CAMS research on creation of MF new folios throws up debate  

May 13, 2011

The transfer agent for mutual funds says ban on entry loads has not affected new folio creation, which has mirrored the market

Moneylife Digital Team

Computer Age Management Services (CAMS), a transfer agent for mutual funds, says that post the abolition of the entry load, the monthly average for new folio creation for mutual funds has improved. However, it states that the entry load had no effect on creation of new folios which mirrored the Sensex. But a careful observation of the research shows that the basis itself is flawed.


Cams

For, CAMS has compared the trend in new folio creation in a falling market, between April 2008 and July 2009, to the folio creation there onwards, from August 2009 to July 2010, during which period the market rose. This is a poor comparison, as it would only be expected that there would be more new folio creation in a rising market than there would be in a falling market. It would make sense to compare folio creation in similar market scenarios.

According to data presented by CAMS in a research report, from January 2008 to December 2008, when the markets fell, new folio creation declined. After this, as the market started to revive, new folio creation started to pick up.

What's interesting and astonishing is that according to CAMS, "post August 2009 the average monthly run rate (of new folio creation) actually improved to 3 lakh folios per month". But its obvious that folio numbers would have risen irrespective of a ban on entry loads in August 2009, as the markets had already picked up momentum.

CAMS says that from April 2008 to July 2009, the average folio creation was 2.73 lakh per month, and from August 2009 to July 2010 it averaged 3 lakh per month. Thus, while the numbers may be correct, the comparison is technically baseless.

As we know, rising markets induce investors to invest and the opposite is also true. So, in a falling market, investors refrain from investments. Same is the case with entry load, as entry load was a negative factor for investors and the ban would have benefited them anyway.

In the period under review, the market was in decline for 11 of the 16 months and the entry load was effective during the entire 16 months. Hence, by the rule of thumb, the two negative influences should have seen low new folio creation. In the second phase, after the ban on entry load, the market was also rising and therefore these were two positive factors which would have naturally been an encouragement for new investments and therefore new folio creation. Still, the increase was just 10%.

Like we said, what actually is required is to compare the effect of the entry load ban on creation of folios in a consistent market scenario. If we take an extended period for the first phase, say August 2007 to July 2009, the average folio creation is 4.6 lakh per month, which is in fact a lot higher than the post August 2009 phase, which averaged 3 lakh new folios per month. It must be mentioned that the two years from August 2007 to July 2009 included a bear run too.

The market scenario was consistent from August 2007 to July 2008 and was at about the same level from June 2009 to May 2010. While in both these periods the markets were doing well, in the August 2007-July 2008 period the upfront commissions were applicable, whereas in the June 2009-May 2010 period the commissions were discontinued. In the first instance 84.7 lakh new folios were added at an average 7 lakh per month, whereas in the second period only 34.6 lakh new folios were created at an average 2.8 lakh per month.

Therefore, to say that the ban on entry load has encouraged creation of new folios is not supported by concrete facts.