NEW DELHI - Private sector mutual funds are likely to outperform state-owned funds for the sixth consecutive year, accounting for over 78 percent of the mutual fund market till May 31, says a report.

“The market share of PSU mutual funds in the overall aggregate AUM (assets under management) has fallen sharply from 71.77 percent to 21.59 percent during the period between years 2000 and 2009,” according to a survey by brokerage firm SMC Capitals.

Fortunes of state funds fell rapidly, with majority of the market share being lost during 2000-03. From a 71.77 percent share with Rs.71,290 crore of AUM in 2000, their share fell to just 23.84 percent with Rs.33,404 crore of AUM in 2003.

This year, state funds have about Rs.138,013 crore under management, while private mutual funds have Rs.501,117 crore till May 31.

“The splitting of UTI (Unit Trust of India) in the year 2003 has really changed the shape of the Indian mutual fund industry significantly in favour of private sector,” said the report.

“The UTI fraud, which happened in 2003, was a blow to the already flagging market share of PSU funds. UTI was split and about Rs.31,000 crore was removed from the AUM,” said SMC Capitals equity head Jagannadham Thunuguntla.

According to him, state funds, which are primarily owned by banks with huge distribution channels, failed to capitalise on this strength, while private entrants were more aggressive and concentrated on increasing their reach by tying up with third-party distributors.

“Any mutual fund person will tell you that distribution is the key to a mutual fund’s success. PSU funds failed to utilise their existing huge branch network. Private companies were more aggressive and built an efficient distribution system,” said Thunuguntla.

But all is not lost for state-owned funds. With the Securities and Exchange Board of India (SEBI) prohibiting mutual funds to levy an entry fee on investments, the private companies may find it difficult to maintain the same margins.

“PSU funds on the other hand, can utilise their internal distribution network (branches) and exploit this opportunity,” said Thunuguntla.