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Random-access: Is there too much money in mutual funds?

The markets may be on steroids, but mutual fund returns are not. The majority have given poorer returns than the benchmark index for their type. Ravi Srinivasan tells us more...

india Updated: Oct 10, 2007 21:39 IST
Ravi Srinivasan
Ravi Srinivasan
Hindustan Times

The party in the stock markets is showing no signs of ending anytime soon. I think even those who have no clue as to what exactly the term ‘equity share’ means, will be able to rattle off the latest Sensex level. This is not such a bad thing, because one of the fallouts of the saturation coverage of stock market movements in the media has been the widespread realization that when it comes to returns on investments, stocks are pretty tough to meet.

The resultant hysteria, and the plethora of ‘millions made in minutes’ kind of stories floating around have effectively converted even die-hard risk-averse stock market skeptics to investors ready and willing to throw their monies into the markets. Which, again, is not such a bad thing either. In the long-term, any reasonably informed investor who is willing to take a few risks is bound to end up considerably better off. The Sensex, for instance, has a twenty-year return of over 20 per cent per year, among the highest in the world.

But — and there are always the inevitable buts — the key words here are ‘long term’, ‘informed’ and ‘risk’. Most of the investors who are jumping into the markets at the moment do not have a very clear understanding of the concept of market risk.

Whenever I have pointed this out to friends and acquaintances who have asked me for advice on what to do, I have always tried to point out both the upsides and the downsides of investing. The usual response has been: “That’s all right, I know I won’t be able to do this myself. I’m leaving it to the professionals.” The professionals being mutual funds.

Again, an extremely sensible thing to do. And something which a growing number of Indian investors are doing. According to data released by ratings firm Crisil, mutual fund assets under management (AUM) increased to Rs.4,80,000 crore during September 2007, up from the Rs 4,70,000 crore sloshing around in mutual funds as of August this year.

This is a single month increase of 2 per cent. The industry grew by almost 50 per cent in the first nine months of 2007, from Rs 3,24,000 crore as on December 31, 2006.

That’s a whacking great sum of money to hand over to someone else for managing it, without any guarantee of returns whatsoever. The usual ‘health warnings’ are there, of course, in any communications put out by mutual funds. But like most health warnings (how many people have quit smoking because of warnings?), these go unnoticed. Nobody reads the prospectus, and the persuasive young men and women calling from your bank offering ‘free investment advice’ do not walk you through them either.

And nobody is questioning the funds either. The markets may be on steroids, but mutual fund returns are not. Apart from a handful of mutual funds, the vast majority of the 1,700-odd schemes have given poorer returns than the benchmark index for their type of fund.

One major reason, a fund manager told me, is that there is too much money coming in, and not enough stocks to put them into. With FIIs grabbing even small-cap stocks, there simply isn’t enough paper. Which probably explains why there are not too many schemes being launched, despite a ready market.

Is there such a thing as too much money?

First Published: Oct 10, 2007 21:36 IST