FDI in mutual funds. Good or bad?

Fri, 4 Mar Pre-Open

   Previous Close   

   09:30 am   

   11:30 am   

   01:30 pm   

   Closing   

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.