Mutual funds: What does the future hold?

It’s hard to believe that it has only been 25 years since the Indian mutual fund industry was opened up to private players. The role that the investment instrument has played in fuelling the country’s economic growth cannot be overstated. This is especially true of the last few years, which have seen rapidly multiplying inflows, leading to total assets under management (AUM) crossing Rs. 25 trillion in August 2018!

These achievements were marked at the recently concluded GIC Re presents CNBC-TV18 Mutual Fund Awards. Bringing together executives from India’s top fund houses, wealth management firms and fund distributors, the event recognised 21 of the best performers across various categories.

That’s far from all the evening had to offer, though. Former SEBI Chairman U. K. Sinha sat down with CNBC-TV18’s Latha Venkatesh to talk about some of the most pertinent issues faced by the market, investors and the economy. Channeling years of experience and expertise, the former regulator brought a unique perspective to the discourse surrounding current events.

For one, Sinha immediately shot down any comparisons of the current scenario to the crises of 2008 and 2013. He stressed upon the importance of the Government of India, Reserve Bank of India and SEBI banding together to ensure that investors’ money is protected, and applauded them for taking charge of the situation with IL&FS. His advice to fund managers and regulatory authorities? “The first attempt has to be to restore faith in the market,” he said.

However, the most notable piece of advice that the industry veteran had was for fund managers to stop focusing on just AUMs, even it meant halting fresh accruals for a few months. “There cannot and should not be a race for enhancing your AUMs and growth all the time,” said Sinha.

More wisdom was doled out at a panel discussion between A. Balasubramanian, CEO, Aditya Birla Sun Life AMC Ltd.; Raamdeo Agrawal, MD & Co-Founder, Motilal Oswal Financial Services Ltd.; Sunil Subramaniam, MD, Sundaram Asset Management; and Nilesh Shah, MD, Kotak Mahindra Asset Management Co. Ltd. Together, these industry stalwarts deliberated upon what the future holds for mutual funds and arguably, finance at large.

And while the discourse surrounding mutual funds’ resounding success has primarily focused on AUM growth, Nilesh Shah pointed out that fund houses, managers and distributors should broaden their horizons and look at improving other metrics, such as investor confidence, investor satisfaction and investment performance. “If I get the mind share of a person, hopefully the pocket share will follow,” he said.

He also posited that fears surrounding the recent market shake-up were a tad exaggerated, since there’s still hope for a comeback. This sentiment was echoed by Motilal Oswal’s Raamdeo Agrawal, who added that liquidity will soon return, once the regulator steps in. He noted that the mutual fund industry is not used to overnight downgrading for institutions as big as IL&FS, which caused a bit of a scare.

But as A. Balasubramanian notes, an uptick in investor maturity has meant that people are now a lot more calm and wise in their reactions to market highs and lows. The reason behind this? The humble SIP, which he credits with making investments more sustainable. “As long as investors stick to the SIP as their mode of investing, nobody needs to worry about short-term volatility,” he added.

Besides, as Nilesh Shah ventured, mutual funds might be the retail investor’s best shield from the unpredictability of the market. As of September 25, 2018, 53.6% of the 3100 traded companies had fallen by 40%. And while that’s certainly not good news, mutual fund investors (and prospective investors) will be relieved to know that not a single fund had invested in any of these companies. This shows that fund managers are not just relying on credit ratings given out by the bureaus, but are also investing time and money into conducting their own due diligence.

Even notwithstanding all other factors, though, it’s impossible to deny that mutual funds have changed the game. As Sunil Subramaniam rightly pointed out, India’s GDP growth would most likely have stalled at 5 or 5.5%, if they hadn’t stepped in to fill the voids left by banks and NBFS. They’ve also worked wonders at a micro level, allowing individuals to reap the rewards of having their money work for them.

Like everything under the sun, mutual funds have seen their share of ups and downs in the last 25 years. But their achievements have largely outweighed the risks, and if the two and a half decades gone by are any indication, things will only get better in the years to come!