Recently, Nilesh Shah, a respected veteran of the industry (and CEO, Kotak Mutual Fund) wondered aloud in a tweet why share of MFs in national financial savings remains low (lower than even cash in the hands/below the pillows of public). For an industry that was meant to be one of the sunrise sectors of the new millennium has been basically been a par beneficiary of growth. Long term trend numbers are impressive, but merely in line with the impressive GDP numbers, and an increase in the level of financial savings in the economy, especially by households.
There were three major verticals in the financial sector opened up for private participation in the first flush of liberalisation - Banks (1994), Insurance (1999) and Mutual Funds (1993). The results have been illustrative.
Barring a couple of blips (1992, 1999 and 2008), when the share of MFs (and other capital market instruments) touched 9-10% of financial savings, the average (mean as well as median) share has hovered around the 4-5% level. This despite a headstart in terms of private sector participation, significant tax advantages (that continue till date) over other financial instruments and the ready playing arena of a well developed equity capital market. Bank deposits continue their dominant (nearly half) share, while Insurance has steadily gained marketshare from other instruments.
The reasons for this are manifold, with some having become cliches that are repeated ad nauseam. Pensions are the biggest one, parroted out during every discussion. While its a legitimate point, it begs the question though what initiative asset managers have shown since 2003 (the year pensions were opened for private sector) to expand the pensions market. Regulatory progress has been admittedly patchy, but the number of bright sparks from the industry can be compared to those from diwali crackers in Iceland!
In general, the problem is a financial equivalence of the oil curse. So comfortable has the industry been on large, significant tax-breaks on its products (Interest on a bond is taxable at marginal income tax rate, but the same interest paid as capital gains in a MF is taxed at a lower rate. Selling unlisted equity attracts capital gains tax, selling close-ended Equity MFs attract no tax!).
A perverse outcome of the above has been the concentration of institutional and corporate treasury money in MF AUMs. As of Dec 2015, close to 50% of the AUMs came from Corporates, Banks and Institutions. In other words, the actual share of MFs in household financial savings is half of the topline number shown in the chart above.
Second, complete lack of innovation. The last big bright idea was creation of differentiated share classes (through institutional plans) in 2003/4. Since then, the biggest ideas have been around fees - either on ways of reducing it or packaging products to extract more of it. For an industry that is so new, the commoditisation (reflected on fees being the primary discussion point) has come in rather fast!
Third and last, lack of disruptive technology interventions of the sort that we have seen in banking. This admittedly isnt entirely an Asset Manager issue, but lack of imagination from the MF industry has been stark.
Most developed financial markets have large Mutual Funds shaping opinions and steering savings in risky assets. Lack of adequate movement in India has led to policy-makers and investors looking for alternative vehicles (note AIF guidelines allowing investments in public market instruments, note the discussion around Wholesale Banks). Just as India risks missing the manufacturing age, MFs risk being bypassed while financial savings find alternate routes to feeding risk capital.
There were three major verticals in the financial sector opened up for private participation in the first flush of liberalisation - Banks (1994), Insurance (1999) and Mutual Funds (1993). The results have been illustrative.
Barring a couple of blips (1992, 1999 and 2008), when the share of MFs (and other capital market instruments) touched 9-10% of financial savings, the average (mean as well as median) share has hovered around the 4-5% level. This despite a headstart in terms of private sector participation, significant tax advantages (that continue till date) over other financial instruments and the ready playing arena of a well developed equity capital market. Bank deposits continue their dominant (nearly half) share, while Insurance has steadily gained marketshare from other instruments.
The reasons for this are manifold, with some having become cliches that are repeated ad nauseam. Pensions are the biggest one, parroted out during every discussion. While its a legitimate point, it begs the question though what initiative asset managers have shown since 2003 (the year pensions were opened for private sector) to expand the pensions market. Regulatory progress has been admittedly patchy, but the number of bright sparks from the industry can be compared to those from diwali crackers in Iceland!
In general, the problem is a financial equivalence of the oil curse. So comfortable has the industry been on large, significant tax-breaks on its products (Interest on a bond is taxable at marginal income tax rate, but the same interest paid as capital gains in a MF is taxed at a lower rate. Selling unlisted equity attracts capital gains tax, selling close-ended Equity MFs attract no tax!).
A perverse outcome of the above has been the concentration of institutional and corporate treasury money in MF AUMs. As of Dec 2015, close to 50% of the AUMs came from Corporates, Banks and Institutions. In other words, the actual share of MFs in household financial savings is half of the topline number shown in the chart above.
Second, complete lack of innovation. The last big bright idea was creation of differentiated share classes (through institutional plans) in 2003/4. Since then, the biggest ideas have been around fees - either on ways of reducing it or packaging products to extract more of it. For an industry that is so new, the commoditisation (reflected on fees being the primary discussion point) has come in rather fast!
Third and last, lack of disruptive technology interventions of the sort that we have seen in banking. This admittedly isnt entirely an Asset Manager issue, but lack of imagination from the MF industry has been stark.
Most developed financial markets have large Mutual Funds shaping opinions and steering savings in risky assets. Lack of adequate movement in India has led to policy-makers and investors looking for alternative vehicles (note AIF guidelines allowing investments in public market instruments, note the discussion around Wholesale Banks). Just as India risks missing the manufacturing age, MFs risk being bypassed while financial savings find alternate routes to feeding risk capital.
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