Assets hit record high: Why fund industry can't rejoice

This means that the Indian mutual fund industry has been serving as a largely quasi-banking industry rather than an actual investment manager.

An article in Business Today quotes a mutual fund distributor who says he is facing difficulty in asking clients to hold on to their equity fund units as they believe “they would have earned more had they kept the same money in fixed deposits”.

Indeed, over the past year, as the markets rebounded, equity funds witnessed outflows for several months straight, according to data released by industry data Association of Mutual Fund Industry.

While the fact is that Indian equity markets have poorly rewarded investors in the past six years -- the benchmark Sensex is still below where it was in January 2008 peak -- the mutual fund industry did not do itself any favours by resorting to pushy sales tactics at the height of the market boom, getting in irrational, eager investors just when they should have stayed away.

Six years after the market returning about zero percent, and with a large chunk of equity funds under-performing even the market, equity investors have understandably fled.

And with the market regulator banning entry load (or commissions that distributors earned while selling a fund) in a bid to clamp down on mis-selling, coupled with a decision to introduce cheaper, direct plans of all schemes that one can could buy directly from the company instead of via a distributor means the distribution business -- the workforce on the ground that sells mutual funds -- could be headed for extinction, if a report by fund tracker Value Research is anything to go by.

So even as assets have hit a record high, a complete lack of interest in equity funds (the higher margin products), poor performance of the stock market and a depleting distributor force means the Indian mutual fund industry has much to worry about.