COMMENTARY
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entered the market. Two banks and two
Myopic Investment View of the
insurance companies joined the fray, thus bringing to an end the monopoly that UTI
Indian Mutual Fund Industry
enjoyed in the market (Table 1).
In 1992, the Securities and Exchange Board of India (SEBI) Act was approved by Rajesh Manjrekar, Pankaj Sinha the Parliament. This Act was designed to
Since the majority of mutual fund investors are salaried individuals, the MF industry should have a long-term investment horizon. However, the data from all mutual funds for December 2007-May 2008 and December 2008-May 2009 reveals that the industry has adjusted its position on a short-term basis in tandem with the short-term volatility of the market. The findings substantiate the observation that there is an urgent need to set up an audit committee for this industry.
Rajesh Manjrekar (rnm7421@hotmail.com) is at SIMSREE, Mumbai and Pankaj Sinha (pankaj-sinha@fms.edu) teaches at the Faculty of Management Studies, Delhi.
T
Trends in the MF Industry
The MF industry in India has its origins in the Parliament Act (52 of 1963). The Act proposed setting up of an asset management company (AMC) in order to create an instrument for channelling investments. The Unit Trust of India (UTI) was incorporated in February 1964 and the first fund was called Unit Scheme 1964, popularly known as US 64.
The first phase of expansion of the industry was witnessed in the year 1987 with the advent of public companies that maximise protection for investors’ interests and regulate the financial markets.
The following year witnessed a turning point in the MF industry with SEBI permitting entry of private AMCs into the mutual fund market. The entry of the private sector offered investors a wider range of o ptions and increased the level of competition among funds, thus resulting in exponential growth of the MF industry. More over, a number of mergers and acquisitions also contributed to the changing scenario of the industry. Apparently, the MF indu stry in India was passing through a new stage of growth and consolidation towards a liberalisation phase. Thus, by 1993 the MF industry emerged with nine AMCs, managing funds worth approximately Rs 47,004 crore.
By the beginning of 2003 India had 33 AMCs that controlled funds worth approximately Rs 1,21,805 crore. The latest position as on 30 June 2009 shows the e xistence of 35 AMCs managing 3,893 schemes and controlling funds worth a pproximately Rs 6,70,936 crore.
A number of MF schemes operate in I ndia catering to the various demands of the investors in terms of their (i) financial requirements, (ii) risk tolerance, and
(iii) expectation of returns.
Mutual funds are classified on the basis of their structure, nature and objectives. Table 2 (p 14) presents classification of the MFs.
Table 1: MF Industry Early Participants
| Industry | Name | Year |
|---|---|---|
| Banking | State Bank of India | 1987 |
| Canara Bank | 1987 | |
| Insurance | LIC | 1989 |
| GIC | 1990 |
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According to Sadhak (1998), “The SEBI-NCAER survey’s findings regarding the occupational background of mutual fund investors indicate that nearly 14 million or 93% of the unit-owning households fall in the category of salaried or self-employed
Table 2: Overview of Existing Schemes
questionnaire evidence that implementation of the buy and hold, momentum and contrarian strategies might be difficult to reconcile with efficient markets.
Sehgal and Jhanwar (2008) conclude that short-term persistence in equity
Structure Nature Investment Objective
Open-Ended schemes: Equity funds: Growth schemes
2009 had witnessed tremendous volatility in the market. We aggregated the data in entirety for each of the fund houses and clubbed the various schemes. The research is confined to data pertaining to the equity market exposure only. The MFI explorer of ICRA did not report the quantitative data for equity in foreign investments by MFs.
• Diversified equity funds
Research Findings
• Mid-Cap funds
The objective of the study was to obtain a
• Sector specific funds
• Tax Savings Funds (ELSS) general overview of the investment pat-
Close-Ended schemes: Debt funds Income schemestern of the Indian MFs. For this, it was nec
• MIPs
to facilitate meaningful comparison and
• Short Term Plans (STPs)
short enough to catch the short-term
• Liquid funds ( money market schemes)
i nvestment pattern.
Interval schemes Balanced funds Balanced schemes
Money market schemes
Trends in Top Five Funds: We decided to
Other schemes
compare the trends in operations for all
• Tax saving schemes:
MF companies in India for the periods
• Index schemes:
• Sector-specific schemes December 2007 to May 2008 and Decem
or wage earner class. In the salaried class, 42% unit-owning households are retired.”
Another study conducted by Sadhak indicated that while 32.4% of the investors belonged to the service class, 24.6% belonged to the business or the professional class. The same study also recorded that of the seven lakh investors surveyed, more than 57% preferred monthly income schemes, 35% preferred tax-saving schemes, and 8% invested in income and growth schemes. In terms of funds, 72% was invested in mon thly income schemes, 24% in tax-saving schemes and only 4% in income and growth schemes (Sadhak 1998).
The above findings indicate that a m ajority of the MF investors are wage earners who invest a part of their savings in the MF schemes with a view to get a comfortable return with a long-term i nvestment perspective.
Although the MF industry has been the subject of a number of studies that have drawn various conclusions, the literature on the Indian MF industry continues to be woefully inadequate.
Hitherto the approach to the study of the MF industry has been mostly from the perspective of relating the returns with the type of investment. Menkoff and Schmidt (2005) conclude on the basis of mutual funds’ performance does not necessarily imply superior stock selection skills. The paper has done some detailed factor analysis for the short-term returns model, elaborating on the causes of the short-term returns and attributing the root cause to the myopic view of the MF industry.
Agudo and Lázaro (2005) infer that risk is one of the variables that influence the evolution of Indian MF net asset values (NAVs). Classifying funds in terms of risk produces small deviations with regard to the criteria of percentages in investment that allow the classification made by the institutions responsible for ensuring correct functioning and investor security in the MF market. We can find one explanation in the fact that this market is not sufficiently developed to be able to sustain an institution that can efficiently control the investments made by different MFs. Alternatively, the predetermined criteria are simply not followed.
The data is from the ICRA database using the MFI explorer software. We studied the data from all MFs for two periods: from December 2007 to May 2008 and from December 2008 to May 2009. These were chosen on the basis of the fact that the period from December 2008 to May ber 2008 to May 2009. We have focused on the net movement of funds in order to assess the general trend in movement of funds. Thus the net of sales and purchases was calculated for each month for all funds in terms of quantity (number of shares bought and sold) and value (net change in value of equity investment).
Table 3 presents the data for the top five mutual funds chosen on the basis of the value of the assets under management (AUM) for the period December 2008 to May 2009.
The numbers in the table are the net securities purchased by the funds during the respective months. Positive numbers indicate the net additions to the number of shares during the period while negative numbers imply net sales, viz, securities sold exceeding those bought during the period.
A clear trend emerging from Table 3 shows that the top five funds follow a very
Table 3: Trends in Net Quantity of Equity Sold and Purchased – Top Five Funds (December 2008-May 2009)
(Quantity in millions of shares)
| Fund Rank | May | April | March | February | January |
|---|---|---|---|---|---|
| 2009 | 2009 | 2009 | 2009 | 2009 | |
| 1 | 54.612 | -14.450 | 26.827 | -9.954 | -13.929 |
| 2 | -2.728 | 18.390 | 2.378 | -59.058 | 76.272 |
| 3 | -4.376 | -6.478 | 0.511 | -0.954 | 0.735 |
| 4 | 39.317 | 2.322 | 20.554 | 1.046 | -9.253 |
| 5 | 1.605 | 23.820 | 11.310 | 6.635 | 1.258 |
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COMMENTARY
similar pattern with heavy downloads in the months of February and April 2009, and heavy buying in the months of March and May 2009. The first and second ranked mutual funds also show some extreme positions during the six-month period.
Table 4 and Figure 1 will facilitate comparison of the above trends with those in the earlier year. The ranking of the funds
Table 4: Trends in Net Quantity of Equity Sold and Purchased – Top Five Funds (December 2007-May 2008)
(Quantity in millions of shares)
Fund Rank May April March February January 2008 2008 2008 2008 2008
394.2 530.6 658.8 635.1 501.7
2 -16.6 6.1 24.3 -7.4 35.0
470.1 355.4 412.7 379.9 379.9
Source: ICRA Data.
Figure 1: Quantity of Stocks Dealt with during December 2007-May 2008
700
600
500
400
MF3
300 May April March February January
Figure 2: Quantity of Stocks Dealt with during December 2007-May 2008
40
20
0
-20
-40
MF1 
May April March February January MF2 MF4 MF5 is based on the ranking of the AUM as on 31 May 2009.
The table shows that funds ranked first and third have tremendous volume being traded while the other three funds seem to
Table 5: Trends in Value – Top Five Funds (December 2008 to May 2009) (Amount in Rs billion)
| Fund Rank | May | April | March | February | January |
|---|---|---|---|---|---|
| 2009 | 2009 | 2009 | 2009 | 2009 | |
| 1 | 86.1 | 23.2 | 16.9 | -10.9 | -10.4 |
| 2 | 42.8 | 20.4 | 6.8 | -16.9 | 2.5 |
| 3 | 6.4 | 8.6 | 4.8 | -2.8 | -4.9 |
| 4 | 52.6 | 20.5 | 14.5 | -5.1 | -5.9 |
| 5 | 14.0 | 7.1 | 3.7 | -3.2 | -2.2 |
Source: ICRA Data.
lag far behind. The numbers are presented in Figure 1 and Figure 2.
Table 5 presents the data for the top five MFs for the period of December 2008 to May 2009 in value terms. Positive numbers imply net addition to the value while negative numbers imply net fall in the value of holding.
The trend in the value of holdings is more comparable vis-à-vis that in quantity (Table 6). While funds have moved in tandem in taking new positions of purchase and sale for the months, one observes extreme positions on some occasions. MF2 and MF4 show heavy trading in the months of February, March, April and May, while MF1 shows strong variations in the value of holdings in all five months.
The change in value terms represents a composite effect of changes due to buying and selling by the funds and the market volatility in terms of prices of securities. For the given period, the market volatility as indicated by the Bombay Stock Exchange (BSE) Sensitive Index was on an average 25% on an annualised basis.
An examination of the above data shows that the industry has adjusted its position on a short-term basis in tandem with the short-term volatility of the market.
Trends in Sale of Securities: It is important to look at all funds and quantify the extent of movement in relative terms. Two measures were devised for this purpose. For each fund under study, a ratio of the number of scripts dealt with to the number of scripts held by it in a given period was calculated. The ratio was calculated on the base (December 2007 and December 2008 respectively) as well as on the new purchases during the period of study.
The absolute numbers for the quantity of stock sold by the MFs during the period December 2008 to May 2009 are glaring as approximately 45% of the time the industry has sold more than 50% of the quantities held by it in the base month of December. The number for quantities sold above 75% also stands out as it is slightly above 38% of the base quantity held in the month of December (Table 7).
A first cut look at the numbers in Table 8 brings out the fact that the bottom 10 funds have heavy volatility but deal in far lesser number of stocks while the top 10
Figure 3: Trends in Value during December 2007-May 2008 (Rs in billion)
20
10
0 -10 -20 -30 -40
May April March February January MF2 MF4 MF5 Figure 4: Trends in Value during December 2007-May 2008 (Rs in billion)
400
MF1
300
200
100
MF3
0 May April March February January
Table 6: Trends in Value – Top Five Funds (December 2007 to May 2008) (Amount in Rs billion)
| Fund Rank | May | April | March | February | January |
|---|---|---|---|---|---|
| 2008 | 2008 | 2008 | 2008 | 2008 | |
| 1 | 161.99 | 350.21 | 198.73 | 239.68 | 223.64 |
| 2 | -9.50 | 14.20 | -9.35 | -3.86 | -27.85 |
| 3 | 73.39 | 176.85 | 95.01 | 140.14 | 146.51 |
| 4 | -8.027 | 13.40 | -32.58 | 16.59 | -32.69 |
| 5 | 16.56 | -14.25 | 13.19 | -6.01 | 1.71 |
Source: ICRA Data.
funds deal in double the number of stocks and trail slightly behind the bottom 10 in terms of volatility. The overall fund n umbers being a simple average, it is
o bvious that the top 10 funds have a bigger role to play in contributing to the i ndustry v olatility.
We also dealt with data that had investments in foreign securities and funds not
Table 7: Quantity of Securities Sold (% Sold on the Base*): December 2008 to May 2009 – All Funds
Average no of securities with sale transaction 143
Quantity Sold Average % of Sale Transactions
More than 50% 45.70%
75%-100% 38.56%
*Stocks held in December.
Table 8: Quantity of Securities Sold (% Sold on the Base*) December 2008 to May 2009
Top 10 Funds
Average no of securities with sale transaction 201
Quantity Sold Average % of Sale Transactions
More than 50% 38.79%
75% -100% 29.95%
Bottom 10 Funds
Average no of security with sale transaction 100
Quantity Sold Average % of Sale Transactions
More than 50% 45.50
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reported by the industry. The calculation of volatility in value terms trails with the quantity data despite the fact that value is also affected by market volatility.
On an average the BSE Sensex had a volatility of 24.5% during December 2007 to May 2008 as against 32% during the period December 2008 to May 2009.
Table 9 clearly brings out the fact that value trends are not in deviation from the
Table 9: Value of Securities Sold (% Sold on the Base*) Period: December 2008 to May 2009 – All Funds
Average no of securities with sales transaction 156
Value Sold Average % of Sale Transactions
More than 50% 41.79
75%-100% 34.29
*Stocks held in December.
quantity trends, showing that the market volatility was “ridden” by the MF industry.
The top 10 funds have contributed tremendously to the overall volatility as the quantity of stocks that they dealt in were more than twice the average on the back of the highest amount of assets under management that they enjoyed. The average percentage of sale transactions (over 34%) where above 50% value has been sold in a period of six months, clearly
Table 10: Value of Securities Sold (% Sold on the Base*) Period: December 2008 to May 2009
Top 10 Funds
Average no of securities with sales transaction 237
Value Sold Average % of Sale Transactions
More than 50% 34.82
75% -100% 26.51
Bottom 10 Funds
Average No of Securities 102 with Sales Transaction
Value Sold Average % of Sale Transactions
More than 50% 42.17
75%-100% 37.43
*Stocks held in December.
indicates a high level of volatility among the biggest funds (Table 10).
A higher level of volatility has been observed in the bottom 10 funds as both the numbers 42% and 37% of sale instances are higher than the average. However, these numbers have to be viewed keeping in
mind the value of the funds Figure 5: Percentage Sale on Base (2008 and 2009) and the number of stocks 70 61 >50
52
52 46 >75
that these funds deal in. 60
47 45 43
Let us first look at the 50
41
40 trends in the number of 40
39
39
30 securities transacted by the 30 mutual funds during the 20 period of study. As shown 10
0 in Table 11, the average All 2009 All 2008 T10 2009 T10 2008 B10 2009 B10 2008
number of securities held
Figure 6: Percentage Sale on New Purchase (2008 and 2009)
32 17 28 30 36 27 14 25 27 29 | by all funds was 210 and | 40 | |||
|---|---|---|---|---|
| 188 in 2008 and 2009, | 35 | |||
| respectively. Of these, the | 30 | >50 | ||
| funds were traded on an | 25 | 24 | >75 | |
|
21 | |||
| average of 138 and 143 se | 20 |
|
|
|
| curities, which amounted to | 15 |
|
||
| 66% and 76%, respectively. | 10 |
|
||
| As compared to 2008, on | 5 |
|
||
| an average the funds held a | 0 |
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|
|
All 09
lesser number of securities and traded in a larger number of securities in 2009. While a similar trend is observed for the top 10 funds, the bottom 10 funds have not shown any notable change.
Trends in Percentage Sale on Base: If we look across funds and try to explore their investment pattern, it appears that many funds traded heavily in the relatively short period of six months. We thus look at the quartiles. The results are presented in Figure 5.
For each fund under study, we added the number of scripts undergoing sale transactions. We then ascertained the number of transactions which resulted in a sale of more than 50% of the base quantity (December quantity), and calculated a percentage of such transactions on the total number of transactions. Taking a simple average across funds, it was found that on an average, 46% of the transactions involved a sale of more than 50% of the base quantity for the period of December 2008 to May 2009. For the same period, an average of 39% transactions by all mutual funds taken together
Table 11: Trend in Average Number of Securities Transacted by MFs
Securities All Funds Top 10 Funds Bottom 10 Funds 2008 2009 2008 2009 2008 2009
Average number of securities traded having net sale transactions 138 143 177 201 101 100
All 08 T10 09 T10 08 B10 09 B10 08
involved a sale of more than 75% of the base quantity. In many cases, 100% quantity was sold.
The percentages were even higher in the previous year. For all funds, on an average, 52% of the total sale transactions involved sales of more than 50% of the base month quantity, while 47% involved more than 75% of the base month quantity.
The profile of the mutual fund investor consists primarily of wage earners who invest their money for a long-term return. Mutual funds are thus expected to take a long-term view and provide steady returns. The percentages of sales on base appear to be way above average. The bottom 10 funds have not shown much variation in their sale on base percentages over the two years. The trend in case of the top 10 funds is quite pronounced. The transactions amounting to more than 50% sale on base were 39% this year as compared to 61% last year. The number 61% implies that on an average 61% of the transactions undertaken by the top 10 MFs involved a sale of more than 50% of the base quantity. The transactions involving sale of more than 75% of the base came down from 52% last year to 30% this year.
The last year’s data indicates that the top 10 funds sold high quantities more
o ften than the bottom 10 funds. The trend
Average number of securities not traded 72 45 118 71 35 33 reversed this year with the top 10 funds Total number of securities 210 188 295 272 136 133 selling high quantities less often as com-Percentage of securities traded 66 76 60 74 75 75
pared to the bottom 10 funds.
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COMMENTARY
Trends in Percentage Sale on New Purchases: It was observed that the funds are not only selling huge quantities from the base but are also selling from the new purchases. We calculated percentage of sale on new purchases for each fund and took a simple average.
In 2009, the bottom 10 funds had more transactions with a high percentage of newly purchased shares being sold. On an average, 30% of the transactions involved sale of more than 50% of the newly purchased quantity. This was 17% and 24% for top 10 funds and all fundsrespectively. For all funds taken together, on an average 21% of the transactions involved a sale of more than 75% of the newly purchased quantities. The corresponding numbers for top 10 and bottom 10 are 14% and 27%, respectively (Figure 6, p 16).
In 2008, all the percentages were higher, implying that there were more short-term purchases last year. On an average, for all funds last year, 32% of the transactions involved a sale of more than 50% of newly purchased quantities. Out of these transactions, about 84% (i e, 27% of the total transactions) involved a sale of more than 75% of the newly purchased quantities. These percentages were less than average for the top 10 and more than average for the bottom 10 funds.
The overall trend that the current period under study shows is lesser short-term sales as compared to the previous year.
The trends in Figure 6 show subdued sale percentages in the current year as compared to those of the previous year for stocks that were purchased during the six months under review. This could be indicative of mutual funds going for “value investing” rather than “momentum investing”.
Sector Exposure: Another way of looking at investment styles is to look at the sector exposure of different funds. We looked for trends in sector exposure in terms of number of funds moving in or moving out of a particular sector. Sale of large quantities was taken as a movement away from a sector and huge buying was taken as entry into a sector.
For the period December 2008 to May 2009, seven sectors saw many MFs buying into them. These sectors were power, cement, fertilisers, oil and gas, consumer durables, finance and telecom. More than 80% of the funds indicated a clear interest in these sectors which was apparent from their huge net purchases.
The sectors that a lot of funds quit were textiles, entertainment and shipping. About 60% of the funds indicated loss of interest in these sectors through heavy selling.
A third group of sectors witnessed a mixed reaction from the funds – banks, metals and electronics. These saw a movement whereby 40%-50% of the funds made heavy purchases whereas an almost equal number of funds showed signs of exit.
Summary and Conclusion
As the majority of the mutual fund investors are salaried individuals or individuals that own small and medium enterprises, the hypothesis that the Indian MF industry would have a long-term investment horizon has now been rejected by the observations made in this article.
The factors that support this research are:
At the FICCI conference held at Mumbai in 2008, the chairman of SEBI had recommended that an audit committee be set-up at the SEBI level for the Indian MF industry. The authors recommend that this committee should set some investment norms with regard to holding period for stocks owned by the MF industry. The authors would conclude by stating that the said recommendations be implemented at the earliest for the MF industry.
Postscript
The current chairman of SEBI, at a mutual fund summit organised by the Confederation of Indian Industry (23 June 2010) reiterated the fact that the mutual fund industry gave importance to short-term views. His statement, “Somehow the focus goes to short-term incentives and that ultimately results in a great loss for investors. And finally, when investors lose money, the whole industry also comes tumbling down. I think, this lesson needs to be internalised by all of us” shows that there is a need for shifting the focus of the industry to a long-term view, which would put the investors before incentive structures benefiting the mutual funds.
References
Agudo, L F and C O /¡zaro (2005): “Does Mutual Fund Management in India Correspond to Its I nvestment Objective Classification?”, Review of Pacific Basin Financial Markets and Policies, Vol 8, pp 659-85.
Menkhoff, L and U Schmidt (2005): “The Use of Trading Strategies by Fund Managers: Some First Survey Evidence”, Applied Economics, Vol 37(15), pp 1719-30.
Sadhak, H (1998): Mutual Funds in India: Marketing Strategies and Investment Practices, Second Edition (New Delhi: Sage Publications).
Sehgal, S and M Jhanwar (2008): “Short-Term Persistence in Mutual Funds Performance: Evidence from India”, International Research Journal of Economics and Finance, Issue No 15, pp 307-17.
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