Despite a rising market and more reforms, mutual fund inflows declined and redemptions went up to a massive Rs6,741 crore in September. The regulator and fund companies seem clueless to stem the tide
The Securities and Exchange Board of India (SEBI) brought into effect its mutual fund reforms from 1 October 2012. The regulator gave fund houses the leeway to hike the expense ratio by nearly 45 basis points (bps). This hike in expenses goes against long-term investors and the new reforms don’t seem to have gone down well with the investors. Mutual fund sales declined by Rs203 crore, from Rs3,385 crore in August to Rs3,182 crore in September. Sales have declined by as much as 32% compared to that of September 2011 where new inflows had touched Rs4,657 crore. Along with the declining sales this has been the highest net monthly outflow since September 2010 and second consecutive outflow. In September 2010 there was an exodus of nearly Rs7,281 crore, but despite the massive net outflow in September 2010, the latest inflows were as high as Rs5,969 crore. In the month of August outflows were as high as Rs2,286 crore.
Moneylife has been constantly highlighting declining sales of mutual funds which has a lot do with the attitude of both fund companies and the regulator. SEBI’s new reforms are aimed to ‘revive’ the fund industry by increasing the fees charged to incentivise fund houses to penetrate smaller towns and cities. As per AMFI data, nearly 70% of the assets come from the top four cities. However, investors from these cities would have to pay higher expenses to enable fund houses to bring in funds from other cities. Unfortunately, existing and new investors of these towns and cities who are actively investing would be penalised by the increase in costs. This definitely will not go down well with existing investors.
New fund flows may decline further as SEBI has also mandated that fund houses need to keep only a single plan per scheme. Mutual fund houses had different plans for the same scheme depending on the investor category (retail or institutional). Fund houses would now have to keep a single plan and discontinue other plans of the same scheme. The discontinued plans will not receive any new inflows, thus existing SIPs (Systematic investment plans) in these plans would be discontinued as well. SEBI has given fund houses time till end of October to inform investors and complete the process of keeping a single plan. The discontinuation of existing SIPs would affect new fund flows.
There have been no new funds offers (NFOs) in the past two months. In the past year there have been only eights NFOs that were launched bringing in just Rs420 crore. From January 2012 to September 2012, there have been just two months of positive inflows, however the inflows were not sufficient enough as the total outflows for calendar year (January 2012 to September 2012) is as much as Rs10,393 crore. Except in March which saw a spurt due to a rush in tax saving investments, sales have failed to pick up and redemptions have just increased month on month since May 2012. (See chart)