As the mutual fund industry moves into the fifth gear, public sector funds find themselves on the sidelines, looking on longingly at inflows, which are increasingly becoming the preserve of private sector funds.
Private sector funds have shown greater innovation and better service, not to mention superior returns vis-à-vis their public sector counterparts. This explains why private funds witnessed a huge surge in inflows in FY2000. At Rs 146.7 bn, (net) inflows in private funds, account for close to 70% of total inflows in the mutual fund industry.
Compare this to the net outflow of Rs 7.0 bn witnessed by public sector funds (excluding the Unit Trust of India), and one gets a fair idea of how the investor perceives these funds. UTI posted net inflows of Rs 45.5 bn in FY2000.
So what's the secret behind the huge inflows in private funds? Its not really a secret, because the entire mutual fund industry is witness to how private funds operate. Over the years (and particularly in the last year), private funds have developed the knack for doing the right thing at the right time with great speed and alacrity.
For instance, when software stocks were booming a couple of years ago, private funds did not have to be told about the benefits of launching a sectoral infotech fund. And when the first one came out, the other private funds did not have take long to duplicate this move. Now virtually every private fund has an infotech scheme, and some even introduced pharma and FMCG schemes to straddle the value of these stocks.
Similarly, private funds took the initiative in launching balanced funds for the investor who did not want to go all the way with equities. The last year has witnessed most initial public offerings (IPOs) from private funds, with the occasional scheme being launched by UTI.
Another reason why mutual funds in general and private funds in particular have reaped the benefits of large inflows is the superior return being offered by funds as compared to banks. This has seen a shift in inflows from term deposits in banks to mutual fund schemes (particularly in income and government securities funds).
For instance, a query run on the bank deposits section of personalfn.com reveals that only 12 banks offered 10% or more on a 12-month deposit. A similar query run on the mutual fund section highlights the fact that there were over 40 open-ended income schemes offering returns over 10% (some as high as 17.7%).
Moreover, while interest in bank deposits is taxable, interest on mutual fund schemes is tax-free. Also, given the high prices of stocks there has been growing inclination towards equity schemes, as entering an Infosys at over Rs 10,000 is an expensive alternative as compared to entering an equity scheme at Rs 10, at the IPO stage.
But the public funds can't really complain. They had a headstart over private funds, but they frittered away the advantage. They were influenced by the same factors as the private funds, but lagged behind and did not exploit their inherent strengths of a large investor base and vast distribution network.