Securities and Exchange Board of India (SEBI) has been taking steps to revive mutual fund industry. SEBI board recently approved long term policy for mutual funds. The main objective of the policy is to promote growth of the industry and allow only serious mutual funds to stay in the business for which it raised the minimum net worth requirement for asset management companies to Rs 50 crore. There has been news that smaller mutual funds may approach the Competition Commission of India (CCI), following the announcement. There is another such proposal which may have more demerits than merits.

What is the proposal?
Now SEBI wants the Government to clear the proposal to allow all Public Sector Undertakings (PSUs) to invest in mutual funds. SEBI aims to mobilise surplus money of PSU companies to mutual funds. It is expected that asset base of mutual funds would significantly grow with this move, if the proposal is accepted. As per public enterprise survey 2011-12, cash and bank balance of around 257 PSUs was approximately worth Rs 2.74 lakh crore as on March 31, 2012. Present norms allow only Navratna and Miniratna companies to invest upto 30% of their surplus in mutual funds floated by public sector companies. SEBI now seeks permission for allowing all PSUs to invest in mutual funds without any precondition requiring it to be a public sector fund house.

Asset break-up of the industry...
At present, income funds and money market funds account for a little over 77% of the assets of mutual funds, as per data released on January 31, 2014. Equity funds constitute about 21% of the total assets under management.
 

Growth Imbalance...

Data as per portfolios disclosed on January 31, 2014.
(Source: AMFI)  

Possible Impact...
If proposal goes through, mutual funds may get thousands of crore rupees under their management. It is expected that the inflows would be mainly in liquid and liquid plus funds. Companies hardly earn anything on their surplus money as most of it is parked in current accounts with banks. This move alone can help mutual fund grow their assets atleast by 10% of the AUM of the industry as on January 31, 2014. Although, companies might fetch better returns on their surplus, banking system may face a liquidity pressure and cost of their borrowing might go up. If companies start putting thousands of crore of rupees in mutual funds, cost of borrowing would go up for banks. Current account deposits and savings account deposits are the cheap source for banks for mopping up money. Furthermore, if companies start making money on their investment in mutual funds, they would become less aggressive on their business and may not think about long term business prospects and let go long term rewarding opportunities for short term gains.

PersonalFN also believes that income funds, gilt funds and money market funds categories have not been a problem for mutual funds. The Achilles’ heel is the equity component. Investors’ apathy to invest in equity oriented mutual funds has thwarted the way of mutual funds. Rather than targeting surplus of PSU companies, mutual funds should make attempts to attract huge retail monies into equity oriented funds. Still less than 5% of savings of Indians are invested in equity oriented mutual funds. Even a small uptick here would make a huge difference. Moreover, unlike money that flows into liquid and liquid plus funds, corpus collected under equity oriented schemes may stay with mutual funds for longer. PersonalFN believes customer orientation and focus on growing investors’ money over long term hold the key for mutual funds. Merely making regulatory changes may not revive prospects of the mutual fund industry. Many first-time investors have either lost their money or made dismal returns. Revival in the investor’s sentiment is a precursor to growth of mutual fund industry.

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Comments
jayant2k6@yahoo.co.in Apr 24, 2014 It would be great if you can inform the MF's which are likely to be discontinued because of directive of SEBI.This would help existing customers.

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