Welcome to the competitive world of equity selling, which is mainly dominated by distributors. Industry sources say that out of the funds collected by distributors for various mutual funds, almost 60% of the funds are mobilised through people who are not qualified to do so. Mutual funds are offering high distribution fees to garner more funds. Just like an FMCG company, these funds will go to any extent to cut competition.
The average investment per investor in the equity market works out to Rs 30,000 as against Rs 5000 in 2001. Over the last five years, retail investment in the market has moved by a compounded annual growth rate (CAGR) of 43%. Against this, the index for the same period has moved up by 24% and mutual funds assets under management moved up by a CAGR of 18.47% to touch Rs 2,31,856 crore in March 2006.
The success of a mutual fund is directly related to the ability to sell. Mutual funds spend more on promotions so that they can collect more funds. Just like an FMCG company depends on volumes and market shares, the same is the case for selling equity.
Broking houses are also marketing equity to retail investors but they go through the net trading route as the commissions on net trading are higher as compared to traditional trading. In any case, only a fraction of the retail investors have taken the broking route to enter the equity market.
The FMCG industry is admired on three counts, namely distribution, high return on investments and high ratio of converting advertising into sales. These companies which operate on negative working capitals are known to squeeze the distributors. Many industries have learnt a lot from FMCG companies and mutual funds have added a different perspective. Again, many managers from FMCG companies have joined the finance sector, thus getting their expertise and experience into this field.
Says Debasish Mohanty, VP, UTI Mutual Fund, Today we see radical changes in the way FMCG products are sold. Just like it was a major buzz in the last 10 years or so, fast moving financial goods (FMFG) are going to be the growth drivers for the next 10-20 years to come. Big is bountiful today. There will be the emergence of financial hypermarkets, which will cater to all the financial needs of the consumer.
At one level the industry is happy that equity is being sold the FMCG way, but they are absolutely unhappy with the way distributors hold mutual funds to ransom. In a typical FMCG scenario, the companies dominate the distributors who always get paid last. But when it comes to selling equities, distributors see to it that funds are totally dependent on them.
Fund managers are not happy. The average remuneration for mobilising money by distributors has always been high. Mobilising money is more remunerative than managing funds. Again, mobilisers always continue to get trail commission. Marketing managers in mutual funds do not know how to handle the situation.
For any FMCG company to be successful, advertisement forms a major head on the expense front. Advertising costs account for 10% of sales for the FMCG industry. The mutual fund industry is also on the same track. Advertising expenses over the last one year have moved up for the industry by almost 60%. Simultaneously, assets under management have moved up by 55% to touch Rs 2,31,856 crore.
Established mutual funds would have this ratio at a lower rate as their incomes and assets are high. But on absolute terms even they have seen their advertising expenses grow. There is a school of thought that feels that advertising expenses for the mutual fund industry should not be high as the industry needs to thrive on financial advisers to sell the product.
Says Arjun C Marphatia, CEO, Quantum Mutual Fund, Advertising has its role to play in communicating a message, informing and educating the readers /viewers, etc, but unfortunately this has gone overboard and expenses on this activity have increased unnecessarily. There are so many instances where assets are mobilised during a new fund offer (NFO) but these disappear shortly after the closure of the NFO. Various press articles have appeared on the fact that the assets gathered during an NFO diminish by about 50% - in one case 83% - soon after the closure of the NFO.
However, Ajay Bagga, CEO, Lotus India AMC disagrees. He feels that advertisement expenses at present are very small and also feels that the distribution scenario has changed over the last two years. He said, An increasing share is going to large distributors, there is professionalism of the whole distributor chain with certification, and internet-based distribution having taken off. Hence, geographical spread of distributors across top 200 cities has taken place.
Apart from the traditional broker and sub-brokers, banks have become very active and aggressive players in distribution and some professional financial planners have taken to selling mutual funds. The Internet as a medium to distribute mutual funds has increased. However, in the race to gather assets, distribution expenses have gone through the roof, and that too, without any benefit whatsoever to the investor.
Adds Marphatia, Huge amounts are paid as distribution commissions either directly and in various other ways. All these expenses are mostly borne by the investors in a fund and this affects the return to investors.
Mutual funds agree that this is not the way they should be sold as they are services. There is a responsibility to the consumer and there is huge element of financial advisory involved. They have started to prefer banks for selling their products. Banks on the other hand have realised the importance of fee-based income and as fund-based activities get squeezed on account of interest rates and other macro economic reasons, fee-based income has become important.
Says Pankaj Razdan, managing director, Prudential ICICI AMC, There has been an improvement in the quality and the reach of mutual fund distribution with various private and PSU banks entering the fray. The network has also stepped up observance of compliance norms. With more and more banks perceiving mutual fund distribution as a lucrative revenue stream, there has also been an increase in their resource allocation to this business and they have also increased their thrust on quality and training.
Most mutual funds agree that there is a problem in the way mutual funds schemes are being sold. Mutual funds have managed to garner phenomenal corpuses on the back of a bull market. But now, with funds keeping the markets buoyant, every NFO will have to be more responsible.
Taking the FMCG way is great. But mutual fund schemes must remember that they are not use-and-throw products, nor should they be fast moving. And in a dynamic market where every rupee collected will give you an edge to manage funds, it will perhaps come as no surprising if one sees FMCG companies taking lessons from mutual funds in the years to come.