February 22, 2008

Market Volatility: Retail investors shift towards MFs

PFW Bureau

Market volatility in the global and domestic markets has brought a change in the investment pattern of the retail investors. Now, they are favouring Mutual Fund schemes more than the initial public offerings (IPOs) or participating directly into the secondary market. 

The growing popularity of the MF schemes is evident with the success of the New Fund Offerings (NFOs) this year. According the market insiders, Reliance Mutual Fund has mobilised around Rs 5,660 crore through New Fund Offerings (NFOs) -  Raliance Natural Resources Fund.
Contrary to this,  Wockhardt and Emaar MGF were forced to cancel their IPOs of Rs 1,100 crore and Rs 5,000 crore respectively.

Market experts said that the retail investors do not want to take any risk by participating in the present volatile equity market. The NFO has mopped up resources from 1,200 cities helping the fund houses to cross 60 lakh folio.
Another fund house, Birla Sun Life Mutual Fund’s NFO Special Situation Fund has mopped Rs 900 crore. The NFO of AIG Investments’ infrastructure and economic reform fund and HDFC’s Infrastructure Fund are also getting good response from the market.

Tata Mutual Fund has also come out with a Tata Growing Economies Infrastructure Fund. The NFO opened on February 18 which will close on March 18. Ved Prakash Chaturvedi, managing director, Tata Asset Management Company said that the fund house plans to mop up more than Rs 2,000 crore through the new fund from the market.
The major reason for the shift of the investors towards MF schemes is the meltdown of Bombay Stock Exchange (BSE)’s Sensex and National Stock Exchange (NSE)’s Nifty leading to the erosion of several crores of the retail investors wealth.  This is the reason that Securities and Exchange Board of India (Sebi) has felt the need to reduce the cost of buying Mutual Fund (MF) schemes to make it a viable vehicle of investment for the retail investors to participate in the equity market.

Sebi has taken several steps to cut the cost of investing in MF schemes for the retail investors. The regulator has decided early this year to waive off entry load for the direct applications including investment made through the internet on the open ended schemes. The new norms have been brought into the force from January 4, 2008.
According to the new regulations, the entry load will not be charged on the direct applications received by the Asset Management Company (AMC), submitted to AMC’s collection centres, investors services and through the internet. However, the regulator has maintained that the applications routed through any distributor or agent or broker will continue to attract entry fee.

Experts say that the new norms will encourage investors to make investments through internet because they can save the entry fee ranging between 1% to 2.5% in the open ended schemes.
However, a section of the market player are of the view that the waiving of entry load will help only a miniscule percentage of population because the majority still depended on distributor for choosing the scheme out of more than 760 schemes available in the market. The distributor, here, plays a dual role of a financial advisor as well as the seller of the schemes to the investors.

Hence, the new norms can offer fruits in real senses only when the investors break this hurdle to invest in the MF schemes. This can happen only if the investors throughout the country are educated about the financial market. Both Sebi and MF industry have taken certain initiative to educate investors which can be intensified further.
The success of NFOs and the withdrawal of IPOs like Wockhardt and Emmar MGF indicates that the MF schemes are the favoured destination of the investors.