'MF industry will see rapid growth soon'

A slowdown in inflows into equity schemes of mutual funds (MF) last year should not be a cause for worry. Rather, it reflects the growing maturity of the investors, feels Ravi Mehrotra, head of Asia Asset Management Companies, AIG Investments. Excerpts from an interview:

Last year(2007), equity assets in the mutual fund industry grew at a slower pace despite the boom in the stock market.

Overall, the growth in AUM was quite healthy. But if you look at the equity assets alone, yes I agree, net inflows have been lower. Stock prices have appreciated, and that has boosted equity assets to an extent. But adjusting for that, flows have declined as compared to 2006. But I think it is also a healthy sign because when you have got a four-year bull run going on, investors tend to become circumspect. They have been investing, but at the same time, they have also been taking money off the table, switch it into different asset classes. At the same time, it would not be correct to assume that local investors are moving away from equity. There are other ways to access the capital markets - be it through insurance-linked products or portfolio management schemes.

Is there a different team that looks at the investments in the MFs and insurance business?

Yes, and a lot has to do with regulations. In the ideal world, overseas, rather than reinvent the wheel, the different equity funds are put into investment linked products — an insurance wrap — and the client ticks the funds he wants to invest in. In India, the regulations have evolved in a different way, you have to separate the managements of the insurance and asset management businesses. In places like Hong Kong and Taiwan, you do not need to replicate the investment team.

Is the mutual fund industry in India still under-penetrated?

I still feel it is only the tip of the iceberg. If we look at our overall size, we are 12-13% of bank deposits. Maybe 15%, but it is still very small. I think the industry will see rapid growth for the next few years. The growth is going to be driven by widening distribution, product innovation, and technology will play a role in that as it will help in other areas like client servicing. I think education, or call it awareness, will also play a crucial role.

Do you feel the Indian MF industry is over regulated?

I think the industry in India is very well regulated. You can always have debates on whether there could be different regulations. But if were to compare it with some other markets, I think the Indian MF industry fares well. Investors are well protected, and you also have a reasonable framework to ensure that the participants and the industry are responsible in the way they conduct their business.

Often, fund houses have been accused of repackaging existing products...

There are a couple of levels of regulation. One is truth in labelling and the second is placing the onus on the trustees and the sponsor to ensure that the new products are not the recycled versions of the existing products. But I have implicit faith in the investors who know what they are buying. Investor awareness has improved significantly over the years. If investors see that old products are being repackaged as new products, many of them ask questions like 'how is this product different from a similar product by another mutual fund with a good track record?'. So I think, there is some amount of self regulation as well.