Sucheta Dalal :Equity fund flows: Another round of exodus in July
Sucheta Dalal

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Equity fund flows: Another round of exodus in July  

August 13, 2012

Despite a pick up in sales and two new fund offers (NFOs), equity funds failed to register a net inflow due to heavy redemptions

Moneylife Digital Team


The two new fund offers (NFOs) launched in July 2012 bought in as much as Rs306 crore. This took the total sales for the month to Rs3,311 crore, according to data released by the Association of Mutual Funds in India (AMFI). However, redemptions increased by 27% over the previous month to Rs4,260 crore leading to a net outflow of Rs949 crore. The Asset Under Management (AUM) of equity schemes came down by 0.79% or Rs1,416 crore to Rs1.78 lakh crore over the one-month period while the Sensex declined by 1% during this period.


The last seven months have witnessed a total outflow of Rs4,548 crore with just two months of positive inflows. In the same period there have been as many as six equity NFOs launched, bringing in a paltry Rs410 crore. Investor participation is clearly declining. Total sales for the first seven months of 2012 amounted to Rs24,448 crore, down by 34% from Rs36,781 crore in the previous year.


Recently the Securities and Exchange Board of India relaxed the Know Your Customer (KYC) norms for mutual fund investments up to Rs50,000. As per the new norms an investor can invest up to a ceiling of Rs50,000 per year in each Asset Management Company (AMC) without a Permanent Account Number (PAN) compared to the earlier norms which had a limit of Rs50,000 across all AMCs. These norms are also applicable to Systematic Investment Plans (SIPs) of mutual funds, as well. Experts have been quoted in media reports saying that this move will benefit the industry. But how many small ticket investors would want to put their savings in a risky asset class as equities.


A few months back Moneylife had pointed out that there are no takers for SIP (SIP: No takers?). There have also been news reports that investors have discontinued at least 1.66 million SIP accounts in 2011. Why have so many investors discontinued their SIPs? Therefore, the problem does not lie only in the KYC norms, there are other factors which the regulator has failed to find out.


There are also reports that the regulator will consider to reintroduce the 2% entry load to revive mutual funds at its board meeting on 16th August. It's been almost three years since SEBI abolished entry load. Noticing a big drop in inflows, sometime ago SEBI decided to introduce a transaction fee. This too didn't go down well with distributors which according to a consulting firm only 16% of distributors have opted for charging transaction fee. However, from the disclosure of commissions of distributors one can see that their commissions have actually increased. (Mutual Fund Commissions: Foreign banks lead once again, other top distributors lag behind). Therefore will the reintroduction of entry load help much? Big distributors will find ways and means for them to earn commissions and survive. But who will take care of the investors needs? SEBI would have to restore investor confidence first by creating stringent norms against mis-selling and other malpractices.


-- Sucheta Dalal