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Monthly MF data is misleading

It seems that the mutual fund industry is finally tired of the monthly declaration of its assets under management (AUM).

india Updated: Oct 03, 2010 23:48 IST

It seems that the mutual fund industry is finally tired of the monthly declaration of its assets under management (AUM). All I can say is that, it’s about time. I’m normally in favour of as much data of all kinds being released into the public, but on this point, I agree with releasing less information. The monthly AUM data is actually harmful and misleading. The reason for this is not the data itself, but the way it is interpreted and analysed in most media outlets.

The headline number that always carries the news is the total AUM of the industry. Every month, there are headlines like “Mutual fund industry expands by X,000 crores or shrinks by X,000 crores.” In the months when there’s a big shrinkage, there’s a general sense of impending doom in the analysis.

In other months, there’s a great sense of optimism. Both are wrong. The reason is that by AUM, a large bulk of the mutual fund industry lies in debt funds of the shorter-term variety. These mutual funds are used by corporates to park temporary extra cash for short periods.

This combination of large size and large and frequent investments and redemptions means that the size changes of debt funds overwhelm the changes by retail customers and in equity funds.

For example, in August, the latest month for which data is currently available, the fund industry grew to R7.09 lakh crore from last month’s R6.68 lakh crore, a rise of 6 per cent, or about R31,000 crore.

However, this figure masks the real story which was that there was a net outflow of about R2,900 crore in equity and a net outflow of R36,185 crore in debt funds. Debt flows are affected by all sorts of factors. For example, July saw a massive outflow of R1.27 lakh — the largest ever. Apparently, the reason was the 3G license payments made by telcos.

The reality is that what is generally perceived as the mutual fund industry is really two separate industries: a retail-oriented equity investment management industry and very different, wholesale, corporate deposit service. Aggregating the two results in analyses that is not just meaningless, but actually misleading.