India was never a home for equity investors. At least long-term investing in equities was never a much talked about thing. Thanks to the closed economy and licence raj, the private sector had more binds than triggers to grow. The equity cult survived in India more in the few wealthy investors and a handful of communities. Barring exceptions like Reliance Industries or Vimal, the retail participation in equities remained far from noteworthy.
Things, however, changed post liberalisation. The interest in equities considerably went up. But the securities scam, allegedly engineered by Harshad Mehta, showed the ugly side of the business to retail investors. However, things changed as the public sector mutual funds followed by the private sector mutual funds entered the markets. Mutual funds offered a taste of high returns to the investing community in debt funds when the rates were going down. Double-digit returns were offered when the banks were offering single digit, making the investors flock to invest in debt funds.
Equities are no exception. Over a period of ten years Indian equity markets have seen some shocks. The dot com bust- ICE meltdown, the Ketan Parekh scam and the May 2005 crash were some of the shocks.
However, over a period of time, especially since 2003, the mutual fund assets are on growth spree, barring a few exceptions. Many retail investors, through the mutual funds, enjoyed the bull-run in equity markets.
Currently, though the overall equity participation is capped below 4% of total investible surplus of Indian public, there is certainly improvement on this front. One must give substantial credit to the mutual fund industry for this increasing participation. The regulatory framework has ensured many positives in both the capital market and the mutual fund industry.
All this discussion is done in the backdrop of the recent proposal on waiver of load for direct applications in mutual fund schemes. Sebi has proposed that there should be no entry load on the investments made through direct applications. Direct applications here mean the applications the asset management company (AMC) receives through Internet or at a collection centre or at a customer service centre.
The regulator has observed that the entry load is normally used towards paying the distributors who bring the investments to the AMC their rewards- commissions. As direct investments do not involve any distributor there is no need to charge entry load as such and we second the regulator?s stand.
The Indian mutual fund industry operates on the ?distributor-driven business? model. The distributors have played a crucial role in the increased popularity of the mutual fund products in the minds of the investing public in India. Especially in the initial years the distributors have made significant efforts to take the products to the individual investor by offering doorstep services.
Even today the contribution of direct channel to the overall investments in the mutual fund is very low. Investors still prefer either to avail of the advice of the mutual fund distributors or want the services rendered by the distributors. And hence there is a need of distributors in the systems.
However, there is a small segment in the economy that is growing at a rapid pace, which does not need any distributor while investing in a mutual fund. There exists a rising awareness about fund schemes. Media is also taking initiatives in educating the investing public. There are web portals that offer the best performer mutual fund schemes in various categories. Information is flowing in, and more importantly, is available at no extra cost.
The ?direct? channel of investment makes sense to those people who can make an informed decision taking into account all these data. This primarily saves an average 2.25% of the invested amount which otherwise goes to the fund. In other words, the returns get a boost. There is growing influence of certified financial planners in the market and they charge fees from the client for the advice and are little dependent on the mutual funds for the compensation.
There are some schemes that have been delivering more than the benchmark indices. There is a set of investors who have been investing in these schemes for a long period of time and won?t mind investing directly in these schemes.
In the wake of this it makes larger sense to waive off the entry load if the investors are investing directly. This has some benefits for the mutual fund industry too. If there are incentives in terms of no entry load, there will be more people investing into the fund directly and this will ensure that the mutual funds will depend less on the sole distribution channel – agency.
The alleged distributor-driven churn in the funds? assets will automatically go down. This will ensure that the let down image of the distributors will certainly improve as malpractices go down.
The above initiative is beneficial for both the investor and the fund industry. The regulator has asked for comments on this issue before September 12, 2007.
The initiative taken by Sebi is welcome and it should not, however, stop here. There is a need to make it mandatory for all mutual fund houses to offer a ?direct? window to the investors. Online investing, using various channels like fund websites, Internet banking and investment using credit cards, should be included in this ?direct? route. More importantly, the fund houses must be instructed to make a mandatory mention of this availability of direct route on all its sales and promotion material. Safeguarding the investor interests will ultimately conserve the mutual fund industry interests in the long run.
