The mutual fund industry today finds itself at a crossroads. The 4% surge in the average assets under management of fund houses for the June quarter may have brought some cheer, but the cloud of uncertainty still weighs heavily on the industry. Market watchers are now pinning their hopes that the government, together with the regulator, will step in to revive the fortunes of the stakeholders concerned.
Consistent regulatory changes over the past few years have put the industry on the back foot, believe experts. The downhill ride for the industry began soon after the entry loads were banned by former Sebi chief CB Bhave in August 2009. The ban dealt a body blow to the distributor community, one of the three main pillars of the MF industry. Following the ban, several independent financial advisers (IFAs) stopped selling mutual fund products altogether and turned to insurance products, which paid a higher commission.
The going has got tougher in the past few quarters as volatile markets have spooked investors and turned them away from equity funds. ?The mutual fund industry has faced a double blow. On the one hand, the push from distributors to sell mutual fund schemes has considerably reduced after the abolition of entry load. On the other hand, there has been little pull from the investor side because of the volatile equities,? says Rajiv Deep Bajaj, VC & MD, Bajaj Capital, a national-level distributor. The BSE Sensex declined by over 10% in FY12.
The numbers paint a dismal picture. India had among the lowest equity assets in its overall AUM among most major Asian economies, according to Ajay Srinivasan, CEO, financial services, Aditya Birla Group. In terms of equity assets, the industry had seen negative net sales of R5,752 crore from FY09 to FY12 compared with positive net sales of R82,600 crore in FY07 and FY08. Folios had shrunk by 17 lakh over the past two years, partly due to consolidation and partly due to exits. ?The combination of macro-economic headwinds, regulatory action and the industry?s inability to adapt to regulatory changes was responsible for the industry woes,? says Srinivasan.
Unsurprisingly, the chorus to bring back entry loads has grown shriller in the past few months. During the recent CII Mutual Fund Summit, Sebi chairman UK Sinha said there had been suggestions to re-introduce the entry load or at least a variable entry-load. However, he hastened to clarify that the re-introduction of entry-load was not being recommended by a majority of the industry players.
?I am not sure if it is feasible to bring back entry loads at this point. Yet, at the same time, the industry has to find a way to adequately compensate the distributors and the independent financial advisors,? says Deepak Chatterjee, CEO, SBI Mutual Fund. ?One of the key issues to solve is the economics for the distributor. Unless a distributor can make a decent return, he is not going to distribute any product,? adds Srinivasan. Bajaj, on his part, suggests that distributors should be able to charge a negotiated advisory fee from investors for the service and advice they provide.
High costs and declining assets have hobbled the industry. While the top three fund houses managed to stay profitable in FY12, the smaller fund houses have been struggling. Some are finding the business unviable. Fidelity, for instance, sold off its asset management business in India to L&T MF, while Mirae Asset is taking a hard look at its MF business in India, say sources. ?Every fund house is grappling with managing costs. It?s a fine balancing act between keeping the costs under control and doing enough promotional activities to attract investors,? says Chatterjee.
A way to get around the problem is to innovate. ?The industry needs to better leverage technology to understand the needs of investors and widen the product base,? says Gautam Mehra, executive director, tax and regulatory services, PwC India. ?The industry needs innovative products. For instance, a product on the debt side can be tailored in such a way that the fund manager can manage the interest rate risk for the investor,? adds Bajaj.
Another concern expressed by some industry participants is the limited reach of the mutual fund industry. According to a recent PwC report Is there a silver lining?, there was a need to increase the penetration of mutual funds as the top five cities contributed over 71% of the total AUM, with Mumbai alone accounting for more than 42%. Industry body Association of Mutual Funds in India (Amfi) is currently in the process of setting up its online platform, MF Utility, by April next year to address this issue. ?We want to reach out to more retail investors by making it convenient for them to invest. The more comfortable they feel, the more keen they will be to invest,? said V Ramesh, deputy CEO, Amfi.
There has been no dearth of suggestions being thrown at market regulator Sebi by various stakeholders. Some of the areas being currently looked at by Sebi include fungibility of the total expense ratio, a single cheque payment for investment and advisory services, and better utilisation of stock exchange and broker networks for sales and distribution of MF products. ?We have been asking for the sub-limits within the total expense ratio limit to be removed so that the overall expense ratio limit can effectively utilised,? says Ramesh.
According to Srinivasan, the need of the hour is to create distribution capacity, educate investors, align product portfolios to changing market situation and customer requirements, balance investment with prudent cost management and manage risks more prudently.
Some experts, however, are of the opinion that too much is being read into the current situation. ?Yes, it?s true that the retail investors have been staying away, particularly from equity funds. But the industry needs to be patient. You can?t have regular inflows year after year,? says Chatterjee.
Dhirendra Kumar, CEO, Value Research, a Delhi-based firm that tracks mutual funds, points out that there are no quick-fix solutions to the current crop of problems the industry finds itself in: ?The industry needs to accept the fact that mutual fund is a seasonal product and the product sales are bound to suffer if the markets don?t perform. The investors will return only if they feel they have enough opportunities to make money.?