Assets Under Management (AUM) of mutual funds in India have crossed Rs 9 lakh crores for the first time following an increase of Rs 77,500 crores in the liquid assets category in the last few months. As per the Association of Mutual Funds of India (AMFI) data AUM as on 31st January 2014 was as under: –

(Amt in Rs. Crores)

Mutual Fund industry is a highly competitive industry with nearly 44 players consisting of public sector, private sector, foreign and joint ventures entities. This industry is a closely regulated by The Securities and Exchange Board of India (SEBI). Clause 52 of the mutual funds guidelines stipulate the maximum amount of expenses that can be charged to the various schemes by the Asset Management Companies (AMC). On account of the intense competition most of the funds stated in the offer letter that they will charge much less than the SEBI parameters limit of expenses to woo investors.

The recent development which has come to light is that most of the mutual funds are charging the money market and liquid schemes as little as 2 to 5 basis points as expense. On account of this there is a huge inflow under this segment and the fund houses have been finding it difficult to charge so little and still are profitable. The industry is now realizing that profitability point is lost on account of the cut throat competition in soliciting subscription with impractical expense portions. Major players under the liquid/ money market fund category are reported to have come together under the AMFI umbrella and decided to charge an expense quotient of 20 basis points from February 2014. The proposed expense quotient will be well under the limit proposed in the mutual fund guidelines. This looks to be a right move because the mutual fund industry has to be profitable to have a sustainable growth.

According to a report by Crisil the rise in AUM was primarily due to inflows of Rs 83,500 crore — the highest since April 2013 — which resulted in AUM of the mutual fund industry touching Rs 9.03 lakh crore.

Bulk of the inflows during the month was into money market and liquid funds. Liquid funds reported their highest inflows in nine months in January leading to a 43% rise in AUM in this category. “This was chiefly due to periodical inflows in the banking system – quarter-end outflows (December) in the category are typically reversed in the subsequent month (January) as banks and corporate re-invest the surplus funds they withdraw to pay their quarter-end advance tax requirements,” said Crisil. Some improvement in the liquidity due to lending by the Reserve Bank of India (RBI) through its term repo window, purchases of gilts via open market operations by the central bank and capital infusion into state-owned banks by the government also contributed to inflows in the category, the report added.

This article is by Dr. K.T. Rangamani . He is a Senior Professor at VIT Business School .