MF growth key to counter exit of foreign investors

NEW DELHI: The growth of the domestic mutual fund industry is important for the health of the Indian stock market, said U K Sinha, CMD of country’s premier asset management company UTI. With the FII investment rising , the role of domestic funds has become crucial as a stabilizing factor in the market , he added. “The stock prices are fairly valued at this level. Those who invest through systematic investment plans could make money in this market,” he added.

According to fund managers , in the absence of strong domestic funds, the exit of FII investment, even by a small amount, could hit the market adversely. In the first nine months of 2010, FIIs have invested over $18 billion . So far, FIIs have invested around Rs 4 lakh crore in the equity market. In terms of market value, according to one estimate, this comes around Rs 10 lakh crore. As against this, the total market value of equity investments of domestic funds is around Rs 2 lakh crore.

The mutual fund industry has been facing tough times since September 2009 when Sebi prohibited fund managers from charging entry fees from investors. This means, if you invest Rs 100 in a scheme, you will be allotted units worth Rs 100. Earlier, fund managers could deduct a certain amount, which could go up to 2%, to meet their sales expenses. Since people are still not aware of the functioning of MFs and stock markets, they require proper information to invest in MF schemes, say fund managers.

As funds are not allowed to charge any entry fee, there is no incentive to push MF products. So far, the units were sold by agents who were paid from the commissions collected by funds as entry load. This has resulted in a fall in the number of folios or investors putting money into MF schemes since November 2009.

As the nominal growth (including inflation) of the economy is around 15%, the equity-oriented schemes over a longer period of five years and more give higher returns than the prevailing interest rates. In the last one year, the average return from investment in diversified MF schemes is 27%.

As the stock market is recovering after a steep fall due to the global financial crisis in 2008, return in the last three years is 6.73% because of high base effect. In the last five years, the investments in diversified funds have appreciated by around 18% on an average. This suggests that if one wants to participate in the India growth story, investing in equities via MFs could be a good move.