Not sure how many of you have read ‘Straight and Crooked Thinking’ – it is a book about writing and speaking in a complicated / simple way.

Now let us look at the mutual fund industry:

Facts:

Entry loads have been abolished.

There have been a lot of redemptions in the equity schemes.

There has been a ‘huge’ fall in the number of folios.

..blah blah…..

When you see such articles in respected newspapers, and magazines…you are being led to believe that:

Mutual funds create relevant schemes, they sell appropriately, however the agents are asking the clients to redeem because they are not getting any commission. And now the regulator should re-introduce entry load.

Far from the truth. The industry is still very, very profitable especially at the top. It makes no sense at all for the distributor to ask existing folio holders to redeem – so that is a stupid argument.

Most of the folios have been added in ‘gold’ which has been sold as a flavor of the ‘month’ scheme.

Too much of the industry aum is lying in Infrastructure funds (sales pitch – look around in India, will there be no demand for Infra…so Infra funds). One of the biggest crimes in investing is ‘paying too much for growth’ and infra funds and a few Infra companies are guilty of pathetic management.

Redemptions from Infra funds could be happening (have never been convinced about sectoral funds where many fund managers are unable to define sectors…)

In all this have the fund schemes performed well?

Ok to put it in the words of a bank director : ‘From when did fund performance matter for getting an aum?’ So many schemes have such poor performance that you may not even believe that such schemes exist. All fund houses have their share of poor performers..

So do not take numbers as is provided by the press. Normally it is meant to scare you, the regulator, …etc.

Damn it, if the mutual fund industry was so unprofitable why are Nirmal Jain of Indiainfoline, India bulls, Edelweiss, Axis bank entering this business now? Or why 23 others waiting to get the license?

Or why inspite of so many entrants we are not seeing fund management costs coming down? Well frankly the main stream media does not have time for such questions. In a worst case scenario they will turn around and say ‘frankly for the retail investor how does it matter’. Chuckle, chuckle. So it will be another story on ‘How SIP works wonders for your portfolio’ based on past numeric data. With a comment – ‘past performanc….’ Then the reader can watch IPL.

A few serious blogs though are asking some basic questions – and frankly are struggling for answers because there is no one single data warehouse from which you can find out

– how many SIPs are added every month? (industry sources say 200,000 new additions – I have no clue)

– how many gold folios are added?

– debt schemes are perhaps as profitable for a big fund house – fees is still a %age of Aum…

so read on…here is one interesting article on the mutual fund industry

http://inquisitiveinvestors.blogspot.com/2010/10/mf-industry-sees-folio-closure-of-over.html

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  1. Out of 43 AMCs, how many are profitable and is the profit commercially justify running the organization?

    We’ll know the answer in next few months when AMCs publish their year end accounts.

    My opinion is that except for handful of AMCs, others may show only miserable numbers.

    As a CA, you may be able to read the numbers better than us. May be if interested, you can share your thoughts once the results are published.

    I hope you’re also watching the results of broking firms.

    The folios getting added can present an incorrect picture. Banks and National Distributors (except NJ) usually go for only one year SIP.

    When the time comes for next year renewal, it is different fund and a different folio.

    The RM gets credit only for one year inflow and that explains the shorter tenure.

    So the net addition to folios would actually be less, though the gross looks impressive.

    As per CAMS-BCG study last March, the average age of an equity asset was 13 months.

    It is now 18 months. Still a long way to go…

    IFAs SIP tenure has increased in the last one year and their average tenure is now around 3 years+.

    I don’t see anything wrong in sharing the past data about SIP performance.

    Regarding ‘comment-past performance’…. It is a both a regulatory requirement and is healthy to share the same.

    ‘Disclaimer’ is not a bad word.

    Ofcourse, watching IPL or Mega Serial or reading a blog is an individual’s option!

    Removing the mark to market component, what is the actual growth in terms of equity assets during the last one decade?

    I hope you would be reading the series of articles Mr.Debashis is writing on broking industry.

    From 12 million, the investor base has come down to 8 million in last one decade.

    With out penetration, with the current AUM, how costs can be brought down unless people decide to run the industry for charitable purposes.

    I only hope load does not come back as it would open flood gates for mis-selling.

    Since manufacturer paid 5% for selling an infra fund, many distributors happily sold them.

    Incentive structures should reward good behaviour and penalise bad ones.

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