other good mutual funds. This has become one of the most serious

problems of the mutual funds industry now.

4. Secrecy in Documents – The documents of mutual funds are often not sound

and their operations are characterised by secrecy, lack of accountability,

unwillingness to furnish required information and so on. Notwithstanding

many guidelines of SEBI, mutual funds are following little transparency in

their working.

Mutual funds are a good source of investment for small investors. They invest

their savings in numerous sectors of the economy thereby contributing to the

212

economic development in our country. Investors have responded very enthusiastically

to this financial instrument of savings, but a lot has to be done for its stabilisation and

popularisation in the country. Thus, it is important to address the above-mentioned

problems in a comprehensive way for the sustainable and rapid growth of the mutual

funds industry.

7.2. Prospects of Mutual Funds

The performance of Indian mutual funds industry has been quite encouraging

over the years in spite of the several problems faced by the industry. This can be seen

from the mounting growth of mutual funds AUM, its market participants, investor

base and total number of schemes offered. Based on which, the industry is anticipated

to sustain its encouraging trends in future also. Moreover, the country’s economic and

financial health, its future prospects, sound regulatory framework and effective fund

performance also play an important role in deciding the future of mutual funds

industry in India.

7.2.1 An Overview of Indian Economy

To take an overview of Indian economy, let us look at its economic growth

since 1950s in general and the last decade in particular. Table 7.2 shows the

movement of major economic growth indicators from 1950s to 2011. The Table

shows that real GDP growth accelerated from 3.6 percent average annual rate in

1950s to 7.8 percent during 2009-11. It however, reached to an average annual rate of

8.9 percent during 2004-08 before being interrupted by the global financial crisis. The

performance of agriculture sector has been very erratic. Its average share in GDP has

declined from 53.4 percent in 1950s to 14.9 percent during 2009-11. The growth in

industrial sector decelerated from 6.3 percent average annual rate in 1950s to 5.7

percent in 1990s. It improved during 2000s but declined again to 6.7 percent during

2009-11. However, its average share in GDP increased from 11.7 percent in 1950s to

20.1 percent during 2009-11. The manufacturing sector experienced a notable rise

after 1990s as its growth has picked up from an average annual rate of 5.7 percent in

1990s to 10 percent during 2004-08. The performance of service sector has been very

213

impressive especially after 1980s. The rate of growth in service sector jumped from

an average annual rate of 4.5 percent in 1950s to 9.5 percent during 2009-11. The

share of service sector in the Indian economy has now become more than 50 percent.

Hence, Indian economy is now led by the service sector, which has been posting

exciting growth since 1980s.

Table 7.2 Indian Economy: 1950-2011

Economic Indicators 1950s 1960s 1970s 1980s 1991-00 2001-10 2004-08 2009-11

Percentage Change

1. Real GDP 3.6 4.0 2.9 5.6 5.7 7.3 8.8 7.8

1. 1Agriculture 2.7 2.5 1.3 4.4 3.2 2.4 5.0 2.3

1.2 Industry 6.3 5.4 4.4 6.7 5.7 7.3 9.0 6.7

1.2.1 Manufacturing 5.8 5.9 4.3 5.7 5.6 8.0 10.0 7.1

1.3. Services 4.5 4.9 4.2 6.3 7.1 9.0 10.1 9.5

Percentage Share

2. Share in GDP

2.1 Agriculture 53.4 45.6 40.8 35.04 28.4 19.4 18.0 14.9

2.2 Industry 11.7 15.02 16.7 18.6 20.1 20.0 20.1 20.1

2.3 Services 34.4 39.2 42.2 46.3 51.5 61.6 61.1 65.0

Source: RBI Handbook of Statistics on Indian Economy 2010-11

The key feature of India’s economic progress has been the continuously rising

proportion of savings and investment in GDP. Table 7.3 shows that the average

savings rate in the economy has increased from 23 percent of GDP in 1990s to close

to 31 percent during 2001-10 with a high rate of over 33 percent during 2004-08. It

reached to the peak average rate of 33.05 percent during 2009-11. Fiscal consolidation

helped in picking up the overall savings rate in country owing to that the savings of

public sector rose significantly during 2004-08. The average investment rate (nominal

gross domestic capital formation (GDCF)) also rose sharply from 24.4 percent in

1990s to 31.2 percent during 2001-10. It became about 36 percent during 2009-11.

The efficiency of capital utilisation also improved as the average Incremental Capital

Output Ratio (ICOR) fell from 5 percent in 1990s to 3.7 percent during 2004-08. It,

however, declined to 4.5 percent during 2009-11.

214

Table 7.3 Savings and Investment

Indicators 1991-2000 2001-10 2004-08 2009-11

As a Ratio to GDP at Current Market Prices

1. Gross Domestic Savings 23.0 30.7 33.4 33.05

1. Household Savings 17.7 23.1 23.4 24.1

1.1 Financial Assets 9.9 11 11.3 11.4

1.2 Physical Assets 7.8 12.1 12.1 12.6

2. Private Corporate Sector 3.8 6.3 7.2 8.05

3. Public Sector 1.5 1.3 2.9 0.95

2. Gross Domestic Capital

Formation 24.4 31.2 34.3 35.8

3. Incremental Capital Output Ratio

(ICOR) 5.0 4.4 3.7 4.5

Source: Ministry of Finance Annual Economic Survey 2010-11

The Wholesale Price Index (WPI) measures the dynamic movement of prices

and serves as an important determinant of economic policy. The WPI (Wholesale

Price Index) inflation went down from an average annual rate of 8.1 percent in the

1990s to 5.5 percent during 2004-08 (Table 7.4). The consumer price inflation also

experienced a similar drop. However, in the post-financial crisis period the inflation

trend has reversed as WPI inflation reached an average annual rate of over 7 percent

and the consumer price inflation turned about twofold (10.6 percent) during 2009-11.

The food price inflation was very high during 2009-11.

Table 7.4 Inflation

Indicators 1991-2000 2001- 2010 2004-2008 2009-2011

Annual Average Percentage Change

1. Wholesale Price Index (WPI) 8.1 5.4 5.5 7.1

1.1 Food Articles 10.2 5.8 5.2 13.3

1.2 Fuel Group 10.6 8.9 7.3 7.2

1.3 Non-Food Manufactured Products 6.8 4.0 5.0 4.0

2. Consumer Price Index (CPI)- Industrial

Workers 9.5 5.9 5.0 10.6

2.1 CPI- Industrial Workers Food 9.8 6.2 5.5 12.5

Source: Compiled from the various issues of RBI Annual Report

215

Table 7.5 Money and Credit

Indicators 1991-2000 2001-2010 2004-2008 2009-2011

Percentage Change

1. Narrow Money (M1) 15.6 16.0 19.6 12.3

2. Broad Money (M3) 17.2 17.5 18.6 17.4

3. Non-food Bank Credit 15.4 22.4 26.7 18.7

4. Investment in Government Securities 20.9 17.7 13.3 16.2

Ratio

5. Credit-GDP Ratio 20.6 37.7 39.5 49.7

6. Broad Money-GDP Ratio 49.9 73.6 74.3 84.6

Source: Compiled from the various issues of RBI Annual Report and Ministry of Finance

Annual Economic Survey

During 1991-2011, the financial deepening of Indian economy has

significantly increased. The broad money (M3) to GDP ratio has jumped from an

average of 50 percent in 1990s to about 85 percent during 2009-11 (Table 7.5). The

credit-GDP ratio has also increased from an average of 20.6 percent in 1990s to

around 50 percent during 2009-11. The non-food bank credit (bank credit to private

sector) rose from an average of 20.9 percent per annum in 1990s to 26.7 percent

during 2004-08 but declined to 18.7 percent during the period of 2009-11. This

happened because the bank’s investment in government securities declined from an

average of 21 percent per annum in 1990s to 16.2 percent during 2004-08 and

increased thereafter owing to global financial crisis. Further, the process of fiscal

consolidation in the country also created the space for private credit expansion.

The Indian economy has experienced a dramatic increase in its openness

during the last two decades. Its exports and imports of goods and services as a

proportion of GDP have more than doubled from 22.9 percent in 1990s to 49.8

percent during the period of 2009-11 (Table 7.6). Its openness in terms of both trade

flows and capital flows together as a proportion of GDP shows a spectacular growth

from 41.9 percent in 1990s to about 106.5 percent during 2009-11. The increasing

openness of Indian economy indicates its increasing integration with world

economies. The net capital inflows as a percentage of GDP rose from 2.2 percent in

1990s to 4.6 during 2004-08 though declined in the recent period of 2009-11 (Table

216

7.7). Due to the global financial crisis, both trade and capital flows grew moderately

during 2009-11. The debt-GDP ratio fell from 29 percent in 1990s to 18.6 percent

during 2009-11. The debt-service ratio has also turned down from 25 percent to 4.7

percent during the said period.

Table 7.6 Openness Indicators

(As a Percent to GDP)

Indicators 1991-2000 2000-10 2004-08 2009-11

1. Exports Plus Imports of Goods & Services 22.9 39.2 40.8 49.8

2. Current Receipts & Payments plus Capital

Receipts & Payments 41.9 78.7 83.5 106.5

Source: Compiled from the various issues of RBI Annual Report and Ministry of Finance

Annual Economic Survey

Table 7.7 External Sector

Indicators 1991-2000 2001- 2010 2004-08 2009-11

1. Balance of Payments

1.1 Merchandise Exports (percent change) 8.6 17.7 25.4 15.8

1.2 Merchandise Imports (percent change) 9.6 19.5 32.3 14.6

1.3 Trade Balance/GDP (percent) -2.8 -5.3 -5.4 -8.6

1.4 Invisible Balance/GDP (percent) 1.6 4.8 5.1 6.1

1.5 Current Account Balance/GDP (percent) -1.3 -0.5 -0.3 -2.6

1.6 Net Capital Flows / GDP (percent) 2.2 3.4 4.6 2.7

1.7 FDI to India (USD billions) 1.6 16.3 15.3 31.4

1.8 Reserve Changes (BOP basis) (USD billions)

[(Increase (-)/Decrease (+)] -3.3 -22.9 -40.3 -2.1

2. External Debt Indicators

2.1 Debt-GDP Ratio (percent) 29.0 19.0 17.7 18.6

2.2 Debt-Service Ratio (percent) 24.9 8.8 8.3 4.7

Source: Compiled from the various issues of RBI Annual Report and Ministry of Finance

Annual Economic Survey

The openness in economy has also been accompanied with the rise in India’s

outward Foreign Direct Investment (FDI). It has risen sharply from USD 759 million

in 2000-01 to USD 16,524 million in 2010-11 (Table 7.8). The outward FDI has also

217

grown from 18.8 percent of inward FDI to about 60 percent during the same period.

The net FDI to India has increased from USD 3,270 million in 2000-01 to USD

11,305 million by the end of 2010-11. It shows that the Indian economy has become a

favourable investment destination for global investors. In the ATKearney FDI

Confidence Index 2010, India is ranked 2nd

in Asia and 3rd

in the world.9

Table 7.8 Foreign Direct Investments

(USD million)

Year Inward Outward Net FDI Outward/

FDI FDI to India Inward (%)

2000-01 4029 759 3270 18.84

2001-02 6125 1391 4734 22.71

2002-03 4976 1819 3157 36.56

2003-04 4322 1934 2388 44.75

2004-05 5986 2274 3712 37.99

2005-06 8900 5867 3033 65.92

2006-07 22739 15046 7693 66.17

2007-08 34727 18836 15891 54.24

2008-09 41707 19364 22343 46.43

2009-10 33108 15143 17965 45.74

2010-11 27829 16524 11305 59.38

Source: RBI Handbook of Statistics on Indian Economy 2010-11

The total unemployment rate in the economy came down from 8.3 percent in

2004-05 to 6.6 percent in 2009-10. The unemployment was at an all time low in 2009-

10. Noticeable feature of the employment structure has been that in spite of the large

employment in agriculture, though with shrinking share, the absolute share of

workforce in agriculture declined for the first time in later half of 2000s. In 2009-10,

the contribution of agriculture to total employment declined by approximately 5

percent as compared to that in 2004-05 (Table 7.9). However, the share of industry

increased from 15.55 percent in 1993-94 to 21.50 percent in 2009-10, basically

because of the spectacular growth in the construction sector. The share of the

9 A.T. Kearney Inc. (2010). Investing in a Rebound: The 2010 ATKearney FDI Confidence Index.

U.S.A: A.T. Kearney Inc, p.10

218

manufacturing sector marginally declined in 2009-10 as compared to that in 2004-05.

The share of the service sector in total employment increased from less than 20

percent in 1993-94 to more than 25 percent in 2009-10. The increase in the share of

service sector between 2004-05 and 2009-10 was 2 percent, from 23.4 percent in

2004-05 to 25.3 percent in 2009-10. The share of service sector in total employment

has significantly increased in the recent years and it is likely to play an important role

in creating new employment opportunities in the coming years but agriculture and

allied activities are also going to play an important role in tackling poverty and

unemployment in future.

Table 7.9 Sectoral Distribution of Workers

(% Distribution of Workers)

Sectors 1993-94 1999-2000 2004-05 2009-10

1. Agriculture 64.75 59.84 58.44 53.20

Sub-Total 64.75 59.84 58.44 53.20

2. Industry 2.1 Mining & quarrying 0.72 0.57 0.6 0.6

2.2 Manufacturing 11.35 12.09 11.69 11.00

2.3 Utilities 0.36 0.32 0.3 0.3

2.4 Construction 3.12 4.44 5.59 9.60

Sub-Total 15.55 17.42 18.18 21.50

3. Service 3.1 Hotels, restaurants & trade 7.42 9.40 10.29 10.80

3.2 Transport, storage & communication 2.76 3.70 3.80 4.30

3.3 Financing & real estate 0.94 1.27 1.50 2.10

3.4 Public administration & community services 8.58 8.36 7.79 8.10

Sub-Total 19.70 22.73 23.38 25.30

Total 100.0 100.0 100.0 100.0

Source: Ministry of Labour and Employment Second Annual Report to the People on

Employment 2011

Today, India has emerged as one of the fastest growing economies of the

world. The country has made significant economic progress over the last two decades.

Its industrial environment has become more competitive and open, and infrastructural

gaps have been sought to be bridged up through the public-private partnership

initiatives with both domestic and foreign source of funding. Current account has

219

become fully convertible while capital account is virtually free for non-residents.

Moreover, the interest rates were deregulated and banks gained operational autonomy

for commercial lending. As a result, the per capita income of India has doubled in the

last 15 years and is likely to double again in 10 years by 2017-18.10

It has also

emerged as the leader in Asia in terms of financial deepening.11

If India is able to

maintain the current pace of growth then it will lift million out of poverty and enrich

the global economy. While India has come a long way, maintaining the current pace

would itself be challenging and require continued reforms efforts.

7.2.2 Growth in Indian Capital Market

The Indian capital market has been one of the best performing markets in the

world over last few years.12

The strong economic growth, large inflows of foreign

investments, development of stock exchange and derivatives market have delivered a

truly impressive growth to Indian capital market. During the last decade, the Indian

capital market has witnessed rapid growth on almost all the fronts. It can be seen from

the trends of annual turnover on Bombay Stock Exchange (BSE) (Figure 7.b). It

increased from Rs. 36,011 crore in 1990-91 to the impressive figure of Rs. 10,00,032

crore in 2000-01 and afterwards, crossed the level of Rs. 15,78,856 crore by the end

of 2008. The volume due to the impact of global financial crisis declined in 2009 to

Rs. 11,00,074 crore. The situation, however, improved in 2010 and the annual trading

volume at BSE rose to Rs. 13,78,809 crore. But, the annual turnover on BSE declined

to Rs. 11,03,467 crore in 2010-11 owing to the dampening effects of Euro zone,

Middle East and North African Crisis. In spite of the crisis, the primary and

derivatives (mainly NSE) segments of the capital market have experienced buoyant

activities in 2010-11. Trends indicate that the investment by foreign institutional

investors, mutual funds and other parties in Indian stock have been rising especially

since 2001-02.

10 Mohanty, Deepak. (2011). Indian Economy: Progress and Prospects. Speeches Section, RBI, p. 1,

Retrieved from http://rbidocs.rbi.org.in.

11 Chakrabarti, Rajesh. (2010). Financial Development in India: Issues and Challenges, p. 1,

Retrieved from http://www.icffr.org.

12 Allen, Franklin., Chakrabarti, Rajesh & De, Shankar. (2007) India’s Financial System, p. 22,

Retrieved from http://finance.wharton.upenn.edu.

220

Figure 7.b Annual Turnover at BSE (Rs. Crore)

Source: RBI Handbook of Statistics on Indian Economy 2010-11

Table 7.10 Select Ratios Relating to Stock Market

Year

BSE Market

Capitalisation to

GDP Ratio

(%)

NSE Market

Capitalisation to

GDP Ratio (%)

Total Turnover to GDP Ratio (%)

Cash

Segment

(All India)

Derivatives

Segment

(BSE+NSE)

2003-04 43.4 40.5 58.7 77.6

2004-05 54.3 50.7 53.4 2.1

2005-06 84.4 78.6 66.8 134.7

2006-07 85.5 81.2 70 178.9

2007-08 109.5 103.6 109.3 284.9

2008-09 55.3 51.9 69 197.4

2009-10 94.1 91.7 84.2 269.7

2010-11 89.1 87.3 61.1 381.1

Source: SEBI Annual Report 2010-11

The market capitalisation to GDP ratio indicates the liquidity of market and it

is an important indicator of stock market development. Table 7.10 gives the ratio of

traded value of shares to GDP on BSE and NSE (National Stock Exchange). It shows

that the BSE market capitalisation to GDP ratio has improved from 43.4 percent in

2003-04 percent to 94.1 percent in 2009-10 though reduced to 89.1 percent in 2010-

221

11 due to uncertainties in global financial market. Similarly, over the same period, the

ratio of NSE increased from 40.5 percent to 91.7 percent but declined to 87.3 percent.

The total turnover to GDP ratio has been higher under the derivatives segment (381.1

percent) as compared to the cash segment (61.1 percent) in 2010-11. The improving

market liquidity on NSE and BSE except for the year 2010-11 indicates the increasing

depth and resilience of the Indian capital market.

Table 7.11 Total Derivates Turnover Since Inception (Rs. Crore)

Year NSE BSE Total

2000-01 2,365 1,673 4,038

2001-02 1,01,927 1,917 1,03,844

2002-03 4,39,864 2,475 4,42,339

2003-04 21,30,649 12,074 21,42,723

2004-05 25,47,053 16,112 25,63,165

2005-06 48,24,250 9 48,24,259

2006-07 73,56,271 59,007 74,15,278

2007-08 1,30,90,478 2,42,308 1,33,32,786

2008-09 1,10,10,482 11,775 1,10,22,257

2009-10 1,76,63,665 234 1,76,63,899

2010-11 2,92,48,221 154 2,92,48,375

CGR 110.9 -7.4 105.7

C.V 113.9 227.6 113.6

Source: Various Issues of SEBI Annual Report, CGR and C.V is calculated by the Researcher

Over the last 17 years, one of the biggest developments in the Indian capital

market has been the introduction of the derivatives market. It enhanced the maturity

of Indian capital market and raised its liquidity. Derivatives trading began in 2000

with trading in stock index future. NSE alone now accounts for around 99 percent of

derivatives trading in Indian markets. The derivatives turnover at NSE and BSE

segment since their inception can be seen from Table 7.11. It shows that the value of

NSE derivatives market was Rs. 2,365 crore in 2000-01 which rose to Rs. 2,92,48,221

crore in 2010-11. Likewise, the turnover on BSE has increased from Rs. 1,673 crore

in 2000-01 to Rs. 2,42,308 crore in 2007-08 but declined to Rs. 154 crore in 2010-11.

The total derivatives turnover on NSE & BSE has grown to the tune of Rs.

2,92,48,375 crore in 2010-11 from Rs. 4,038 crore in 2000-01 registering the

222

compound annual growth of 105.7 percent. However, the variation in turnover was

quite high about 105.7 percent during the said period. The product wise turnover

shows that index futures followed by index options are the most popular products in

derivatives (Table 7.12). The impressive growth of derivatives has encouraged the

retail investors in market. Hence, derivatives have quickly become the major part of

Indian capital market.

Table 7.12 Product Wise Equity Derivates Turnover on NSE (Rs. Crore)

Month/Year

Index

Futures

Stock

Futures

Index Options Future Options Average

Daily

Trading

Volume Call Put Call Put

Jun-00 to

Mar-01

2,365 - - - - - 12

2001-02 21,482 51,516 2,466 1,300 18,780 6,383 413

2002-03 43,951 2,86,532 5,670 3,577 69,644 30,489 1,752

2003-04 5,54,462 13,05,949 31,801 21,022 1,68,174 49,038 8,388

2004-05 7,72,174 14,84,067 69,373 52,581 1,32,066 36,792 10,067

2005-06 15,13,791 27,91,721 1,68,632 1,69,837 1,43,752 36,518 19,220

2006-07 25,39,575 38,30,972 3,98,219 3,93,693 1,61,902 31,909 29,543

2007-08 38,20,667 75,48,563 6,68,816 6,93,295 3,08,443 50,693 52,153

2008-09 35,70,111 34,79,642 20,02,544 17,28,957 1,71,843 57,384 45,311

2009-10 39,34,389 51,95,247 40,49,266 39,78,699 3,89,158 1,16,907 72,392

2010-11 43,56,755 54,95,757 90,90,702 92,74,664 7,77,109 2,53,235 1,15,150

CGR 100.07 55.09 145.6 163.04 34.02 30.67 108.8

C.V 91.46 113.78 174.35 181.43 119.58 117.41 186.58

Source: NSE Fact Book 2010-11, CGR and C.V is calculated by the Researcher

The Foreign Institutional Investors (FIIs) play an important role in the Indian

capital market. Since their entry in 1993, foreign institutional investment has

continuously been growing with the exception of few years. Moving with stock

market boom and a sound global economic scenario, investments by FIIs have been

quite high in last few years mainly since 2003-04. The FIIs made a record investment

in the Indian equities in 2010-11. The net investments by FIIs have increased from

USD 2,159 million in 2000-01 to USD 32,226 million in 2010-11 (Figure 7.c). The

continuously rising investment by FIIs indicates their level of confidence in the Indian

capital market and sound growth potential of Indian economy.

223

Figure 7.c Net Investment of FIIs (USD Million)

Source: RBI Handbook of Statistics on Indian Economy 2010-11

The role of primary market (also known as new issue market) has been crucial

to the growth of capital market. In the last two decades, one of the major factors

responsible for boosting the growth of primary market has been shift in the private

sector corporates financing from debt financing to equity financing. Further, the all

India financial institutions (FIs), which were earlier dependent on the government and

other FIs for cheap financing have also turned towards the primary market for raising

capital. The total amount of resources raised from the primary market has grown at a

compound annual rate of 2.47 percent during 1990-91 –2010-11 while the growth of

corporate securities and government securities have been about 14.46 percent and

19.40 percent per annum respectively. If we look at a period-wise growth in the total

resource mobilisation from primary market, it has been relatively higher during the

period of 2000-11 as compared to 1990-00 (Table 7.13). The variation in total

resource mobilisation is also higher during 2000-11 probably due to the global

financial crisis.

224

Table 7.13 Resources Mobilisation from Primary Market (Rs. Crore)

Year Corporate Securities Government Securities Total

1990-91 14,219 11,558 25,777

1991-92 16,366 12,284 28,650

1992-93 23,537 17,690 41,227

1993-94 44,498 54,533 99,031

1994-95 48,084 43,231 91,315

1995-96 36,689 46,783 83,472

1996-97 37,147 42,688 79,835

1997-98 42,125 67,386 1,09,511

1998-99 60,192 1,06,067 1,66,259

1999-00 72,450 1,13,336 1,85,786

2000-01 78,396 1,28,483 20,688

2001-02 74,403 1,52,508 22,691

2002-03 75,241 1,81,979 25,722

2003-04 74,850 1,98,157 27,301

2004-05 1,08,650 1,45,602 25,425

2005-06 1,34,765 1,81,747 31,651

2006-07 1,94,958 2,00,198 39,516

2007-08 1,16,266 2,55,984 37,225

2008-09 2,22,204 4,36,688 65,889

2009-10

2010-11

3,83,891

27,26,65

6,23,619

58,35,21

1,00,751

8,56,186

CGR (1990-00) 16.97 28.73 23.05

C.V (1990-00) 46.66 69.36 58.84

CGR (2001-11) 17.25 16.35 29.53

C.V (2001-11) 63.82 64.20 217.13

Source: Compiled from various issues of Indian Securities Market Review, NSE (Mumbai),

CGR and C.V is calculated by the Researcher

Table 7.14 highlights the growth in terms of the number of participants in

different segments of the Indian securities market. It shows that the number of FIIs

have tripled from 506 in 2000 to 1,722 by 2011. During the same period, the total

number of portfolio managers have risen six fold from mere 23 to 267 and the number

of mutual funds from 37 to 51. Venture capital funds have made their appearance in

the market and witnessed a sound growth. These funds have increased from 27 in

2000 to 184 in 2011. We can see the performance of Indian securities market through

the trend of various parameters as given in Table 7.15. The table shows that during

225

2001-10, the all India equity derivatives turnover grew at a compound annual rate of

132.19 percent. The net investments by mutual funds grew at a compound annual rate

of 54.07 percent. The turnover in the cash market has nearly doubled over the decade.

The mobilisation through euro issues and FIIs also increased manifold. Similarly, the

resource mobilisation from primary market grew up to five fold and the all India

market capitalisation to eight fold. The entire securities market has, therefore,

undergone tremendous growth during 2000-01 – 2010-11.

Table 7.14 Market Participants in the Indian Securities Market

Market Participants 2000 2011

Securities Appellate Tribunal 1 1

Regulator (DCA*, DEA**, SEBI, RBI) 4 4

Depositories (NSDL, CSDL) 2 2

Stock Exchanges

With Equity Trading 23 19

With Debt Market Segment 1 2

With Derivatives Trading 2 2

With Currency Derivatives - 4

Brokers (Cash Segment) - 10,203

Corporate Brokers (Cash Segment) - 4,774

Brokers (Equity Derivatives) - 2,111

Brokers (Currency Derivatives) - 2,008

Sub-brokers 5,675 83,808

FIIs 506 1,722

Portfolios Managers 23 267

Custodians 14 17

Registrar to an Issue & Share Transfer Agents 242 73

Primary Dealers 15 21

Merchant Bankers 186 192

Bankers to an Issue 68 55

Debenture Trustees - 29

Underwriters 42 3

Venture Capital Funds 27 184

Foreign Venture Capital Investors - 153

Mutual Funds 37 51

Collective Investment Schemes 37 1

Source: Indian Securities Market Review 2000-01 & 2010-11,

*Department of Company Affaires **Department of Economic Affairs

226

Table 7.15 Key Performance Indicators of Securities Market (2000-10)

Parameters Compound Annual Growth

Rate (%)

Resource Mobilisation in Primary Market 17.15

Resource Mobilisation through Euro Issues 43.89

All India Market Capitalisation 23.15

All India Equity Market Turnover 19.94

All India Equity Derivative Turnover 132.19

Assets under Management of Mutual Funds 18.99

Net Investments by Foreign Institutional Investors (FIIs) 30.53

Net Investments by Mutual Funds 54.07

Returns on Nifty 50 13.13

Returns on BSE Sensex 25.42

Source: Indian Securities Market Review 2010

According to the Financial Development Report 2011 of the World Economic

Forum, India ranks 36 (37 last year) in terms of financial development among 60

countries. While in terms of financial stability, India’s rank is 47. The report further

says that “India’s particular strength lies in its non-banking financial services (5th

),

with Initial Public Offerings (IPO) activity (5th

), Insurance (7th

) and securitisation (4th

)

being the primary drivers of the pillar’s high score. India’s strong financial

intermediation is further bolstered by robust results in its foreign exchange (15th

) and

derivatives market (20th

). However, a low level of financial sector liberalisation (56th

),

an inability to enforce contracts (57th

), an underdeveloped infrastructure (56th), and a

high cost of doing business (55th

) all contribute to a weak institutional and business

environment (both ranked 54th

). Weakness in financial access (47th

) is a reflection of

India’s lack of retail access to capital (41st)”.13

The weak areas are really the areas of

concern and need proper attention for embarking upon the future financial

development of country.

The foregoing discussion clearly brings out the economic & financial health of

Indian economy. It indicates that India has attained significant growth in the last two

decades driven by several economic and demographic factors such as rising income,

savings & investment rates, growing working age population and increasing openness

13 The Financial Development Report 2011, World Economic Forum USA Inc., p.20

227

in the economy. The booming stock market, positive business environment,

increasing reach of asset management companies (AMCs) and foreign investors’

participation furthermore drove the growth pace of the economy. Hence, being a part

and parcel of the economy, the Indian mutual funds industry will also move with the

growth of Indian economy in future.

7.2.3 Future Prospects

The prospects of mutual funds industry in India is closely linked to the

performance of economy in future. So, before discussing the prospects of mutual

funds industry, we will underline the future prospects of Indian economy in brief.

7.2.3.1 Growth Prospects of Indian Economy

India is home to 1.21 billion people, which is about 17.4 percent of the world

population. However, it accounts for only 2.4 percent of world GDP in terms of US

dollar terms and 5.5 percent in terms of purchasing power parity (PPP). Hence, there

exists a huge potential for reaching to higher growth trajectory in future. According to

Dun & Bradstreet (D&B), “India’s real GDP is expected to register an average growth

of 9.2 percent during 2011-2020, on the back of increased infrastructure spending,

substantial growth in investment activity, higher saving, strong growth in services

sector, emerging of a large working age population and robust consumption demand.

Strong GDP growth is expected to result in a considerable increase in real per capita

income, which in turn would lead to significant reduction in the percentage of people

living below the poverty line. With rising income levels, India is expected to move

from a low-income country to a middle-income or upper-middle income country by

2020. In the journey during the current decade (2011-2020) as India traverses a high

growth path, it is expected that India will become USD 5 trillion (at current market

prices) economy by 2020”.14

Figure 7.d shows the growth pattern of the Indian

economy. It exhibits that starting with 3.5 percent average annual growth rate during

the first three decades, the economy is expected to grow at an average annual rate of

9.2 percent during the current decade.

14 Dun & Bradstreet (D&B). (2012). India’s Macro Economic Outlook 2020, p. 7. Retrieved from

http://www.dnb.co.in.

228

Figure 7.d Indian Economy: A Shift to High Growth Path (Growth in Real GDP)

Source: Dun & Bradstreet India’s Macroeconomic Outlook 2020

Dun & Bradstreet pointed out that with normal monsoon, “the agriculture is

expected to record an average annual growth of 4.3 percent during 2011-2020 with an

increase in investment in the agricultural infrastructure such as irrigation facilities,

warehousing and cold storage”.15

The industrial sector is expected to grow at 9.5

percent per annum largely driven by the robust consumption demand, increase in

exports, infrastructure development and the strong growth in domestic investments.

Owing to the impressive growth of hotels, transport, communication and financial

services, the growth in service sector is estimated at 10.1 percent per annum during

2011-2020. Figure 7.e shows the sectoral forecast of the Indian economy.

15 Dun & Bradstreet (D&B)., p.10.

229

Figure 7.e Sectoral Forecast of Indian Economy

Source: Dun & Bradstreet India’s Macroeconomic Outlook 2020

The infrastructure sector has a huge untapped potential, which will be used as

the main driving force for achieving higher economic growth in current decade.

Growth in infrastructure sector will not only boost the investment and consumption

activities but also increase the employment opportunities in the country. It is expected

that gross domestic capital formation (GDCF) as a proportion of GDP will increase to

41.3 percent in 2020 from 35.1 percent in 2010-11. The major portion of investment

will be funded by domestic savings, which means there will be less dependence on

foreign capital. The rising per capita income will be the basic factor responsible for

raising domestic savings. Savings rate is expected to surge to 38.8 percent in 2020

from 32.3 percent in 2010-11. The private final consumption expenditure is likely to

increase at an average annual rate of 9.1 percent during 2011-2020. Further, with

rapid industrialisation and development of Tier II and Tier III cities, the urban

population as a percent of total population is expected to become more than 32

percent in 2020 from 31.1 percent in 2011. This will boost up the public expenditure

in education, which is expected to rise to 3.9 percent of GDP in 2020 from 3 percent

in 2011.

230

According to the Report of the Technical Group of Population Projections

constituted by the National Commission on Population (2006), “The population of

India is expected to increase from 1029 million to 1400 million during the

period 2001-2026 – an increase of 36 percent in twenty five years at the average

annual rate of 1.2 percent. Out of the total population increase of 371 million between

2001 and 2026, the share of the workers in the age-group 15-59 years in this total

increase is 83 percent”.16

The substantial rise in the working age population will result

into a large supply of labour force for productive purposes and thus brighten the

growth prospects of the economy.

Table 7.16 Growth Prospects of Indian Economy: 2011-2021

Year

1990-91 to

2001-02

2001-02 to

2010-11

2011-12 to

2020-2021

GDP at Factor Cost Constant Prices (USD Billion) 400 1070 2500

GDP at Factor Cost Constant Prices (Growth Rate) 5.7 7.3 9.3

Population Billion 1.01 1.1 1.38

Per Capita Income (USD) 400 900 1800

WPI Inflation (Average) (%) 7.8 5.6 5.6

Gross Fiscal Deficit as % of GDP 5.6 4.7 3.4

Current Account Deficit as % of GDP -1 0.75 < -1

Exports of Goods and Services (USD Billion) 60 33 1500

Source: PHDCCI Growth Prospects of the Indian Economy Report 2011

The Progress Harmony Development Chamber of Commerce and Industry

(PHDCCI) Report (2011) on Growth Prospects of the Indian Economy says that

“India’s real GDP growth is projected to reach a higher growth trajectory and

estimated to achieve an average growth of 9.3 percent during the decade by 2021”.17

The per capita income of India is expected to rise to USD 1800 during 2011-12 –

2020-21. It will push up India’s share in world consumption. The average wholesale

price index (WPI) inflation is projected to remain within 5-6 percent. The gross fiscal

deficit is expected to be within 3-5 percent of GDP. The exports of goods and services

16 Technical Group of Population Projections constituted by the National Commission on Population.

(2006). Population Projection for India and States 2001-2026. New Delhi: Registrar General &

Census Commissioner of India, p. vii-viii.

17 PHD Chamber of Commerce and Industry (PHDCII). (2011). Growth Prospects of the Indian

Economy: Vision 2021 – Trillion Dollar Growth Opportunities. New Delhi: PHDCII, p. 56.

231

are projected to expand enormously and the average current account deficit would be

less than (-) 1 percent of GDP (Table 7.16).

Table 7.17 Edelweiss Capital’s Forecast for Indian Economy

Sectors Projected Growth (2009-2020)

1.Banking Sector 5.3 times

2.Broking 4.7 times

3. Life Insurance Sector 4.7 times

4. Domestic Pharma and Health Care 6.0 times

5. Media and Entertainment 5.0 times

6. Education Sector 5.7 times

7. Premium Urban Housing Sector 6.5 times

8. Organised Retail Sector 6.3 times

Source: Edelweiss Capital India Today 2020 Report

The Edelweiss Capital Today India 2020 report predicts that “India’s GDP will

become quadruple from 2009 level to INR 205 trillion (USD 4.5 trillion at the exchange

rate of 46) by 2020 with nominal growth of 13 percent per annum”.18 During the same

period, the total private final consumption will grow from INR 30 trillion to INR 113

trillion and the key beneficiary sectors will be education, pharma & healthcare, media

& entertainment, urban housing, organised retail and automobiles. The report

estimated the infrastructure investment to grow from INR 21 trillion in XIth

Plan

(2007-12) to INR 62 trillion between 2010 and 2020. In infrastructure, significant

growth sectors include the power, roads, railways, irrigation and water supply &

sanitation. The process of urbanisation will be very fast during 2010-2020 as more

than 3 million people are expected to migrate to urban areas every year, which means

there will be huge demand for urban infrastructure in the coming years. In financial

services, the total non-food bank credit is expected to reach INR 214 trillion by 2020

from INR 26 trillion in 2009. At the same time, the total asset management will grow

from INR 7.2 trillion to INR 41 trillion. Edelweiss’s forecast for the Indian economy

is given in Table 7.17.

18 Edelweiss Capital Ltd. (2011). Edelweiss Capital Today “India 2020” Report, p. 39. Retrieved

from http://www.edelweiss.in/ IEReport.

232

Thus, in the light of above estimates, it can be presumed that the average

growth of Indian economy will be around 9 percent during 2011-12 to 2020-21. This

growth would be achieved on the back of rising income levels, investment activities,

consumption demand and increasing share of service and working age population in

economy. However, to reach the high growth trajectory, India needs to lay emphasis

on inclusive growth. Special efforts are needed to improve the level of education &

health in the country. Without sufficient growth in agriculture and allied activities,

significant dent on the problem of poverty and unemployment is not possible.

Financing of infrastructure expenditure, lowering the costs of doing business,

simplification of tax structure and making land available easily to industry would be

critical to the rapid growth in future. The recent proposal for opening up of 51 percent

FDI in multi-brand retail will alter the demand-supply dynamics of the economy and

boost up the allocation of global financial capital in the future. So, the long-term

growth prospects of Indian economy appear to be very good.

7.2.3.2 Prospects of Mutual Funds in India

Mutual funds constitute a very important component of the capital market in

developed countries and now, are also becoming the vibrant institutions in emerging

markets like India. In the coming years, the mutual funds in India are likely to emerge

as important players in the capital market for managing the funds of small investors.

The country’s economic and financial health, regulatory framework, and the

performance of the funds are likely to play an important role in deciding the future

prospects of the industry.

Despite some temporary disturbances, the overall country’s economic and

financial growth scenario foretells the good future of mutual funds in India. This can

be observed from the fact that with the continuously rising savings rate, the

investment activities in mutual funds have also risen in the country. The share of

mutual funds (net resources) in gross domestic savings (GDS) was 5.78 percent in

1990-91. It increased to 8.08 percent in 2007-08 but declined to 3.56 percent in 2009-

10 owing to the global financial crisis. Similarly, the mutual funds share in gross

household savings (GHS) increased from 7.17 percent in 1990-91 to 13.26 percent in

233

2007-08 though, declined to 5.11 percent in 2009-10. The above trends show that in

the coming years, mutual funds will tap the larger portion of domestic savings,

especially household savings. The rising per capita income and savings will further

increase the investment in mutual funds. Looking at the institutional segment of

mutual funds, we observed that rising corporate earnings and maturing capital

markets will play a key role in accelerating the growth of the mutual funds industry.

Rapid stock market development as indicated by the increasing ratio of market

capitalisation (on NSE & BSE) and GDP, and the growth of derivatives market will

also foster the growth of mutual funds. In the coming years, more transparent

disclosure standards and trading mechanism will fuel the growth of capital market in

general and the mutual funds market in particular.

The Indian mutual funds industry has mobilised the savings of millions of

investors and supplied a huge amount of capital to different sectors of the economy

since its inception in 1964. Starting with an asset base of Rs. 24.67 crore in 1964-65,

the total assets of the industry has grown to Rs. 6,871 crore in 1987-88 registering an

average annual rise of 27.81 percent (Table 7.18). The year 1987, is marked by the

entry of public sector players in the industry, with which the growth of mutual funds

had accelerated. The AUM of industry grew at an average annual rate of 49.9 percent

during 1987-88 – 1992-93. During the same period, the number of schemes and

players increased from 13 and 3 to 142 and 9 respectively. Another turnaround in the

industry came in 1993, when private sector players (including foreign players) were

given permission to start the mutual fund business. Total AUM of the industry

increased from Rs. 62,430 crore in 1993-94 to Rs. 90,586 crore in 2000-01 with an

average annual growth of 10.6 percent. Over the said period, the number of schemes

increased to 393 from 167 and the number of players to 35 from 14.

The growth of industry has been quite impressive after 2000-01 (the year of

UTI Crisis). Its AUM grew from Rs. 1,00,594 crore in 2001-02 to Rs. 6,11,402 crore

as on December, 2010-11 at an average annual rate of 22.98 percent. During this

period, the number of schemes rose to 1,226 from 417 and the number players to 44

from 35. It is significant to note that the total investor base of mutual funds

234

constituted 3.90 percent (4.72 crore) of the total population (121.02 crore) in 2011

which was merely 0.029 percent (1.32 lakh) of the total population (43.91 crore) in

1964. The growth trends of the mutual funds industry indicated that since 1964-65,

the industry has grown in several folds in terms of assets, investor base, number of

players and the total number of schemes offered. Looking at the ongoing trends and

combining it with the past developments, we can say that the industry will maintain

the same growth trend in coming years too and will achieve more exciting growth.

Table 7.18 Growth of Mutual Funds Industry in India: 1964-2011

Year

Assets Under

Management (AUM)

(Rs. Crore)

No. of Mutual Fund

Schemes

No. of Mutual Fund

Players

1964-65 25 1 1

1987-88 6871 13 3

1988-89 13456 21 5

1989-90 19131 47 7

1990-91 23161 83 8

1991-92 37973 116 9

1992-93 47734 142 9

1993-94 62430 167 14

1994-95 72967 178 21

1995-96 70497 168 26

1996-97 72063 196 32

1997-98 75368 235 30

1998-99 68193 277 32

1999-00 107946 337 32

2000-01 90586 393 35

2001-02 100594 417 35

2002-03 109299 382 33

2003-04 139616 403 31

2004-05 149600 451 29

2005-06 231862 592 32

2006-07 326292 756 35

2007-08 505152 956 37

2008-09 417300 1,001 39

2009-10 613979 882 43

2010-11

April11-Dec11

592250

611402

1,131

1,226

42

44

Compound Growth Rate

(1964-65 to 2010-11) 26.27 19.77 11.91

Source: Compiled from various issues of AMFI quarterly reports and SEBI Annual Reports

Compound growth is calculated by the Researcher

235

Undoubtedly, SEBI has put in place a well-defined regulatory framework for

mutual funds in India. The regulatory mechanism and supervisory control are strong

and efficient enough to protect the interest of investors. Recently, SEBI has taken some

regulatory steps to revive and energise the Indian mutual funds industry. Some of these

major steps are allowance of higher expense ratio, removal of internal limits in expense

ratio, crediting back of exit load to schemes, service charge on investors, option of

direct selling, cash investment in mutual funds and the regulation of distributors. These

steps will certainly improve the penetration of mutual funds and strengthen the

distribution network in our country. The proposal to increase expense ratio up to 30

basis points (0.3 percent) on net assets of the scheme if the mutual funds are able to get

30 percent of the business beyond top 15 cities, will prove quite beneficial for the

AMCs and distributors. It will directly increase their profits. The distributors will have

to work hard to get more business because lower business means proportionately lower

expense ratios. Under the approach, mutual funds have to disclose all the efforts taken

by them to increase the geographical penetration and the details of the opening of new

branches especially at locations other than the top 15 cities. This move will increase the

reach of mutual funds to smaller towns and places in India and thus augment the growth

of the industry in coming years.

Another step that includes, the removal of internal limits on the expense ratio

is a big change for the AMCs. Earlier, there was an allocation limit on AMCs

regarding fund management and distribution in expense ratios. Now, the allocation

limit is removed and the mutual funds are allowed to allocate their expense ratio

according to their interest. With this move, the distributors will be able to get more

commissions and AMCs to do more advertisements for selling of mutual funds.

Further, investors can now prematurely exit the schemes without any exit load as

SEBI has instructed mutual funds to credit back the exit load money to the scheme’s

account, which will not be treated as AMCs profit. To compensate the AMCs loss, an

equal amount of expense ratio is allowed by SEBI for inclusion in the expense ratio.

The net effect of this move would be no gain and no loss to both the parties – AMCs

and investors. Earlier, service tax was borne by the mutual funds themselves but now,

236

it would be charged from the investors through the AUM of funds. In this way, the

exemption from service tax will increase the profits of the AMCs.

SEBI has also introduced the option of direct selling in mutual fund

investment. It means that the investment will not be routed through agents or

distributors. Such plans will save the investors from unnecessary distribution charges

and commissions and thus, increase their returns on schemes. We believe that direct

selling of mutual funds will go a long way in benefiting the long-term investors in

mutual funds. Further, in order to enhance the reach of mutual funds among small

investors, the cash investments to the extent of Rs. 20,000 per investor, per mutual

fund and per financial year has been allowed by SEBI. This is for small investors who

are not tax payers and do not have PAN/ bank accounts such as farmers, small traders/

businessman/ workers. Further, the announcement of regulations for distributors will

lower the incidence of misselling in industry and thereby make the industry a safer

investment avenue. Thus, the moves taken by SEBI will not only raise the

participation of investors from small and medium cities but also, encourage those

investors who had not invested in mutual funds because of the burden of unnecessary

charges and commissions. Moreover, the permission to qualified foreign investors

(QFIs) for investing in Indian mutual fund schemes will further boost up the growth

of the industry. It would enable the Indian mutual funds to have direct access to

foreign investors and widened the class of foreign investors in equity market. It would

further raise the efficiency of mutual fund market participants. In addition, after

global financial crisis in 2008, SEBI has now, assumed the role of a more responsible

regulator. Along with the continuous monitoring of the market, it is also making

consistent efforts to refine the working of capital market and mutual funds. All these

would go a long way in boosting the growth of the industry in coming years.

The future growth of mutual funds industry depends on the performance of its

funds. Our results regarding the mutual funds performance suggest that majority of

the sample schemes have offered above than risk-free asset returns to investors.

Sample scheme have followed their risk & return investment objectives very well

thereby, provided commensurate returns. However, most of the sample schemes have

237

failed to offer returns higher than their representative market index. Also, the fund

managers of our schemes are showed to have low stock selectivity and diversification

skills. It indicates that mutual funds have provided limited benefits of professionalism

to its investors. However, investors should not worry much as they are getting more

than risk free returns on their investment. They are getting better returns than any

traditional investment alternative such as bank deposits and post-office savings

scheme etc. It is also noteworthy that during the global financial crisis, our mutual

fund schemes provided positive returns to investors. The mutual funds industry in

India is at a growing stage and in coming years we are likely to see more encouraging

results. The Indian mutual funds industry has enough potential to outperform the

market in future.

When an economy experiences higher economic growth, mutual fund plays an

important role in its wealth creation. This simplification is the outcome of the US

experience where people convert their large amount of savings into mutual funds every

day and now holding on the world’s largest mutual fund market. In spite of several

problems, the same is expected from the mutual funds industry in India. The areas

where industry is facing problems are actually the areas of its potential for achieving

long-term growth. Some more factors that also point the good future of mutual funds

can be listed as:

1. The low penetration level of domestic AMCs and the continuous process of

urbanisation, enhanced financial literacy and a huge young population with an

increased risk appetite are also likely to be instrumental in the long-term growth

of the retail segment of the mutual funds industry.

2. Public sector banks and post-offices have a good network base. They have

significant reach beyond the top 20 cities in semi-urban and rural areas and the

potential to build a strong retail investors base. Public sector banks may play a

crucial role in strengthening the mutual funds distribution system. However,

they are not committed to do so but their role will provide the platform needed

for mutual funds distribution.

238

3. With the entry of global players, competition for the domestic mutual funds is

expected to increase. In view of the intense competition and shrinking margins,

the industry is likely to witness some consolidation as AMCs will review

business strategy and explore exit/ mergers in case of no significant competitive

advantage. With this, only efficient players will stay in the industry.

4. Mutual fund managers are required to upgrade their skills as in the coming

years they will have to manage the pooled money of investors in a more

professional way owing to the intense competition.

5. The newly created Financial Stability and Development Council (FSDC) by the

Ministry of Finance will act as a coordinator across multiple financial sector

regulations in India. It will look into the matters relating to financial inclusion,

financial development and literacy across the whole financial sector, which also

includes mutual funds. The council will certainly boost up the prospects of the

mutual funds industry in India by making people financially literate.

Thus, on the basis of the above analysis, we can predict a very bright future

for the mutual funds industry in India. However, to be more competitive, the industry

is suggested to take necessary steps with regard to regulations involving fund

governance, penalty, education, distribution, fund names and investment policies

disclosure provisions. Also, to boost up the confidence of investors, the problems and

queries of investors are needed to be dealt with properly and promptly. With rising

expectations of investors, operational costs also increase. Hence, check on

operational costs is needed. After sales services is required to be sound. There is also

a need to add variety into products marketed by mutual funds. Different types of

ETFs, college savings fund, e-funds, green funds, socially responsible financial

instruments, fund of hedge funds, advanced money market funds, renewable and

energy/ climate change funds, rural and urban development funds etc. have to be

developed to cater to the entire needs of investors and economy. Mutual fund

companies are required to upgrade their skills, technology and cost management

techniques.