The Hindu Business Line : Why is retail role passive?

THE mutual fund industry is still in the initial stage of development in India, with an investor base of only around 3-4 million. Total investments in mutual funds of around Rs 1,20,000 crore constitute less than 10 per cent of the total bank deposits.

In the US, mutual fund investments exceed the bank deposits and most households have some investments in mutual funds.

A large part of the growth in the MF industry in recent years has come from corporate and institutional investments, particularly in debt and liquid schemes. MFs have, by and large, remained an urban phenomenon, with the top 10 cities accounting for almost 90 per cent of the total investments.

Retail participation in the industry has been stagnant. Some of the reasons for this would be:

Most investors still seek stable returns and safety of the investments even at the cost of sacrificing higher returns.

Until recently, bank deposits and other savings schemes gave reasonable returns. Only in the last year have deposit rates fallen to levels where investors seriously have to seek alternative investment avenues.

High volatility in the stock markets would tend to discourage retail investors. Many investors have lost a substantial portion of their savings on two occasions in the last decade when the stock markets crashed. Even sharp rallies like the current one may give a feeling to new investors that they have missed the major part of the rally and by investing now, they may face another downslide soon.

MFs have been targeting urban HNIs (high networth individuals) for mobilisation. The investing community in rural and semi-urban areas still need to be educated on the merits of investing in MFs. Real broadbased retail participation can come only when the large middle class populace starts investing in MFs.

Investors are still to experience consistency in returns and safety over a longer period to get the requisite confidence to shift a major portion of savings into MFs. The transition would be gradual, as investors do not have the comfort of assured returns as was available in the past.

The advantage to a retail investor today while investing in MFs is that he can choose from a wide range of products tailor-made to suit the specific risk appetite. Because of the relatively low risk and good returns generated from appreciation of investment in a falling interest rate regime over the last three years, investments in MFs have been largely confined to debt schemes.

Debt schemes are unlikely to generate double-digit returns in future as interest rates have virtually bottomed out. As such, for a risk-averse investor, the ideal choice for investment in future should be the hybrid funds such as Monthly Income Plans (MIP) and Balanced Funds, which have a mix of both equity and debt.

SBI Mutual Fund has always focused on the retail investor offering a variety of schemes aimed at individuals. The fund has an investor base of over 8,00,000. The product range for the retail investor is quite wide: The Magnum Income Fund, a pure debt medium-term fund has been offering consistent returns (13.18 per cent since inception in 1998) and is ranked RRR 1 by Crisil for over six months for giving consistent risk adjusted returns. The Magnum Monthly Income Plan schemes have been giving 10-13 per cent returns over the last one year.

With a higher equity component of around 60 per cent, the Magnum Balanced Fund has given 40 per cent returns over one year. The diversified equity funds (Magnum Multiplier Plus 1993 and the Magnum Equity Fund) are currently giving a return of 45-50 per cent for one year, while the sector funds for pharma, the Magnum Pharma Fund is the top performer in its category giving 60 per cent returns over one year (six-monthly returns have been 68.30 per cent). A new scheme specifically aimed at the retail investor, having novel features is expected to be launched shortly.

(The author is Chief Investment Officer, SBI Mutual Fund.)

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