The Assets Under Management (AUM) with mutual funds could expect a moderate slowdown by the end of this fiscal and may drop below Rs.5 lakh crore, according to the PHD Chamber.

This is on account of a combination of factors such as uncertainty prevailing in the capital market arising out of global slowdown, inflationary pressure in the economy and bleak prospects of revival of the economic reforms process.

At the same time, PHD Chamber’s analysis points out that the AUM of Indian mutual funds have the potential to grow to Rs.15.6 lakh crore by 2012-13, powered by strong economic growth and better distribution. One has only to remove the short term glitches, both domestic and external, in order to regain and sustain the long term growth potential in this sector.

The PHD Chamber analysis shows that the industry’s asset under management has consistently dropped from Rs.5.95 lakh crore in April to Rs.5.88 lakh crore in May and Rs.5.6 lakh crore in June this year. The month of July has yet again witnessed a further drop in AUM to Rs.5.29 lakh crore, which is more than 6 % lower than in the previous month.  One of the reasons attributed to the declining performance in the mutual funds industry is lack of investor support in equity based funds, which have shrunk by nearly a third riding on the back of uncertainty and steep decline in sensex.

The result is that equity fund inflows fell to their lowest in June since August, 2006 and reports suggest that new stock funds have collected just Rs.18.3 billion in the April-June period in fiscal 2009, compared to 63.35 billion rupees in the year-earlier period. The trend in July is no better with investor sentiment remaining weak and investors adopting a ‘wait and watch’ attitude. In the meantime, investors are diverting their money in debt funds causing this segment to register an almost a 50% increase in the last six months. “Yet obviously this switch is not sufficient to compensate for the fall in fund flows in equity based schemes,” says Dr L K Malhotra, President, PHD Chamber.

A market rebound could turn the situation around for the mutual fund industry. But resumption in the Bull Run this year seems far from certain given the tight monetary policy stance of RBI, which recently hiked interest rates to curb high inflation, and ongoing worries about the global economic slowdown and credit crunch. Besides, the political uncertainty in the election year and lack of political consensus on hastening the reforms agenda could further aggravate the problem.

“The revival of mutual fund industry is crucial for wealth creation in the economy. What is more, this industry has the potential to benefit multitudes of small investors who are willing to bear a little risk to make a higher inflation/tax-adjusted return as compared to fixed deposits. Yet to translate this potential into reality, it is important to implement pro-people reforms, particularly in the financial sector which would restore stock market to its previous bull phase and bring back the confidence of investors to put their investible surplus in mutual funds.,” says Dr Malhotra.

Hence, priority should be given to implement the much awaited pension reforms for which the Pension Fund Regulatory and Development Authority (PFRDA) Bill, which allows pension funds to be invested in the stock markets by domestic and foreign fund managers, should be enacted on an urgent basis. Besides, the much awaited insurance Bill – that seeks to raise foreign direct investment from 26% to 49% as also the Banking Regulation amendment Bill deserve special consideration The disinvestment of PSUs would also send a strong signal to the investor regarding the Government’s resolve to hasten the pace of reform.