SECTION 3 : MARKET TRENDS Krishnamurthy Vijayan

Chief Executive Officer J. M. Capital Management Pvt. Ltd.

Mutual Funds
The mutual fund industry is a lot like the film star of the finance business. Though it is perhaps the smallest segment of the industry, it is also the most glamorous in that it is a young industry where there are changes in the rules of the game everyday, and there are constant shifts and upheavals. The mutual fund is structured around a fairly simple concept, the mitigation of risk through the spreading of investments across multiple entities, which is achieved by the pooling of a number of small investments into a large bucket. Yet it has been the subject of perhaps the most elaborate and prolonged regulatory effort in the history of the country. A little history: The mutual fund industry started in India in a small way with the UTI Act creating what was effectively a small savings division within the RBI. Over a period of 25 years this grew fairly successfully and gave investors a good return, and therefore in 1989, as the next logical step, public sector banks and financial institutions were allowed to float mutual funds and their success emboldened the government to allow the private sector to foray into this area. The initial years of the industry also saw the emerging years of the Indian equity market, when a number of mistakes were made and hence the mutual fund schemes, which invested in lesser-known stocks and at very high levels, became loss leaders for retail investors. From those days to today the retail investor, for whom the mutual fund is actually intended, has not yet returned to the industry in a big way. But to be fair, the industry too has focused on brining in the large investor, so that it can create a significant base corpus, which can make the retail investor feel more secure. 2003-2004: A retrospect: The last year was extremely eventful for mutual funds. The aggressive competition in the business took its toll and two more mutual funds bit the dust. Alliance decided to remain in the ring after a highly public bidding war did not yield an acceptable price, while Zurich has been sold to HDFC Mutual. The growth of the industry continued to be corporate focused barring a few initiatives by mutual funds to expand the retail base. Large money brought with it the problems of low retention and consequently low profitability, which is one of the problems plaguing the business. But at the same time, the industry did see spectacular growth in assets, particularly among the private sector players, on the back of the continuing debt bull run. Equity did not find favor with investors since the market was lack-luster and performances of funds, barring a few, were quite disappointing for investors. The other aspect of this issue is that institutional investors do not usually favor equity. It is largely a retail segment product and without retail depth, most mutual funds have been unable to tap this market. The tables given below are a snapshot of the AUM story, for the industry as a whole and for debt and equity separately.

Krishnamurthy Vijayan is the Chief Executive Officer of J.M.Capital Management the asset manager of JM Mutual Fund. He spent over 17 years in mutual fund industry, handling a number of portfolios at Unit Trust of India. He was involved in the setting up of UTI- Institute of Capital Markets and UTI Investor Services Ltd. He was also with Jardine Fleming, as a part of the team that set up its mutual fund business in India.

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Impact of local and international developments During the year we had two major political developments that affected the mutual fund industry. The standoff between India and Pakistan at the beginning of the financial year saw the debt market being extremely volatile. Investors pulled out of funds and this also put pressure on fund managers to hold returns

comprehensive attempts to address the issue of risk in the mutual fund business and carries with it the added advantage of phase wise escalation starting with mandatory items and moving towards best practices. AMFI and its role One of the most effective industry bodies Mutual Fund Trading Activities Table-14 today is probably the Association of Mutual Funds in India (AMFI). It has Month Equity (Rs. Crore) Debt (Rs. Crore) been a forum where mutual funds have Gross Gross Net Purchase Gross Gross Net Purchase Purchase Sales /Sales Purchase Sales /Sales been able to present their views, debate and participate in creating their own November-2001 1,002.69 1,345.90 -343.16 3,276.45 1,632.18 1,644.27 December-2001 1,326.83 1,262.91 63.92 2,498.73 1,619.26 879.51 regulatory framework. The association was January-2002 1,720.01 2,152.92 -432.94 4,915.73 2,826.24 2,059.07 created originally as a body that would February-2002 1,703.28 2,057.76 -354.47 3,880.25 3,063.52 816.72 lobby with the regulator to ensure that March-2002 1,177.70 1,649.97 -472.22 2,495.20 2,506.11 -10.93 the fund viewpoint was heard. Today, it is April-2002 1,299.38 1,685.71 -332.67 3,115.03 1,695.22 1,419.80 usually the body that is consulted on May-2002 1,366.20 1,506.21 -140.01 2,511.87 2,084.85 427.02 matters long before regulations are framed, June-2002 1,083.19 1,477.73 -394.54 3,266.92 2,360.82 906.10 July-2002 1,444.61 1,732.39 -287.78 4,232.72 2,537.79 1,694.93 and it often initiates many regulatory August-2002 1,020.20 1,222.89 -202.69 4,261.21 2,777.17 1,484.04 changes that prevent malpractices that September-2002 959.51 931.37 28.14 3,952.36 2,962.93 989.43 emerge from time to time. October-2002 1,247.63 1,292.04 -44.41 5,598.04 3,157.62 2,440.42 This year some of the major initiatives November-2002 1,059.44 1,394.94 -335.50 4,637.75 2,387.49 2,250.26 December-2002 1,412.36 1,409.93 2.43 4,011.62 3,780.91 230.71 were the framing of the risk management January-2003 1,534.19 1,937.23 -403.04 5,258.97 4,108.52 1,150.45 structure, a code of conduct and February-2003 1,077.74 1,046.64 31.10 3,115.31 3,611.95 -496.64 registration structure for mutual fund March-2003 1,015.74 953.60 62.14 2,652.96 2,563.71 89.25 intermediaries, which were subsequently April-2003 1,332.78 1,509.97 -177.19 4,019.04 2,267.57 1,751.47 mandated by SEBI. In addition, this year May-2003 2,110.68 2,042.35 68.33 5,306.34 2,635.08 2,671.26 AMFI was involved in a number of TOTAL 52,093.62 61,490.96 -9,078.74 73,006.50 50,578.94 22,397.14 developments and enhancements to the regulatory framework. and at the same time meet redemption commitments. The equity markets were equally subdued but the industry did not AMFI works through a number of committees, some of which react greatly to this since equity funds were in any case not a are standing committees to address areas where there is a need for constant vigil and improvements and other which are ad significant part of the mobilization in the last few years. With the stand down on the Indian side, the debt markets recovered and with that the inflow of funds into our industry The industry focused also on making existing soared once again. But at the end of the year the industry was products more attractive by adding on a hit by another war the impending US attack on Iraq and consequent oil price pressures once again made the debt market number of service features and cost control volatile. It is a mark of the maturing of the Indian investor that redemptions were only need based and the industry did not see measures. Same day redemption in liquid as much outflows as one feared. funds, institutional plans which would Product innovations With the bond yields plateauing and with the mutual fund reduce the overall cost of investment and industry trying to attract people to the equity market, the year bonus units in lieu of dividend were some of also saw some remarkable products flavors for Indian investors. Birla Sunlife Mutual Fund led the pack with an equity fund these features. focused on dividend yield stock, a bond index fund and a bond-for-units swap product. Some of the other innovative products were the series of exchange-traded funds from hoc committees constituted to address specific issues. These Benchmark, including a liquid index traded fund. Prudential- committees consist of industry professionals from among the ICICI also launched an exchange-traded fund, the SPICE, in member mutual funds. There is now some thought that AMFI association with BSE. should become a self-regulatory organization since it has worked The industry focused also on making existing products more so effectively as an industry body. attractive by adding on a number of service features and cost control An Overview: measures. Same day redemption in liquid funds, institutional Overall FY2003 can be summed up as the year of the maturing plans which would reduce the overall cost of investment and bonus of the mutual fund industry. It was a year when fund houses units in lieu of dividend were some of these features. went through turmoil and consolidation and the strong ones A new Emphasis on Risk Management emerged stronger. Investors too became savvier, and began The year also saw a tremendous emphasis on risk management. investing based on far more scientific criteria than in the past, A number of mutual funds were already taking steps to mitigate and with clearly defined investment horizons. Distribution gave risks not only in operations as in the past, but also in the area of way increasingly to intermediation and more and more management of funds. A committee constituted by AMFI carried distributors graduated to providing technical advise to their the initiative taken under the FIRE Project forward and clients. Thus the industry has come of age in FY2003, and we developed a risk management framework for the industry. The hope that FY2004 and beyond will see us come out of a stormy subsequent circular by SEBI is perhaps one of the most adolescence to become a trusted avenue for saving. 139