Mutual fund flows -- Private sector funds in focus

S. Vaidya Nathan

PRIVATE sector mutual funds appear to still have the hold on the sector that they established in the wake of the US-64 crisis two years ago.

The woes dogging the UTI in US-64 and in many assured schemes, and the indifferent performance of the bank- and institution-sponsored funds created a fertile ground for private sector funds to thrive.

The good performance of such funds as Alliance Capital, Birla Sun Life and Kothari Pioneer (after a bad period in the mid-1990s) over a fairly long period also provided investors with alternatives. The sustained good performance, backed by better disclosures and improved service levels, ensured that private sector funds attracted better investor interest.

The comeback by many funds in the dumps, such as Prudential ICICI, SBI Mutual Fund, Apple Mutual Fund (now part of Birla sun Life) and 20th Century Mutual Fund (now part of Zurich India), also helped improve investor perception about private sector funds. The numbers tell the tale.

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Shifting asset base

As the Table shows, private sector funds now have a higher share in the assets under management in the industry. It was inevitable that the share of the biggest player -- the Unit Trust of India (UTI) -- would decline from the time when it had a monolithic hold on the market. But the US-64 crisis ensured that the decline was much faster.

Between March 1997 and October 2000 -- a period of 40 months -- the UTI's share declined from 82.3 per cent to 64.8 per cent. And this happened at a time when the level of assets under management in the industry rose 47.8 per cent, from Rs 65,510 crore to Rs 96,837 crore. Collectively, the share of private sector funds rose from 4.7 per cent to 27.3 per cent.

The growth rate in fund mobilisation also confirms the picture. The UTI, for all its stress on mobilisation targets, managed a compounded annual growth of 4.3 per cent in 1997-2000. This must be seen in the light of the Rs 12,000 crore raised by its Monthly Income Plans in this period. If, despite this, the assets under management are up by only Rs 9,000 crore, the pressures of repurchase/redemption becomes clear. Since the US-64 corpus has also risen after the crisis-driven redemption in 1998, numbers suggests pressures on other UTI schemes too.

Bank-sponsored funds have actually seen an annual decline of 8.7 per cent in assets under management driven by redemption of a few big schemes, such as BOI Double Square Plus, and the absence of any notable inflows. The slew of income products have ensured that LIC/GIC-sponsored funds have seen a modest, 7 per cent growth.

In sharp contrast, private sector funds (Indian) have recorded compounded annual growth rates of over 60 per cent. Those with an FII linkage (with a foreign institutional investor as a partner) have seen growth rates in excess of 80 per cent. The low base is certainly a factor. But, in absolute terms, private sector funds have close to Rs 26,500 crore under management.

During the period, notwithstanding the sharp decline in the market, the assets under management have increased. In the UTI, on the other hand, the assets under management declined by around Rs 14,000 crore from a high of Rs 76,547 crore in March 2000. Income funds -- especially short-term -- provided an impetus here for the private sector funds.

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Big share in inflows

While in terms of assets under management, the UTI has a sizeable share of over 60 per cent, the trends in fresh inflows provide a clearer idea of the changes underway in terms of investor preferences. From a share of 25 per cent in fresh mobilisation three years ago, private sector funds now account for over 80 per cent of fresh inflows. Between March 1997 and now, these funds collected Rs 92,031 crore -- almost twice the level of funds raised by the UTI (see Table).

But the story on the redemption side is equally interesting. Having raised substantial sums of money, the private sector funds also had a larger outgo of Rs 69,265 crore. At the end of the day, the net accretion to the private sector funds was almost three times the levels managed by the UTI, though the latter, as a single fund, continues to be largest fund mobiliser, with a net accretion of Rs 8,451 crore.

Healthy competition

At the end of the day, the sums mobilised by way of fresh sales and redemption highlight the intense activity in the industry and its rising importance. Aggregate fresh mobilisation between 1997 and now were Rs 1,46,949 crore, and redemption Rs 1,17,500 crore. Add the activity of the FIIs, which have become bigger and bigger traders, and the growing role of institutional investors in the Indian debt and equity markets becomes clearer.

From the point of view of the UTI, the loss in market share and the rising number of players is a good thing. It ensures better balance in the market place. And if the private sector funds collectively grow larger from the present -- a prospect pretty much on the cards -- the disadvantage of being the sole big player may be left behind as far as the UTI is concerned.

This has implications for its investment performance. If the fund management is handled objectively without extraneous pressures, the UTI may be able to effect its buying and selling without as much of an impact cost as earlier. UTI buying and selling has a big impact on prices, which run up or decline in a sharper manner, affecting its performance. A better balance is now in the offing and that is good for mutual funds, including the UTI and investors.