Worries of mutual fund houses are compounding as markets remain under pressure and investors have been turning away from equity oriented mutual funds. Over July-September quarter Assets under Management (AUM) of the industry fell by about Rs 38, 500 crore. As per quarterly data published by Association of Mutual Funds in India (AMFI), average AUM of 44 fund houses combined together stood at about Rs 8, 10,000 crore.

Why AUM has dropped?
Prevailing volatility in capital markets has been affecting investors’ sentiment to a great extent. Equity markets have been range-bound almost for last 3 years now due to which retail participation in equity oriented funds has been very low. This fiscal too, sentiments have not improved much. There have been a number of occasions when equity markets have witnessed wide fluctuations in daily returns during the quarter gone by. Over July-September quarter, daily returns in equity markets have varied frequently in the range of 3%-4% on both positive as well as on the negative side. One of India’s most tracked equity indices, S&P BSE Sensex moved in the range of 15% in July-September quarter. The index touched upper limit of the range it has formed over last 3 years and traded near its all-time high. But as witnessed even in the past, investors preferred to redeem their investments in equity oriented funds.

Many first-time investors who had invested in markets in late 2007 and at the beginning of 2008; would have made no real profits till now despite of staying put for nearly 5 years. This has made many investors skeptical about effectiveness of equity as an asset class. Such investors have been pulling their monies out as soon as they break-even.

Till recently, debt funds were witnessing steady inflows as investors were expecting interest cycle to turn favourable. But in the second quarter of Financial Year (FY) 2013-14, debt funds have also witnessed outflows. Let’s have a look at returns generated by equity and debt indices.
 

Performance equity and debt indices

Benchmark	Quarterly Returns (July September)
S&P BSE 200	-1.8%
S&P BSE SENSEX	-0.1%
Crisil Composite Bond Fund Index	-4.1%
Crisil Liquid Fund Index	2.4%
Crisil Short Term Bond Fund Index	1.1%
INR USD	-5.2%

Returns are absolute
(NAV data as on September 30, 2013)
Source: ACE MF, PersonalFN research)  

Over July-September quarter, broader equity markets registered higher losses than the concentrated bluechip indices. As given in the table above, S&P BSE Sensex remained absolutely flat while S&P BSE 200 incurred a moderate loss of 1.8% over the quarter gone by. On the debt side, Crisil Composite Bond Fund Index, which is used as a benchmark to track the movement of long term debt funds, fell sharply. Rupee fell by about 5.2% over the quarter ended on September 30, 2013. Although it had recorded much severe losses during the quarter; it recovered towards the end. Weaker rupee induced RBI to intervene heavily in the market. RBI hiked short term borrowing rates. When the interest rates are hiked; value of debt which has already been issued, falls and vice-versa. Lower GDP growth, stagnant industrial growth and high retail inflation discouraged RBI from lowering short term borrowing rates; affecting the bond market outlook. Investors shunned long term debt as it is exposed to higher risk. However, Fixed Maturity Plans (FMPs) became appealing but they too turned unattractive after RBI hiked Repo rates by 0.25% at second quarter mid review.

PersonalFN believes that although 4.5% fall in AUM of the industry may not be unusual but is high enough to make things more difficult for mutual fund houses. Till now, investors were pulling out money from equity oriented funds but were investing in debt oriented ones. Since even debt has turned unattractive now; they might find themselves clueless. Furthermore, mutual fund industry which is facing multiple issues at present would find it difficult to retain their investors. PersonalFN is of the view that, investors would be better off chalking out asset allocation plan which is in line with their long term financial goals. Switching from equity to debt was a speculative call for many investors who are now finding it difficult to deal with losses or low returns. PersonalFN believes that one should consider one’s time horizon before investing in debt funds as no debt fund is safe. You should not hold more than 20% of your debt portfolio in long term debt funds. You shouldn’t change your asset allocation with every market movement but should review only occasionally, especially when there is any change in your financial circumstances or preferences of financial goals.

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l6q9zfnh2ly@gmail.com Mar 18, 2014 The entire key to ivnpomirg results is debt. Do not go into debt unless the cost of the debt is less then the appreciation of the asset sounds simple, but all factors must be entertained. Example: Real Estate HISTORICALLY has appreciated less then FOUR (4%) percent annually using a 100 year time frame and stocks less, after considering most of the companies are out of business.

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