Equity Mutual Funds witnessed a heavy outflow of Rs1,665 crore along with a decline of 6 lakh folios in December 2012. All this in the last month of the year when the Sensex closed at 19427, up 25% for CY2012

The year 2012 had been a good year for the markets where the Sensex rose by more than 25%. However, equity mutual funds suffered heavy redemptions over the year. December has been the seventh month in a row where there has been a net outflow from mutual funds. In the last month of 2012, equity mutual funds witnessed an outflow of as much as Rs1,665 crore, as per data from Association of Mutual Funds in India (AMFI). Sales touched their maximum in the last nine months at Rs4,125 crore, however, a massive redemption of Rs6,008 crore led to a net outflow. Despite good sales, there was a massive reduction in folios of equity schemes and equity linked savings schemes (ELSS). The number of folios declined by a huge 6 lakh from 3.46 crore in November 2012 to 3.40 crore in December 2012 according to data from the Securities and Exchange Board of India (SEBI).
 

March 2012 and May 2012 were the only two months of CY2012 which witnessed a net inflow of funds. The remaining 10 months witnessed a net outflow as much as Rs15,678 crore, taking the net outflow for CY2012 to Rs15,567 crore. But not only are fund houses faced with heavy redemptions, there has been a massive decline in folios as well. In the nine month period from April 2012 to December 2012, the number of folios has declined by over 36 lakh. Data from Computer Age Management Services (CAMS) also shows that a large portion of Systematic Investment Plans (SIPs) were withdrawn before the completion of their tenure. From April 2012 to September 2012 as many as 9.78 lakh SIPs were withdrawn before their tenure. (Read: Mutual fund SIPs decline further. Who is to blame?)
 

In fact this has not been a recent phenomenon. Moneylife has constantly been writing about the declining investor population. Over the past three years from March 2009 to December 2012 there has been a massive decline of 77 lakh folios. As on 31 March 2009 the number of folios stood at 4.17 crore, but since then there has been a constant reduction in folios and as on 31 December 2012 the number stands at 3.40 crore folios. It would be very unlikely that existing investors would keep investing more and more. The net outflow from 1 April 2009 to 31 December 2012 totalled a massive Rs23,317 crore. In this 45 month period, there were as many as 28 months that witnessed a net outflow.
 

(Read our earlier articles on the issues faced by the fund industry:
 

Huge mutual fund outflow points to a much deeper malaise
 

Retail interest in equity mutual funds is shrinking
 

Fidelity’s exit, a slap on SEBI’s face)

It is not that the regulator is not aware of these facts. Just recently it woke up to the declining investor population. However, instead of coming up with policies that are pro-investor, it came up with policies that benefit the asset management companies and punish existing investors. Last year, SEBI came up with the idea of a transaction charge for new and existing investors. However, a majority of the distributors opted out from charging their clients a transaction charge.
 

Now, after the latest slew of reforms, existing investors would have to bear an increase in costs as mutual fund schemes are allowed to charge an additional expense ratio of upto 30 basis points depending on inflows from the beyond 15 cities. Fund houses are to use this additional revenue to increase their penetration beyond the top 15 cities. However, as the data shows, since the inception of this regulation from 1^st October 2012 and up to 31 December 2012, as many as 14 lakh folios have moved out of the industry. In a recent article (Read: Mutual fund regulations: Who contributes the most to equity inflows is overlooked) we showed that independent financial advisors (IFAs) contribute the most to new equity fund inflows especially from beyond 15 cities. Yet the regulator chooses to ignore this ‘small’ distributor community. In fact the new direct route could do more harm to their business as they would lose existing clients who may opt for the plan with lower expenses.
 

As per the new reforms, direct plans have been launched to benefit direct investors as it would have a lower expense ratio. However, with no proper advice and handholding it is doubtful whether the new route would be able to attract nascent investors.
 

It took SEBI three years to realise the ill-effect of banning entry load in August 2009. After which it has come out with a new set of reforms which has yet to have a positive effect on the industry. How much longer would SEBI wait to come out with tougher reforms, we would have to wait and see.