Comparison of global mutual fund industry data shows India is ranked 19th out of 46 markets in equity fund category
They are there globally. Mutual funds operate in numerous countries in the world and the mutual fund industry has flourished in most of them.
What is interesting among different countries' mutual fund industry is the diversity in the form and shape of the industry. Financial Chronicle Research Bureau analyses the differences in the mutual fund industry's contours between the Indian mutual fund industry and other peer--and non-peer--countries.
The analysis helps to address several questions and doubts about the way the domestic MF industry. For instance, it answers the question whether the sizeable share of liquid and money market funds in the domestic mutual fund industry, which fluctuates a few hundred basis points around the 25 per cent mark, is unique to India. Our anlaysis looked at the latest data from US-based Investment Company Institute (ICI), a group, which lobbies on the behalf of mutual funds in US. The last ICI release on quarterly worldwide trend in mutual fund assets and flows data pertained to the third quarter of calendar year 2014 (CY14).
Money market funds
Some mutual fund observers consider the high share liquid funds, which are referred to as money market funds in several international markets, in total industry size to stand out like a sore thumb. At the end of last month, data from Association of Mutual Funds in India, showed 23 per cent of industry aggregate assets under management (AUM) of about Rs 12,02,000 crore to have come from liquid funds.
In our global comparative analysis from ICI data pertaining to the end of third quarter of CY14, Indian money market funds made up for 24.2 per cent of its aggregate AUM across all types of funds. The ICI data encompassed AUM in equity funds, bond funds, money market funds, hybrid funds and miscellaneous funds.
Our analysis of the 46 countries data given by ICI revealed there were 31 countries where the money market funds share was lower than India's 24.2 per cent share and there were 14 countries where it was higher.
Given that as compared to the Indian scenario, there were twice as many countries with lower dominance of money market funds than those with higher dominance, it confirmed the apprehensions on the domestic funds industry. The median of the share of 46 countries, too, was much lower at 9.6 per cent.
Even in terms of absolute AUM values in money market fund, Indian money market funds had a total AUM of $29.88 billion, which was the ninth highest (see chart) among the 46 countries. India's peer market of Brazil had the eight highest money market funds AUM of $52.38 billion. But Brazilian money market funds made up for just 4.9 per cent of total mutual fund industry size in Brazil, as per ICI data.
However, in South Korea which ranked sixth largest in money market AUM size globally in the ICI data sheets, its AUM of $81.6 billion in its money market funds made up for 26.0 per cent of its mutual fund industry's aggregate AUM. China, ranked fifth, too, had even more proportion (47.0 per cent) of its funds industry size coming from money market funds.
Interestingly, in the largest market of US, ranked first in money market AUM size, the share of money market funds in total industry size was 16.7 per cent, lower than that in India.
Indian money market funds are almost fully driven by investments made by corporate and institutional money. The flows in and out of domestic liquid funds tend to fluctuate widely every month but their share in total industry AUM tends to stay in a high range between 20 per cent and 35 per cent.
Equity funds
Equity fund AUMs, too, tend to fluctuate widely relying as it does on the volatile movement of stock prices in the equity market. The origin of the mutual funds industry was based on the need for financially un-savvy investors to utilise the services of professional fund managers to invest in the asset class of equities. There was not much difficulty for investors to invest in fixed-income instruments in the debt market and banking system, but equity investing was very challenging.
It is for this reason that a mutual fund industry having a higher contribution by equity funds is regarded as the most valuable for the purpose of serving investor interest the most. Indian equity funds are pre-dominantly invested in by individual investors unlike the institutional money-reliant liquid funds.
The ICI data, as of September-end last year, showed Indian equity funds AUM to have a 31.3 per cent share in the domestic funds industry aggregate size. Of the 46 countries in the ICI-released data, there were 18 countries where equity funds clocked a higher share and there were 27 countries where it was lower. The median of the respective share of equity funds in total funds industry in the 46 countries was 26.9 per cent. Thus, India did fare relatively better in terms of equity funds. The bull run of last year would have also contributed in giving a boost to equity funds AUM in India.
Bond funds and hybrid funds
Domestic bond funds in India sees a decent investment contribution by individual investors and offer utility to fixed-income investors in the country. Our analysis of the ICI data pertaining to bond funds in the 46 countries provided a further insight into the fascinating contours of the domestic funds industry. Indian bond funds accounted for 37.4 per cent of market share and there were only 14 other countries where this share was higher. The median of the bond funds' respective market share in the 46 countries was 29.6 per cent. Thus, Indian funds industry was seen performing better than most mutual funds industry around the world.
Hybrid funds category is also seen as a useful option for investors given the fact they invest in multiple asset classes covering the equities and debt markets, and in some cases even the gold asset class.
The ICI data on hybrid funds across geographies revealed India to be at the bottom. Indian hybrid funds had a 2.4 per cent share in total funds industry size and there were 42 countries where this share was higher. The median of the share of hybrid funds across the 46 countries was 15.5 per cent.
The broad conclusion from our analysis is that the domestic funds industry to have a relatively lower prevalence of equity funds and a un-healthy reliance on liquid funds.
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