25 YEARS OF MUTUAL FUND: TOUGH TREK TO STRIKE SILVER
Despite shocks due to bad decisions, mis-selling and regulatory changes, the industry has done well
In the early 1990s, you wouldn't identify an Indian fund manager with a Leonardo DiCaprio in The Wolf of Wall Street. Mutual fund professionals of the time were mostly unknown bankers who ran the show with a handful of equity analysts.
More often than not, one landed the job because the bank had no other openings. As a leading mutual fund (MF) manager of the 1990s says: “I took a late decision to join a bank instead of the civil services. On my first day, the manager told me apologetically that all plum positions were taken, and I could only do equity research.”
For the MF industry, 1993 was a watershed year in many ways. The Securities and Exchange Board of India (Sebi) came out with its first MF regulations where all mutual fund houses, except Unit Trust of India, were to be registered and governed by it. In July 1993, the first private sector MF – Kothari Pioneer – was registered.
Between 1993 and 1996, the number of asset management companies rose from 15 to 32. Firms like ICICI, Reliance, Birla, ITC and 20th Century set up asset management companies.
Like Bharat Shah, executive director, ASK Capital says: “First, people were not familiar with the concept of managing money through MFs. Though US-64 had been around for a long time, it was actually a baggage for the new players. Also, convincing investors who believed that they could do it themselves made things tougher.” Shah was the chief investment officer (CIO) of Birla Sun Life in the mid-nineties.
But retail investors soon got their first taste of mis-selling. In 1994, Morgan Stanley, the first foreign name to enter the field, launched its 15year closed-end growth fund. Initially, the fund house said it was targeting ~3 billion, and investors would get allotment on a ‘first-comefirst-served’ basis. Investors believed it was like an initial public offering (IPO) and there would be proportionate allotment. The result: The line for applications snaked way back. However, the fund house retained the entire ~10 billion. When the scheme declared its net asset value (NAV), it was down 10 per cent, and though it was listed on exchanges, investors had to exit at a huge loss.
This hurt investor sentiment badly. As Samir Arora who was CIO of US-based Alliance Capital in the 1990s recalls: “Morgan Stanley destroyed the retail market. Our scheme, Alliance 95, came just after that and raising money was very difficult.” The scheme collected just ~750 million. Arora is currently partner with Helios Capital.
These initial setbacks notwithstanding, investors as well as private sector fund managers got their first windfall with the technology boom of the late nineties. Both Shah and Arora played leading roles in that phase.
“There were many winners, like Digital Equipment, E-serve, Polaris, NIIT and Visual Soft,” says A Balasubramanian, now CEO of Birla Sun Life Mutual Fund. Deputy CIO under Shah, in the mid-1990s, he fondly remembers travelling with friends in Premier Padmini that Reliance MF gave its managers as perks.
But the tech bubble burst soon, in early 2000, hurting everyone. Interestingly, only Prashant Jain of Zurich (currently CIO of HDFC Mutual Fund) emerged unscathed as he took the call of selling technology stocks almost six months before the catastrophe, say industry players.
The disaster was a lesson for the industry. Soon after, when debt funds were giving returns of 15-20 per cent (yields were at 4-5 per cent) and above, fund houses came together and advised clients to get out before another crash occurred. Consequently, fixed income assets came down by 85-90 per cent. Fund houses also launched shortterm debt and floating rate products so that investors could move from duration funds.
Nilesh Shah, managing director, Kotak Mutual Fund, says the major difference between the technology crash of 2000 and the infrastructure crash in 2008 was the quality of stocks. “Even though these stocks were in a free fall, we held good companies. The only mistake that many fund managers made was that they kept on collecting money despite knowing that markets were likely to crash soon,” he says.
What helped the industry to grow in the initial years was the expense of 6 per cent for marketing and distribution of new fund offers (NFOs). There was also an entry load of 2-2.5 per cent on existing schemes. But it also led to a lot of mis-selling. Distributors encouraged investors to have many mutual fund schemes, especially in NFOs to earn this commission. In fact, some investor portfolios had over 150 schemes.
Sebi started its crackdown on mis-selling by banning the 6 per cent commission under Chairman M Damodaran in 2006. Three years later, Chandrashekhar Bhave dealt another blow by banning the entry load in 2009. A host of market and regulatory pressures led to consolidation in the industry as some weaker players were acquired by established ones.
But the MF industry bounced back within a couple of years mainly due to improving market conditions and rising investor interest in direct plans which were much less expensive than regular ones. Fund houses also popularised the concept of MFs across the country.
Today the industry stands on solid ground with inflows of around ~75 billion a month through systematic investment plans and total assets of ~23.4 trillion. Investments by mutual funds have also countered the severe sell-off by foreign institutional investors in 2018. Leo Puri, managing director, UTI Mutual Fund sees a material shift in the trend line in the coming years: “Due to genuine financialisation of the economy in the past couple of years, the MF industry which has been growing at an average of 12-14 per cent annually will see faster growth of, say 15-18 per cent, in the coming years.”