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Saturday, July 02, 2011

Mutual funds may benefit from long-term money

The finance ministry’s guidelines allowing foreign individual investors to invest in Indian mutual fund schemes should be music to the ears of the industry. Fund-starved since the entry load ban, the industry would look to tap international investors aggressively.

The finance ministry has capped the cumulative investment limit to $10 billion or Rs 45,000 crore. This will be reviewed after six months. The Securities and Exchange Board of India (Sebi) will notify the final guidelines by August 1.

As on May 31, the mutual fund industry’s total assets under management stood at Rs 731,448 crore. The entry of foreign investors is likely to make the market more vibrant. 

The advantages are obvious. According to market experts, internationally, foreign retail investors hold mutual funds in their country for an average of five years. In comparison, Indian retail investors hold it for only 18-24 months. In addition, they invest larger sums. This implies more money as well as stable money. This, in turn, could increase the depth of the market.

The reverse is also true. Today, foreign institutional investors dominate the Indian equities market. Their inflows and outflows impact the benchmark indices substantially. In fact, they more or less decide the market sentiment. Since January, they have sold net equity (according to data with the exchanges) worth Rs 12,049 crore. This has dragged the markets down by more than 10 per cent.

One fear experts have is that any change in the sentiment can lead to large outflows as well, leading to redemption pressures on the scheme. This could hurt domestic investors as the net asset value of the scheme will suffer.

The new class of investors, called qualified foreign investors (QFI), will be able to invest through the depository participant route as well as the unit confirmation receipt system, which will involve custodians. QFIs can be individuals and bodies, including pension funds. Though industry players are rather upbeat about the announcement, they say they are awaiting final guidelines from Sebi regarding the same. Fund houses, too, will have to gear up to attract foreign retail investors.

While Sebi guidelines are awaited, it would be interesting to see if the market regulator separates schemes for foreign investors. For instance, even as a fund house has the same scheme today, collections from retail and institutions are kept separately. That is, ICICI Prudential Indo Asia Equity has a separate institutional and retail scheme. The question is, would foreign retail investors be allowed to invest in the Indian retail scheme or a third variant would be made available to them? Experts say this move is more beneficial for investors from smaller countries. In bigger countries, investors have the option to invest in the country through India-dedicated funds.
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