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Reforms, markets help MFs rake in large inflows

Mar 1, 2000

The mutual fund (MF) industry was among the biggest beneficiaries of Yashwant Sinha's last budget. The move to make dividends tax-free in the hands of investors was the starting point for the scramble to invest in MFs. Then followed the reforms that drew more investors to MFs. Some of the more significant moves that benefited the MF industry were the cheque writing facility advanced to unit holders. Taking a cue from their counterparts in western countries, some MFs introduced cheque writing facility by allowing unit holders to issue cheques against a savings account in a designated bank.

Then the Reserve Bank of India (RBI) permitted MFs to undertake forward rate agreement (FRA)/interest rate swaps (IRS) with banks, primary dealers and financial institutions for hedging their balance sheet risks.

However, the most significant development that boosted inflows in MFs was undoubtedly the robust performance of the stock markets. The rally was first led by the 'golden triangle' sectors (IT, pharma, FMCG) and then by IT and media. As these stocks got overheated (read overpriced), retail investors turned to MFs to channelise their investments in IT and other technology-driven companies.

Taking a cue from the avid interest shown by investors in pharma/FMCG/IT stocks, fund managers launched sector-specific funds in a big way to ride the growth in these sectors. Technology/e-commerce funds have now become the order of the day and every other private fund (as also some public funds) has an IT-dedicated fund. Even UTI and SBI MF have reaped the benefits of IT funds. UTI in particular witnessed a dramatic turnaround in its fortunes as its exposure to IT crossed the US$ 1 bn mark. Then P S Subramanyam, UTI chairman had remarked, 'We might have entered a bit late, but we have entered big.'

Resource Mobilisation by Mutual Funds

  April-December 1999
(Rs bn) Pvt. sector Pub. sector   UTI  Total
Gross inflows 245.8 17.3 96.1 359.1
Repurchase/Redemption 155.1 24.7 57.4 237.2
Net inflows / (outflows) 90.6 (7.4) 38.6 121.9

Private sector MFs have shown the way by posting net inflows of Rs 90.6 bn over the period April-December 1999. Over the same period, public sector funds have posted net outflows of Rs 7.3 bn. This highlights the inclination of the MF investor, who has got increasingly disenchanted with public funds and has turned to private funds that have impressed him with excellent returns and a high level of customer service.

Source: Economic Survey 2000, Ministry of Finance


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