In India, it’s the institutional investors who dominate AUMs, particularly in the fixed income space. Apathy in fixed income products when there are enough guaranteed return products around, inadequately compensated retail distribution channels and a drive to chase large tickets in fixed income to buttress their AUM are some of the prime reasons for indifferent retail patronage.

Improving retail penetration requires fund houses to expend significant efforts and costs, while access to institutions ready with funds is relatively easy in terms of the effort reward relationship.

Why is this so? Here, size does matter. Let’s take an example. If there is a liquid fund of 1,000 crores with 100 investors vis-à-vis 750 crores with 1,500 investors, guess which get’s noticed up by distributors and the media alike?

The 1,000 crore fund. Hence, the rush for ramping up size and it’s consequences thereof.

This skewed distribution is a cause of concern because massive redemptions by institutional investors in times of crisis or otherwise influence the decisions of the fund and are likely to negatively impact the interests of small investors. Since institutions help swell the AUM, fund houses find little merit in aggressively pursuing the retail investor. But this means that the retail investor is missing out on a beneficial investment product. Also, as most corporate investments flow into debt schemes, and the flow is easy, there are few incentives for product innovations.

I have always maintained that there has to be an equal focus on number of investors. The right way to assess an AMC’s schemes is the weighted average result of AUM and number of investors.

Apparently, SEBI is in sync with the same. There have been recent reports about SEBI relooking the ‘20-25’ rule ie a rule which requires a scheme to have a minimum of 20 investors, with a single investor not owning more than 25% of assets. It has often been observed that this rule is usually not followed in spirit with a few dominant investors ruling the roost, specially in a scheme like an FMP.

To put a check on this practice SEBI is planning to increase the minimum numbers of investors required in a mutual fund scheme and bring down the maximum holding by a single investor from the current level of 25.

Mandatorily ask AMCs to disclose their unitholder status per fund and then let the investors decide whether they would still like to invest or not.

While this is welcome, I think the better route would be to require fund houses to disclose the details of their AUM composition at the end of every month. Apart from disclosing the total AUMs (that is the way it is currently done), mutual funds may have to specify the pattern of investor holding among other things. Many retail investors choose a scheme based on its AUM – their perception is larger the AUM, the better is the scheme. But these are not necessarily correlated; also the AUM figure by itself does not give the investor an idea of a scheme’s client base.

I would like to believe that once there is more transparency on this count, the impetus will be on fund houses to get more and more new investors. As I have mentioned elsewhere in this blog, retail penetration is the core necessity around which there will be many more inventions in the AMC space.

Disclaimer: All views expressed in this blog are my personal and in no way express or implied, of that of the company I work with, or have worked with in the past.