How Nirmala Sitharaman’s Recent Announcements Impact the Mutual Fund Industry
Aug 27, 2019

Author: Rounaq Neroy

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Last Wednesday, the capital market regulator, SEBI, in its board meeting cleared the proposal to simplified KYC (Know Your Customer) requirements for FPIs, eased compliance requirement, and permitted them to carry out off-market transfer of securities.

A couple of days later, on Friday--August 26, 2019--evening, Finance Minister, Ms Nirmala Sitharaman, announced a slew of course-correction measures to revive India's plagued economy.

The following noteworthy announcements, among others, are expected to revive the animal spirit or sentiments in the Indian capital markets:

  • Withdrawal of higher surcharge levied by Finance (No. 2) Act, 2019 ( Nirmala Sitharaman's maiden budget 2019) on long/short term gains arising from the transfer of equity shares/units -which had upset the FPI and was one of the reasons for turmoil in the Indian equity market.

  • Withdrawal of angel tax provisions for start-ups and their investors

  • Reduction in GST returns and simplification

  • Additional upfront capital injection of Rs 70,000 crore to PSBs (Public Sector Banks) and liquidity to the tune of ~Rs 5 lakh crore

  • Additional liquidity support to HFCs (Housing Finance Companies) increased to Rs 30,000 crore

  • Directing banks to pass on rate cuts through MCLR reduction, which will benefit borrowers (reduce EMI on home loans, car loans, and other retail loans), and in turn, support consumption

  • And permitting 'Aadhar-based KYC' for NBFCs (to on-board customers) and domestic retail investors (by issuing the necessary notification for an amendment to PMLA Rules).

The potential positive impact on the Indian mutual fund industry...

Adhaar-based KYC for domestic retail investors will see the opening of more demat accounts to trade and invest in direct equities, and at the same time make investing in mutual funds easy.

Also, it would now be easy for mutual fund houses to comfortably on-board new investors. The Average Assets Under Management (AAUM) of the Indian mutual fund industry is currently Rs 25.81 trillion.

Graphs: Spirited growth in assets of the Indian mutual fund industry and mutual fund folios...

Spirited growth in Assets Spirited growth in Assets
(Note: AAUM data is as of July 2019, while the folio data as of June 2019)

With reforms measure taken by the government, I expect the assets of the Indian mutual fund industry only to grow.

The long-term trend suggests that since the Modi-led-NDA was voted to power in May 2014, investors have been exuding confidence, taking risks, and deploying their hard-earned money in mutual funds in the pursuit of better returns amidst a time when the real rate of return from traditional instruments, such as bank fixed deposits, do not seem very effective from a financial planning point of view.

(Note: Data as of July 2019)

Also, if we look at the data a little more deeply and geographically, in terms of AUM of the Indian mutual fund industry as a percentage (%) of the country's GDP, the potential is huge!

Among the BRICS, the penetration of the Indian mutual fund industry is just about 11% of India's GDP currently, much lower in comparison to 59% in case of Brazil and 49% for South Africa.

Definitely, India has a lot of catching up to do. But a point to note is that the ratio of 'Indian mutual fund industry's AUM-to-GDP' and 'net mobilisation by mutual funds-to-gross domestic savings' have increased significantly over the years.

Post-demonetisation of 2016 a shift in the composition of household savings is seen from physical assets to financial assets - particularly mutual funds SIPs (Systematic Investment Plans). And fortunately, now even the B-30 locations (i.e. the locations beyond the top 30 geographical locations) are also slowly but surely recognising the benefits of investing in mutual funds.

A piece of advice for investors...


Dear investors, mutual funds are a potent avenue for wealth creation. However, when you add mutual fund schemes to your investment portfolio, always pay attention to factors such as:

✓ Your risk profile;

✓ The investment objective;

✓ The financial goals you wish to address;

✓ And the time horizons before goals befall.

Following the above four-point approach will help you sensibly set your asset allocation and align your mutual fund portfolio well.

Never try to mirror or copy your friend, relative, next-door neighbour, or anyone else's investment portfolio, because each person's needs and risk profile is different. Remember the old adage: One man's meat is the other man's poison."

[Read: Why Mimicking Your Friend's Investments Can Be Risky]

Once, you have recognized the aforesaid finer aspects of astute investing, the next crucial move, of course, is to select the best mutual funds schemes to clock inflation-beating returns (also known as the real rate of returns). Remember, the return potential of your portfolio would depend on the type of mutual fund schemes held in the portfolio.

Finally, when you invest in mutual funds opt for Direct Plans over Regular Plan, as the lower expense ratio of Direct Plan can add significant wealth in the long run.

Editor's note:  If you wish to select the worthy mutual fund schemes --both, equity and debt mutual fund schemes--to address your future financial needs, I recommend that you subscribe to PersonalFN's unbiased premium research service, FundSelect.

​With  FundSelect, you get access to high quality and reliable funds picked by our research team using their comprehensive S.M.A.R.T. score fund selection matrix.

Each fund recommended under  FundSelect goes through our stringent process where we assess each one on both quantitative as well as qualitative parameters.

Every month,  PersonalFN's FundSelect service will provide you with insightful and practical guidance on equity mutual funds and debt mutual fund scheme --- the ones to Buy, Hold, or Sell. 

If you are serious about investing in rewarding mutual fund schemes, subscribe to PersonalFN's flagship mutual fund research service FundSelect today!

Happy Investing!

Add Comments

Mar 16, 2020

very informative especially on Goods and service TAx

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