'Mutual funds may see their best period in next 5 years'

India's mutual fund sector, the assets under management of which exceeded Rs 10 lakh crore (Rs 10 trillion) last month, has high expectations from the new government at the Centre.

A Balasubramanian, chief executive of Birla Sun Life AMC, tells Business Standard the sector will see one of its best phases in the coming five years.

Balasubramanian says the sector's efforts to reach more investors have started yielding results, adding he wouldn't be surprised to see them diverting incremental investment towards equities.

Edited excerpts:

Retail participation through equity schemes in capital markets has hit a low in the past few years. When can one expect a wave of retail investors in equities?

While there is a perception that retail participation is low, we have seen the entry of new investors into both equity and debt schemes of mutual funds.

They are being identified on the basis of the permanent account numbers of investors who don't have folios in mutual funds.

The sector's efforts to expand the market seem to be paying off.

With the improved sentiment towards our country and the mutual fund sector in general, I am extremely bullish on investor participation in capital markets in general, and mutual fund equity schemes in particular.

In September 2012, the Securities and Exchange Board of India announced several reforms. However, the objective of lifting the sentiment in the fund sector hasn't been fully met.

I assume every effort takes time to fructify into result.

As I mentioned earlier, the sector's efforts to build size through various investor education initiatives, including a district adoption programme, have gained momentum.

A series of investor-awareness initiatives are being conducted at the industry level and the individual mutual fund level.

In general, investor sentiment is directly correlated to the economic sentiment.

Now that there's a belief India is coming back in terms of growth, it is only a matter of time before investor participation increases.

This might also be triggered by the prolonged underperformance of assets that have only storage value, such as gold.

One should not be surprised if investors divert their incremental investment to assets such as equity, which allows participation in the country's economic growth.

What is the likely scenario for India's mutual fund sector?

The Indian mutual fund sector might just see one of the best periods of its life-cycle in the next five years.

Today, the sector has surpassed Rs 10 lakh crore (Rs 10 trillion) in AUM, with Rs 2.4 lakh crore (Rs 2.4 trillion) in equity.

With average returns of 22.25 per cent, equity mutual fund schemes have helped investors make decent returns, across equity schemes.

Through the last two years, the sector has kept pace with increasing awareness and connectivity across the country.

This has also been supported by suitable investor-friendly regulatory changes.

One such initiative was expanding the market beyond the top 15 cities.

Overall, we can expect the sector to do well in the years to come.

The Union Budget is expected within a few weeks. Do you expect anything positive for the mutual fund sector?

It is widely believed the Budget will set a trend in terms of a broader vision, with specific steps towards deepening the Indian capital market, especially the equity investment culture.

This is possible by giving the necessary importance to savings through mutual fund schemes.

There are expectations of an increase in the limit under Section 80 C to exclusively invest in equity.

Also, it is expected mutual funds might be allowed to launch pension funds, the equivalent of 401K in the US, to channel long-term savings into the capital market.

Mutual fund managers have established a transparent investment track record and have built a good distribution network, which could potentially make such provisions meaningful for the sector.

AUM growth from B-15 cities has been static for long. Is the sector failing to tap the huge potential outside India's top cities?

Investor pools exist in both T-15 and B-15 markets.

Through the past few years, the increase in wealth in B15 cities has been high due to a rise in land prices, an increase in agricultural incomes and more urbanisation of such cities.

Therefore, the mutual fund sector is focusing on building B-15 market participation.

Every mutual fund has a differentiated strategy for T-15 and B-15 to enhance the market size through various initiatives, including differential pricing for such markets.

We are seeing increased participation from the new set of financial advisors from B-15 markets.

Sebi's higher net worth norm of Rs 50 crore hasn't found favour with many fund houses. Amid this, do you see further consolidation in the fund sector?

Recently, Sebi stipulated a higher net worth for asset management companies, after multiple rounds of debate and discussion.

Discussions on an increase in capital or net worth were held after the 2008 global market crisis.

With only five per cent of the savings coming into the capital market, there is ample scope for players to increase the size of the mutual fund sector.

Therefore, consolidation will be as normal for us as with any other sector.

At the same time, we might even see new players coming into the market, given the size of the opportunity is fairly big.

Image: A Balasubramanian; Photograph, courtesy: Business Standard