FALL in Mutual Fund Folios - FACT or FICTION

MF industry sees folio closure of over 8 lakh accounts in Mar-Jul - The Economic Times

Equity MF folios dwindle in June - Financialexpress.com

In the last couple of weeks I have been repeatedly seeing this headline popping out…blogs, news agencies, I guess are just copying the main headline rephrasing the lines and publishing this story.

I just want to know has anybody gone deeper to see what is happening. Mutual Fund houses are crying out loud saying that we are losing folios, our corpus is dwindling we are facing huge redemption pressures.

The typical answer I get in the news paper for the above problem is investors are redeeming like crazy. They were just waiting for the capital to be on par. Another reason what I got to hear is MF distributors  are no longer interested in selling MF units, as fund houses have restrictions in paying commissions. The result is dwindling corpus as well as the redeemed folio’s have not entered the markets.

For the Inquisitive Investor…

Now let’s sit and analyze since we are from the Inquisitive Investors Tribe and anything what we hear or read we don’t take it at face value we wish to go deeper. After reading a couple of reports here and there I am going to lay down some facts and then my analysis on the subject.

First of all don’t mix or never ever make the mistake of thinking that corpus and investor and folio’s means one and the same. Corpus/AUM is the entire funds the Mutual Fund Company holds. As far as an MF’s are concerned they are only bothered about CORPUS the more they get the happier they are and obviously more profits. They are not bothered whether they get 100 Cr from 10 investors or from 1 investor so folio’s are immaterial to them as long as there is fund/corpus inflow.

Secondly anytime u make a fresh investment u get allotted a folio, for the last so many years investors nor the distribution agents thought it necessary to mention the folio numbers while making an additional investment (it could have made their job so much easier) into the same fund house. The awareness has started only now and I don’t think most of them are still following it.

Example I have an investment in DSP BR Top 100 Fund the folio allotted is 36589/20, after three months because of the fund performance is good I decide to make another investment. The Relationship Manager of XYZ Financial services advices me to invest in DSP BR Small & Mid Cap fund as it is doing much better. So what do I do I sign the application form he fills it up with the details already available with him. What happens I get allotted another folio number 25699/21. As far as I am concerned I have invested in DSP BlackRock. For the fund house they have 2 folio’s but a single investor. Every time when people make investments like this additional folios are created so over a period of last so many years millions of folios would have been created. Imagine HNI’s investing every time they have 50,000 or a Lak to invest if they have been investing for the last 4 years I am sure he would have had at least 200 folio numbers which is not a big thing as the distributors have softwares that consolidates the report and send to him but for the Mutual fund House they have created laks of Folio’s.

Now coming back to facts; these are excerpts I have pulled out from various financial papers.

“Two of the largest fund houses, in terms of assets and investor base, UTI Mutual Fund and Reliance Mutual Fund have lost 1.65 lakh equity folios each over the past four months, though they have added folios in the fixed income segment in the period.”

My question is how many folios have they added in debt. 2008 and 2009 saw huge redemptions in Equity funds I agree, but what about switches into to debt funds…tell me how many debt folios have been added. I never get that information; why because MF players are always crying about their losses not what they make. Another thing is 70% of MF Industry corpus is Debt not Equity… so if they don’t tell you what is their debt folio size how do u make an informed decision.

“Equity asset base of SBI Mutual Fund declined by over 77,487 folios; Tata Mutual’s equity base fell by 76,546 folios during the considered period. Small fund houses, such as JP Morgan and AIG Global, have lost higher number of folios as a percentage to their total folio base in March”

“Fund houses that have witnessed a positive increase in equity folios are HDFC Mutual Fund (by over one lakh folios), Axis Mutual ( over 16,000 folios), DSP Blackrock ( 41,000 plus folios) and Baroda Pioneer Mutual Fund ( 5,000 plus folios”).

My question is why everyone is talking about equity when 2008 and 2009 and even 2010 to some extent have seen huge debt sales and two what is the net redemption and purchase in the Industry don’t just give redemptions how will we come to an informed decision without knowing about net additional purchase.

“According to data from Association of Mutual Funds in India (Amfi), total equity folios stood at 4.05 crore in June as compared to 4.07 crore in May. However, total folios (including debt and others ) saw a marginal increase of over 21,300 and was at 4.7 crore in June with most new folios coming into debt schemes”.

Now let me show you how the corpus have grown over the last so many quarters from Jan 2008 according to the most people the peak to Sep 2010 the worst period in history of the MF Industry. It is pretty evident from the chart that the MF industry has down roaring business for the last year.

Proof;

Fund houses' profit climbs 3 times in entry load-free year - Economic Times, 5 OCT 2010.

The article mentions that the total earnings of the 41 fund houses in India rose 284% to a record high of ₹ 935.6 Cr in the fiscal year ended March 2010,

“In fiscal 2009, Indian asset management companies reported a profit of Rs 243.5 crore. The list of the most-profitable fund houses was led by Reliance Asset Management Company , followed by HDFC AMC, UTI AMC, ICICI Prudential AMC and Birla Sunlife AMC in that order”. 

So now you understood how the news statements can misguide you… the story is not over here I am also going to give my own set of reasons for the decrease in the folio’s and I am open to discussion on the reasons mentioned.

Reason1: The period March07 to March08 saw atleast 60 new schemes launched, the maximum number in any fiscal year. Investors and clients were pushed to the limit to get additional business for the NFO’s. Fund houses used to provide incentives in the range of 3-5% for business done in the NFO’s hence you can imagine the amount of additional folio’s that were created at that time.

Reason2: A majority of NFO’s were witnessed in theme based funds focusing majorly on Infrastructure. Infrastructure was one of the worst performing sector in 2008 and stocks in reality fell by more than 80%. When markets started recovering in 2010 clients were requested to realign their portfolios and exit the Infra and other theme based funds. Since infra funds were underperforming and to create more business MF Agents were redeeming client holdings in these funds and investing into Debt funds (FMP’s, Income Funds, MIP’s).

Reason3: Awareness among the distribution industry that if single folio is maintained clients can view their entire statements from CAMS itself and get a better picture of their holdings. So investors started requesting for consolidated holdings and consolidating their folio’s. Distribution companies and other MF advisory firms to woo more customers started proposing portfolio clean up as a part of client relationship building.

I am not saying investors have not redeemed, but the amount of redemption has been compensated well enough in fresh flows to the debt segment. My only advice is the report that said folio’s have fallen by huge numbers is just a misnomer. Clients have realigned their portfolio’s, clients are consolidating their portfolio’s moreover clients have switched to debt funds and MIP’s. By concealing some facts the media has led us to believe that there is huge redemptions and MF houses are in losses.  

"In my opinion if you need to actually find out the number of investors who have entered or exited over the past 3 years the best way is to calculate thru PAN numbers"

PAN cannot be tampered with so much and hence the number of unique investors can be assessed thru the PAN number.