FE Editorial : New kind of mutual fund

Written by The Financial Express | Updated: Jun 30 2009, 03:28am hrs
Market regulator Sebis decision to scrap entry load for investors on mutual funds seems to have displeased independent financial distributors across the country. Of the 75,000 mutual fund agents certified by Association of the Mutual Funds in India, around 25,000 agents who work independently in small towns have boycotted sales of mutual fund products and are instead pushing unit-linked insurance products where fund houses pay around 30% commission to them. As we argued in these columns, Sebis move will bring more transparency, bring down the cost of investing in mutual funds and attract retail investors, which will help the industry grow. No one is saying independent distributors will be out of business. They could now look at turning into advisers and educate investors on the prospects of a fund and its potential performance by demanding an advisory fee in return. But the prospect of relatively easy money by just selling a scheme will not be there any more and independent distributors will have to ensure that they give worthwhile advice to the investor. Sebi data shows only 4% of investments in mutual funds are through the direct route and the rest rely on distributors. So, the onus now falls on mutual fund companies to educate investors on various schemes and build a sales force that will distribute their products directly.

Mutual fund houses have recorded good business since March. Total assets under management (AUM) for fund houses rose 16% in May as compared to April. But the bulk of the mobilisation is still from corporates and high net worth individuals. In 2007-08, companies and financial institutions accounted for 56.6% of the total AUM and individuals, which include high net worth ones, contributed 37% of the total AUM. In contrast, in the US retail investors contributed 82% of the total AUM. The industry in India also has limited penetration geographically as 90% of the AUM comes from the top 10 cities in the country. KPMG estimates that AUM of mutual funds will grow in the range of 15% to 25% by 2015 and has cautioned that profitability of fund houses will reduce as they will have to focus on low margin products to attract risk-averse investors. Competition is expected to intensify further with the entry of global players in India, which are facing stagnant growth in home markets. So, all this means a new kind of fund distribution business will have to be invented. Those sulking will be left behind.