THE GREAT INDIAN MUTUAL FUND STORY

The recent regulatory pronouncement scrapping distribution fee from equity schemes has added to the woes of smaller fund houses.To ensure investment stability, investors should now consider both the brand name and long-term performance of the fund house before investing, says Bakul Chugan Tongia

 Are investors no more than consumers drawn by brands? Can just a name ring in returns? Birla, ICICI, Reliance and HDFC, household names in the country for decades, dominate the Indian mutual fund (MF) industry even as the lesser known among the urban investing elite, such as Canara Robeco, Taurus and Sahara, fail to draw investors despite some of their fine performances, though on a small asset size. One answer is the brand-pull. But the fact is that a strong brand alone is not enough to keep a fund house on top forever. In India, the MF industry, once dominated solely by the Unit Trust of India for more than three decades, is today gaining ground with foreign companies, such as T Rowe Price, Nomura and BNP Paribas, investing to run asset management business. But their strategy of entering into joint ventures with a dominant local name rather than an independent foray suggests that local brand names are far stronger than global ones. Despite being one of the early entrants in 1990s, Morgan Stanley is stuck with Rs 2,300 crore of assets while Reliance has about Rs 1,17,248.57 crore in its kitty. In fact, nine off the top 10 largest fund houses of the country today belong to some of the prominent, well-known Indian brand names backed by strong pedigree. Data reveals that the market share of the top five fund houses in the country has increased from about 50% in 2007 to more than 56% by January 2010. Correspondingly, the top 10 fund houses of the country today enjoy a market share of about 80% visà-vis 73% in 2007. These funds don't just draw the corporate money, but also the retail investors who mainly come from urban centres and familiar with the business houses. Of the four crore or so equity folios in the country — predominantly retail — more than 75% of these investor accounts are with the top 10 fund houses, according to the Association of Mutual Funds in India (Amfi). Similarly, on the debt front, which is known to be dominated by corporate money, there are currently about 37 lakh investor accounts, of which more than 93% are dominated by these top 10 fund houses alone. 
    Even as the existing brandnames continue to dominate the Indian MF market, regulatory pronouncements such as scrapping of distributor commission from investments in equity schemes, have compounded the problems of other smaller fund houses. Until the time, the investor is in this country is financially responsive enough to pay the distributors a fee for advisory and other services, the onus to compensate the distributor to indulge him into selling their products is now on the fund houses. This will impact the margins of these fund houses especially when most of them are already reeling under losses. 
    Thus, the regulator, while ensuring transparency for investors with respect to charges levied on MF investments, has also endeavoured to make MF industry a preserve for serious players only, re-enforcing the maxim — 'survival of the fittest'. Just that fitness here is grossly dependent on the brand name, size and reach. 
    But for investors, it may not be wise to blindly follow the brandname and size of the fund house without analysing the past performance and also the fund manager's track record. One of the examples of investors getting carried away by brand-name and size without consideration to performance is the maddening rush to invest in new fund offers (NFO) of popular fund houses. Despite the fact that the financial advisors have time and again advised investors against investing in NFOs in the absence of any performance record to justify an investment, investors usually end up thronging to these offers on the mere pretext of buying the units at the face value of Rs 10. 
    For instance, Reliance Natural Resources Fund created a record at its launch in Jan 2008 — just a few days before the financial crisis hit the market in 2008. It collected about Rs 5,660 crore, second highest only to the collections of Reliance Equity a couple of years ago. Today, two years after the record setting collection, at Rs 9.75, its net asset value (NAV) languishes below the face value of Rs 10, despite benchmark indices recovering sharply. Similarly, Birla Sun Life's Special Situation Fund, launched around the same time received around Rs 900 crore. The fund is today trading at Rs 9.19 per unit. Thus, though brand name is important to ensure the fund house stability, investors should also consider the long term performance of schemes before investing. 
    To illustrate, some specific schemes of rather smaller fund houses such as Canara Robeco, Sahara and Taurus are today reporting relatively better returns than some of those belonging to larger fund houses. An argument against them is they manage small funds and it is always easier to manage smaller funds than the larger ones. Canara Robeco manages about Rs 9,000 crore of assets while Sahara and Taurus manage about Rs 608 crore and Rs 1911 crore, respectively. And if one were to assume that these companies may attract assets in future, of these three, it is Canara Robeco which is better placed given the strong backing of a prominent state-owned bank that has both the brand-name as well as the reach. 
    Thus, despite performance being a forte, in the absence of a strong distribution and identity, it will be difficult for many such smaller firms to survive in the ever changing and more challenging environment of the Indian mutual fund industry. 
    bakul.chugan@timesgroup.com