Do investors need 61 mutual funds?

Wed, 17 Mar Pre-Open

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How many stocks should an investor have in his portfolio? In this famous book 'The Intelligent Investor' published in 1949, Benjamin Graham suggested 30. He opined that adequate diversification can be achieved with 10 to 30 stocks. Though some other money managers claim 15 is sufficient, others say the number is 30 stocks. However, most agree that the benefit of risk and volatility reduction peaks around 20 to 30 stocks.

Leave aside stocks, what does an investor do when he has 5 dozen mutual funds to choose from? Alas the Indian mutual fund industry seems to be going by the maxim- 'the more the merrier'.

Currently just about 7.6% of India's savings is invested in equities and mutual funds. 80% of the investors hail from metros and Tier I cities. As against this, nearly half of the Indian population invests in bank deposits. The latter comprises 57% of the nation's savings. It thus seems appalling that the mutual fund regulator in India is seeking to register 23 new applicants in the over-crowded sector already accommodating more than 3 dozen members.

The combined average asset under management of the 37 fund houses currently operating in India stood at Rs 7.6 trillion at the end of January 2010. This data from the Association of Mutual Funds in India suggests that of every Rs 100 of the country's GDP, Rs 14 is being invested in mutual funds. There is therefore very little logic for mutual fund investors to seek other options unless the new funds offer much higher returns or more preservation of capital or lower cost of asset management.

But most importantly, none of the new mutual fund applicants seem to have reasonable experience in managing retail assets. This stacks the odds against them. While banks like Axis Bank, Union Bank and IDBI Bank may claim to have the formula for replicating HDFC's or SBI's success in asset management, they may get it wrong. Engineering company L&T and steel manufacturer Jaypee have a lot to learn lest they lose their reputation and investors' money in managing equities. Brokers like India Infoline, Prime Securities, Karvy, ASK and Reliance Money have obvious reasons to get the mutual fund license. The faster the funds' portfolios are churned, the more money the broking arm will make!

Therefore it is not too difficult to figure out why players in Indian financial markets are trying to rake in all the possible licenses – be it in banking or asset management. While some of them may succeed in putting their funds to better use and multiplying shareholder wealth, others may fail miserably. It is therefore upon the regulators to get more cautious. It is for the SEBI to question whether 61 mutual funds will make diversification easier for Indian investors.