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FDI in mutual funds. Good or bad?
Fri, 4 Mar Pre-Open

The Finance Minister, Mr. Pranab Mukherjee, presented the Union Budget 2011-2012 this Monday. One of the key areas of focus is the development of the equity markets. With this in mind, he has proposed to allow foreign investors to invest directly in the Indian mutual funds.

To most it would appear that the mutual funds should be partying like crazy after hearing this news. After all, which fund would not want to see their assets under management (AUM) grow? But most of the mutual funds are wary with regards to this proposal.

While there are several reasons for this. One of the key reasons is lack of clarity regarding the rules of investment. While the proposal has been tabled, the rules related to the foreign investments in domestic mutual funds have not yet been decided. Knowing history, it is quite doubtful that these rules would allow ease of investments.

Another big reason is that most mutual funds see their costs going up if they were to market their funds abroad. Indian fund companies would face the difficult and expensive task of marketing their products to foreign investors as well as to service these customers. Moreover, the domestic companies would also face severe competition in this space. There are already several India-focused funds launched by the foreign fund houses. The domestic funds would need to compete with these in addition to their domestic peers.

One big reason why it may not attract the kind of funds that are being envisaged is that most of the foreign funds are professional investors. Therefore, why would they look at investing into another mutual fund instead of going ahead and picking up the stocks directly? One might argue that the proposal maybe targeted at the retail investors. While they maybe attracted towards using the mutual fund route to invest in the Indian markets. However, they would not have the huge corpuses that would make servicing them feasible for the domestic fund companies.

As a result all fund houses, both domestic as well as foreign, are quite skeptical about the budget proposal. It may not lead to the huge flood of investments as many are making it out to be. The government would have to clarify on the rules and regulations, before this happens. And even if the rules are lenient, the costs and the competition involved may not make the foreign participation lucrative enough for the fund companies to pursue.

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Equitymaster requests your view! Post a comment on "FDI in mutual funds. Good or bad?". Click here!

1 Responses to "FDI in mutual funds. Good or bad?"

ANil

Mar 3, 2011

3. Boon for real estate companies.
come up with IPOs and then the real estate AUMs buying the corpus...
Reason: cash crunched real estate companies got one more route to keep the prices high nce again.
Its a wait and watch game.

2. And also keeping a watch on thematic funds.

3. Definetly this is not aimed at retail or professional investors abroad. They may be big shot investors directly from Halloween party with thier masks (written 'F''D' 'I' all over it) on. Moreover, may i bet that they have understod and digested the FDI investment specifications with thier financial geniuses who accompanied with them in the party.

FDI investment should be a Pure may i say AUthentic like investments in retail, conventional industries which builds a good book value creating stability for people who work there (employment) which fulfills or Innovates to fulfill a specific larger need.

I may be worried this can be a Las Vegas(the India mutula fund industry) for the big players.

Nothing wrong in worrying...at the end of the day its investments ......more of DOnts than the Dos....

Regards,
Anil



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