Mutual Fund Industry (India) Update

CRISIL reports that fund flows into mutual funds in recent months, have shown a strong correlation to performance and size of fund houses. Large fund houses, with a large number of better performing funds in line with the CRISIL Composite Performance Ranking (CPR) of mutual funds are attracting higher inflows. The Indian mutual fund industry's average assets under management (AAUM) grew for the third month in succession and stood at Rs. 5.02 trillion in February 2009 as compared to Rs. 4.62 trillion in January 2009. The AAUM crossed the Rs. 5 trillion milestone in February 2009 for the first time after it dipped below this level in October 2008.

According to Krishnan Sitaraman, Head – CRISIL FundServices, "The top three fund houses, which recorded the highest increase in absolute AAUM over January and February 2009 have a large number of funds which fall in the CRISIL~CPR 1 (very good) and CRISIL~CPR 2 (good) ranking clusters and are large in size." These included Birla Sun Life Mutual Fund (11 funds of which were ranked CRISIL~CPR 1 or CRISIL~CPR 2), ICICI Prudential Mutual Fund (8 funds ranked CRISIL~CPR 1 or CRISIL~CPR 2) and Reliance Capital Mutual Fund (10 funds ranked CRISIL~CPR 1 or CRISIL~CPR 2).

Size appears to be a key factor determining choice, with large fund houses recording higher net inflows as compared to the relatively small ones, a number of which have seen lower inflows, if not net outflows.

Added Krishnan, "With equity markets still volatile, and the economic climate uncertain, the AAUM growth currently is driven mainly by debt and liquid funds. Corporate bond yields fell in February 2009 and in such an environment, debt funds held an edge with respect to returns."

In absolute terms, mutual funds received net inflows of Rs. 340 billion in February 2009 as against Rs. 668 billion in January 2009. Income funds continued to receive the largest share of net inflows (Rs. 199 billion) followed by liquid funds (Rs. 149 billion). Gilt funds witnessed net outflows (Rs. 5 billion) for the first time since November 2008 as G-Sec yields rose in February 2009 adversely impacting returns from these funds. Equity funds witnessed marginal net inflows of Rs. 4 billion, a majority of which were in Equity Linked Savings Schemes (ELSS) as they constitute a tax-planning instrument.

The share of debt funds (income, gilt and liquid) in the Indian mutual funds universe has risen from 62 per cent a year ago (February 2008) to 77 per cent in February 2009 indicating a shift in investor preference towards debt funds due to the change in market dynamics.

Ranjan Varma
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