Although UTI has been around for several decades now, it is only in the last 18-20 years that the mutual fund industry really came into its own, with over 40 companies now jostling for investor money.
Back in 1993, the total assets under management by the mutual fund industry were around Rs 47,000 crore. By end 2012, this has grown nearly 17 times to Rs 7.9-lakh crore.
Phase of consolidation
The initial years were dominated by foreign players and private companies, though UTI still was the largest of them all. Then came a phase of consolidation. Later, burgeoning assets under management with new fund offers. There have always been regulatory changes, but the past few years have been marked by groundbreaking moves by SEBI.
SBI Mutual fund was established in 1987 and continues to be a prominent player. Curiously, some of the first private players (apart from the genuinely pioneering Kothari Pioneer Mutual Fund) to test the Indian waters, were foreign asset management companies such as Zurich, Alliance Capital and Morgan Stanley between 1993 and 1995. Among Indian players that started off in 1993-94 included ICICI Prudential and Taurus Mutual Funds. Over the next couple of years Birla Capital, Reliance Capital, Tata and JM Financial came into the scene too.
Getting to know the NAV of the schemes held was an arduous task then. But that changed with SEBI drafting the first set of MF regulations. Closed-ended schemes were required to disclose their NAVs once a week, while open-ended schemes were mandated to publish their NAVs every day. Disclosures on portfolio holdings were improved.
Enter dot-com era
As the mutual fund industry began to evolve, so did the dot-com boom. As Y2K fever caught on, funds focussed on technology stocks had an almost maniacal run. As technology, telecom and media firms were re-rated rapidly, leaving Old Economy firms behind, fund houses loaded their portfolios with the former and delivered stunning gains.
But the market meltdown saw funds with concentrated weights tumble rapidly. The market regulator then introduced exposure norms for diversified equity funds, with limits of 10 per cent on individual stock exposures and 25 per cent on any single sector.
The meltdown of 2000 set off a wave of consolidation in the MF industry. Over 2002-04, prominent buyouts included Franklin Templeton – Pioneer ITI, HDFC — Zurich and Birla Sun Life — Alliance Capital. This gave way to smooth sailing between 2003 and 2007. As stock markets easily climbed from one high to another, fund houses expanded their assets through new fund offers. Infrastructure, power, capex, banking, contra, opportunities, pharma, special situations, arbitrage etc. were some of the new ideas that emerged then. It was quite common to see these NFOs garner Rs 1000- Rs 4000 crore during their initial offers, abetted by the concept of ‘cheap’ units at ‘par’. When the credit crisis ushered in a new bear market in 2008, fund-raising via NFOs ground to a halt.
Regulatory overdrive
In August 2009, in a bold move that put an end to upfront commissions earned by fund distributors, SEBI banned entry loads on all funds. Entry loads on equity funds were usually around 2-2.25 per cent earlier.
The regulator’s intention was to push distributors to move to a fee based advisory model. But this led to a significant shakeout in the distributor force, with smaller distributors ceding ground to larger players.
Three years on, with other segments of the financial market still holding on to commissions for their agents, a rethink is on. Recent regulatory moves governing the mutual fund industry have been mostly aimed at promoting funds as an asset class. The move to grant funds the leeway to use their expense limits as they like (fungibility) is in this direction. So is the move to allow fund houses to charge higher expenses for collections from outside the top cities.
Direct plans with differential NAVs have also come into force, wherein investors can directly park their money in the scheme of their choice without the help of an intermediary and save from it.
On the whole, the changes over two decades have made mutual funds one of the most investor-friendly and transparent vehicles around. Hopefully, irritants such as complicated KYC norms will be revisited soon too.