The Indian mutual fund industry has turned more debt-oriented, with debt funds (including liquid funds) forming 64 per cent of the AuM. Beset by net redemptions by investors and adverse global and local market conditions, the industry has shrunken by 1.6 per cent in terms of assets under management during the year FY2011-2012, says a report by PwC India.

"As in the past, increased equity participation is the need of the hour for the mutual fund industry," it said.

The benchmark BSE Sensex and the assets under management (AuM) for the mutual fund industry have risen in tandem. Booming markets in 2006 saw increased investor participation in the industry, leading to fund inflows enabling the AuM to grow at a pace greater than the Sensex.

However, volatile market conditions over the past two years have led to net withdrawals by investors to the tune of Rs 49,406 crore in FY2010-11 and Rs 22,023 crore in FY 2011-12, leading to a further drop in AuM, in addition to the drop caused by adverse market movements.

"At present, the industry is facing interesting times. The past few years have seen a series of events, both within and outside the Indian economy, which have impacted the industry. Additionally, investors appear to have adopted a more cautious approach," said Gautam Mehra, leader for asset management at PwC India.

"The present scenario demands vigorous innovation and reinvention. Among others, the purpose may be served by adopting a cluster of key initiatives in the areas of cost efficiency, product design and positioning, alternative distribution models, revenue diversification and capacity creation," he said.