Global scenario

The mutual funds boom is a recent phenomenon. The magnitude of the industry and the recent change can be understood in terms of growth in assets of mutual funds during 1991-96. According to the Investment Company Institute, USA, the total assets of open-ended mutual funds have risen by 125 per cent, from $2,82,554 million in 1991 to $6,404,255 million in 1996. The non- USaccounted for less than 45 per cent, while the share of the US was more than 55 per cent of total assets of open-ended mutual funds of the world. Today the net assets of US mutual funds would be more than $4 trillion. Though mutual funds in India started in 1963 with the UTI, the mutual movement really started in the late 1980s with the entry of public-sector mutual funds namely SBI MF, Canbank MF and LIC Mutual Funds. Since then, the industry has come a long way. However, the mutual funds industry in India revolves around close-ended schemes and given the state of the economy and capital markets, it has performed reasonably well. Indian MFs (open-ended and close-ended) have posted a significant growth particularly since liberalisation in 1991-92. Resource mobilised (cumulatively) by them rose from Rs 4,563.68 crore in 1986-87 to Rs 81,026.52 crore in 1995-96, which further went up to Rs 97,228.39 crore in 1997-98. The funds achieved a growth of 405 per cent during 1986-87 to 1990-91, 116 per cent during1991-92 to 1995-96. The growth rate has been lower since 1994 - cumulative resources mobilised by MFs rose by 58 per cent during 1993-94 to 1997-98. However, the recent trend in funds mobilisation raises hopes of a quick recovery of the mutual-fund industry in India. Recent trends also indicate a structural shift in investors preference in India. But before we examine that, let us see how the mutual funds stand in the context of the economy.

Mutual funds in national economy: Critical importance of MFs in the national economy is often judged with the help of the asset-holding pattern of the household sector and also in terms of GDP. The share of MFs in household financial assets in the US and UK is around 8 per cent, while in Japan its is a little over 3 per cent. In India, there has been a gradual decline in the share of the mutual-fund industry in household financial assets - 13.3 per cent in 1991-92, 7 per cent in 1992-93, 2.8 per cent in 1994-95 and 0.5 per cent in 1996-97. In terms of GDP, it was1.5 per cent in 1991-92, but declined to 0.4 per cent in 1994-95 and has been less than 0.1 per cent since 1996-97. However, the size of MFs in terms of GDP stands nowhere near the US or continental Europe - which hold 23 per cent and 57 per cent of GDP respectively.

Growth in yearly collection of Indian MFs showed an uneven trend. Yearly collection of the funds rose by 265 per cent in 1991-92, but declined by 34 per cent in 1992-93, and posted a growth of 50.5 per cent in 1993-94. The growth rate continued to decline during the next three years - 3.9 per cent in 1994-95, 52.6 per cent in 1995-96, and 26.4 per cent in 1996-97. However, the yearly collection registered a growth of 137.8 per cent in 1997-98. This is a very positive development for the mutual-fund industry in India, particularly in view of the recent decline in the real economy and the continued bearish phase in the stock market.

Generally, it is expected that mutual funds should have a direct relationship with the growth rate of GDP, GDSand disposable income. A direct relationship between mutual funds and stock markets is also expected. Existence of these relationships can be noted in the data, but in a weak form. GDP growth has not been reflected directly in the growth of mutual- fund collections except in 1993-94. Further, higher savings rate may not necessarily boost mutual funds, but the increase/decrease in household savings in financial assets has a direct impact on mutual-fund collections. Significant growth in yearly collection of mutual funds 1991-92 and 1993-94 can be attributed to this fact. Similarly, the stock market movement has a strong inducing effect on mutual funds. In India, however, stock markets rarely follow the emerging direction of the real economy and very often fail to act as a barometer of change of other sectors. Yet, a direct relationship between the Sensex and response to mutual-fund schemes can be noted--improvement in market sentiment generally boosted growth of mutual funds in the past.

Recent trends:An analysis of the recent performances of MFs in terms of resource mobilisation indicates a structural shift and the emerging direction of the mutual-fund industry, which dictates the need for re-positioning mutual funds in India. Recent trends also indicate certain potential threats which need to be tackled for sustainable growth. This threat perception has been examined in terms of the mutual fund market structure. Recent trends have been examined with the help of sectoral distribution of cumulative collection of mutual funds up to March 1997, and then comparing the same with the sectoral distribution of collection for the period 1995-96 to 1998.

Recent Trends

Cumulative collection of MFs by March 1998 was Rs 97,228 crore, of which 43.83 per cent was collected under income schemes, 16.26 per cent under growth schemes, 34.26 per cent under income & growth schemes and 5.44 per cent under ELSS. The rest included collection under venture schemes. However, the collection matrix has undergone adramatic change during the last three years owing to changes in market dynamics caused by weakening of the real economy, slow growth of the industrial sector, structural impediments in stock markets and a confused political scenario.

Total yearly collections of mutual funds during the last three years was Rs 6,513.45 crore, Rs 4,795.87 crore and Rs 11,406 crore respectively. Sectoral distribution of collection indicates the nature of mutual-fund markets and the direction of flow of funds from mutual funds to capital markets. This is often used as a barometer of investors' perceptions about risks and the investment-management efficiency of mutual funds. Keeping the twin factors in view, we have examined funds' collections during the period 1995-96 to 1997-98, considered to be a bearish phase in the Indian markets. Our data indicates that: