Investing In India with Dr. Uday Lal Pai

Indian Mutual Funds - highest returns in world

By Dr. Uday Lal Pai
Exclusively for InvestorIdeas.com
posted February 20, 2007

The Indian mutual funds industry is booming as the number of players is on the rise and products are being rolled out by the dozen.

Indian mutual funds (MFs) have rewarded their investors better than any other funds in world. According to a report by Lipper, a leading market research agency, Indian funds have grabbed eight of the top 10 ranks over a 10-year period. If one takes the last five years, they account for seven of the top 10 and over a 3-year period, six of the 10 best performing mutual funds are from India.

However this is in the medium and long term segments. If one takes a short-term view, there is no Indian fund among the top 10 global performers over last year (November 1, 2005 to October 31, 2006) under preview. This is despite the fact that the last twelve months have been among the best periods ever for Indian markets, with the Bombay Index (sensex) rising by 64.2%.

As of today the size of the asset under management (AUM) in India is $68 billion against the country's GDP of $ 780 billion. In some developed economies AUM size is close to the GDP figure. This clearly shows the further scope for growth. If you take the last four year period (January 2003-007) the AUM of the mutual fund industry has risen substantially about 277%.

The MF sector has 30 active players and they have mopped up nearly $8 billion through equity mutual fund schemes. Market pundits expect that this will further grow to $ 10-12 billion. Thirty-eight new equity schemes were launched in 2006 and garnered around $6.3 billion. New categories of funds, like capital protection-oriented funds and equity derivative funds were launched.

In calendar year 2006, the total AUM of mutual funds grew 6.47 percent to cross the $68 billion. The MF industry had achieved this landmark first in August 2006 according to the data released by Association of Mutual Funds in India (AMFI).

While, the Securities and Exchange Board of India (SEBI) has already made few amendments for launch of gold exchange-traded funds, whereby investors can trade in gold as any other instrument, it is likely to take a final call on realty funds as well.

Consolidation and growth

The MF industry has been seeing few consolidations. With the Indian MF industry witnessing sustained high growth, it is natural that the foreign players are eyeing the huge Indian opportunity. It is likely to get further boost with major players like AIG, Japanese Shinsai Bank and Nikko AMC planning to set shops in the country. Indian MF market is expected to witness the entry of more global mutual funds in 2007.

Five leading global asset management companies are planning to enter India's mutual fund industry in the face of the spectacular 65 per cent growth in 2006. American International Group (AIG), JP Morgan, AXA Investment, Korean financial services major Mirage Asset Group and a Japanese company are planning to foray into the MF business in India in 2007. "This year at least four to five international players should come in. The more the merrier," AMFI Chairman A.P. Kurien said in a statement.

Existing foreign funds like Franklin Templeton, Merrill Lynch, Fidelity and HSBC made good returns in 2006. Out of 30 AMCs in the country now, nine are predominantly controlled by global players.

The non-resident Indians (NRIs) have also increased their exposure in the Indian mutual fund industry by 30 times in the past four years. While the NRI share in total AUM in January 2003 stood at $102 million, in January 2007, the figure rose to $3.1 billion, according to industry estimates. In percentage terms, the NRI share has risen from 0.5% to more than 4%.

The Reserve Bank of India (RBI) has recently hiked the investment limit of mutual funds in foreign equity and debt instruments from the current US$ 2 billion to US$ 3 billion. This is a reform step. Domestic mutual funds are yet to even come near the existing limit of $ 2 billion as the Indian markets currently look to be more attractive.

The mutual fund (MF) industry is seeking to get tax relief on debt schemes and a solution to the issue of treating Fund of Funds (FoF) schemes on par with equity schemes from this Budget. The decisions, it expects, will boost retail participation in these schemes. The debt-oriented mutual fund schemes, at present, pay around 12.5 per cent and institutional investors pay 23 per cent distribution tax plus surcharge and cess on the premium they earn on their investment, while equity-oriented schemes are exempt from these taxes.

The industry in its wish list, which it submitted to the finance ministry, sought nullification or reduction of this tax. The industry expects the government to take a call on this issue. If the tax limit is brought down, the industry will be able to attract far more retail investments that, at present, go to conventional investment sources.

Stay invested

If the market remains subdued in 2007, returns from the equity schemes may narrow down, but it still will be nearly 20 percent, predicts market analysts. With new products, as many as 54,000 distributors (including 80 banks), retail investors are clearly swarming in large numbers to invest in mutual funds. AMFI believes this trend will reinforce itself as innovative products woven around commodities, and even real estate, make their entry in the coming days.

A total of 13 new fund houses are either waiting for SEBI's approval or have plans to enter the Indian mutual fund market. According to Lipper The best performer over the five and ten-year period is Reliance Growth Fund, which has given a compounded annual return of 71.38% and 35.21% respectively against the sensex's improvement of 34.10% and 15.14% respectively.

According to observers, the growth in MF has been spectacular so far and the bottom line and top line of the industry is attractive. With more players entering the market, the industry is expected to grow 23% to 24% a year. The yields are good. The AUM will witness trmendous growth.

Disclaimer
Dr. Uday Lal Pai is an independent columnist for this web site. Dr. Uday Lal Pai may hold long or short positions in any of the stocks mentioned in this article and those positions can change at any moment. InvestorIdeas.com Disclaimer: www.InvestorIdeas.com/About/Disclaimer.asp, InvestorIdeas is not affiliated or compensated by the companies mentioned in this article. Dr. Uday Lal Pai is a freelance writer. Nothing in the articles should be construed as an offer or solicitation or recommendation to buy or sell any specific products or securities. Past performance does not guarantee future results.

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