MFs to test waters in smaller cities with outsourcing model

Written by Ashley Coutinho | Ashley Coutinho | Mumbai | Updated: Sep 1 2012, 08:05am hrs
Fund houses are likely to focus on the outsourced distribution model in their efforts to reach out to customers beyond the top 15 cities. The aim will be to minimise costs as they test the viability of selling mutual fund products in smaller cities.

For a start, fund houses are likely to focus on strengthening the outsourced distribution model, which already prevails in some form or the other, said Debasish Mallick, MD & CEO, IDBI Asset Management. This model might include using the services of small IFAs or sub agents of the bigger IFAs, besides individual agents and authorised reps (ARs).

Fund houses are likely to use a mix of branch network and authorised representatives to make their presence felt beyond the top 15 cities, said Jimmy Patel, CEO, Quantum Mutual Fund. These ARs may not be on the rolls of the company, but are likely to exclusively sell their products. Firms are likely to use the hub and spoke model rather than going on an overdrive to set up physical branches. AMCs may also make use of agents, who may be CA firms or those selling insurance products.

Market regulator Sebi, in its recent guidelines, had said that it would simplify the distributors registration process and allow postal agents, retired bank and government officials and retired teachers to distribute simple products. Experts believe that fund houses will be keen on tapping these persons to push the MF products.

Firms with a pan-India presence will have an advantage in expanding beyond the top 15 cities, feel industry watchers. Technically, bank-sponsored fund houses will be the biggest beneficiaries. Banks, especially in the private sectors, can better leverage their network to sell MF products in these regions. But what remains to be seen is how PSU banks are able to leverage this advantage, said Patel.

It could take at least a year for the fund houses to establish a viable business model in the smaller towns. According to Patel, identifying, training, motivating and keeping track of the performance of distributors will be a long-drawn process.

A strong CRM system will be needed, especially for big fund houses. The costs involved in training and retraining, besides retention of ARs or agents, could also prove to be a hurdle, he said.

The top five cities contributed over 73% of the total AUM of the MF industry, with Mumbai accounting for more than 44%, according to Amfi. As per Sebis new guidelines, AMCs will be able to charge 30 bps additional expense ratio if the new inflows from beyond the top 15 cities add up to at least 30% of total inflows.