It would be rare to find any investor making excellent profits these days due to topsy-turvy experienced in equities. Equity markets have been absolutely flat over last 3 years and equity oriented mutual funds have been witnessing continuous redemption pressure. It is often said that mutual fund industry is passing through a rough patch. We have seen mutual fund houses exiting business for lack of profits. But you would be astonished to know that profitability of asset management companies has gone up substantially over last 3 years. In fact, collectively a profit of mutual fund houses is expected to record a 3-year high in Financial Year (FY) 2012-13. You may have found it startling and may be keen to know what led them earn such huge profits when you are burning your fingers.

Profitability of mutual funds
Except for two fund houses rest all have declared their profit numbers for FY 13 which stands at about Rs. 764 crore. It is estimated that when the remaining two fund houses announce their results, the number may rise to Rs 860 crore. Investors’ interest in long term debt funds and some favourable regulatory changes have helped fund houses register a huge growth in profits.

Typically fund houses charge an expense ratio of 1.70% on long term debt funds including long term gilt funds. During FY13, Asset under Management (AUM) of mutual funds in the category of long term debt funds went up several times.
 

Long term debt funds- flavour of the season…

(Source: ACE MF, PersonalFN Research)  

As depicted in the chart above, from little over Rs 31, 000 crore in June 2012, AUM of long term debt funds jumped above Rs 95,000 crore towards the end of FY13. Long term income funds and dynamic bond funds have been the flavour of session. RBI did cut repo rates in April 2012 for the first time after monetary tightening began in 2010. This resulted in investors chasing long term income and gilt funds in an anticipation of further rate cuts.

The other factor that has helped mutual funds earn high profits is regulatory changes. Securities and Exchange Board of India (SEBI) allowed fund houses to charge additional 0.30% if they collected funds (in certain proportion to total AUM) from other than top 15 cities. This was made effective from October 01, 2012.

What about investors?
Early entrants who invested in the first quarter of FY 13 earned attractive returns but those who entered late, especially following momentum, have either earned low returns or even might have even made losses. High retail inflation, currency depreciation and slow growth affected debt market dynamics. This even forced RBI to take some stringent measures such as increasing short term borrowing rates for banks and squeezing liquidity among others. This not only affected debt fund investors but also those who invested in equity oriented funds.

PersonalFN believes whether you invest when markets are favourable or when markets ain't favourable; mutual funds earn. If investors earn good profits and AUM grows, mutual funds earn more but even if investors don’t make any profit; mutual funds still earn their profits, albeit lower. PersonalFN is of the view that those who chase momentum, invest in funds only following their popularity (without doing much research); usually repent later. On the contrary, those who keep their long term goals in mind and invest only in funds which are likely to help them attain their goals; eventually gain. PersonalFN also believes that investing may be boring but selection will always matter. While selecting a fund, be it debt or equity, you should take a note of cost structure of the fund. But that doesn’t mean all low cost funds are good. Judge a fund on other parameters too.

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