<p>Talks of how to "restore" growth to Indian mutual fund industry have accelerated ever since the Prime Minister Office's showed its keen interest to revive the industry in June this year.
Industry officials are unanimous on the point that lower penetration of mutual fund products, equity products in particular, is increasingly becoming a function of low fees being paid to distributors which is as low as 20-50 basis points, thanks to abolition of entry load in August, 2009.
According to them, this is creating hurdle in reaching out to potential investors in the country and as a result of it barring a select few big names in the fund management industry none is profitable.
Amid this, Quantum Mutual Fund, one of the smallest fund houses in India with an assets under management of barely Rs 200 crore, has bucked the trend and emerged as a profit making house within four years of starting its operations. And interestingly, for the fund house, which has a low-cost-model and is not dependent on distributors to sell its products, there is no look back as it continues to remain in the black.
The seven year old Quantum, founded by Ajit Dayal - former deputy chief investment officer of US-based Hansberger Global Investors; after making losses in the first three years, posted its first time net profit, though a meagre amount, of Rs 0.17 crore in 2009. This only moved north in the following years to Rs 3.47 crore in 2010 and Rs 4.94 crore in 2011. The fund house, which follows July-June accounting year, is all set to post profits in 2012 too.
"Investors are bothered about returns and not costs," says Jimmy Patel, chief executive officer (CEO) of Quantum Mutual Fund. If I charge my investors 25 bps less but give 50 bps higher return or which is comparable with my peers, investors look at me, he adds.
Currently, Quantum has six schemes in its kitty. Four in equity category, two gold funds and one each in hybrid and liquid segment. The much-hyped expense ratio on these products ranges from as low as 25 bps in gold funds to 1.25 per cent in its long term equity fund. This attracts attention as in an active diversified equity fund this is industry's lowest expense ratio.
Over 60 per cent of Quantum’s assets are into equities at around Rs 120 crore. Dhurva Chatterji, senior research analyst at Morningstar India, says, “Higher percentage of equity assets help fund houses and Quantum is benefitting out of it as fees are higher in equity schemes.”
Fund tracking firm, Value Research has given its highest rating to Quantum’s long term equity fund which puts the scheme amid big names of the industry.
"Though mutual fund is still a push product in India but we don't push our products. We erect stalls participate in exhibitions to meet potential customers and communicate to them what is equity investment all about and then send informative and educative articles to customers," explains Patel. After 2-3 months the fund house does a re-check with customers to get feedback and if they show interest one-on-one communication is arranged with them.
"As a result, the investor comes to us and starts in a small way. We have a small ticket-size of Rs 500 for first time investment. Later we ask whether they would like to do systematic investment (SIP) of systematic transfer plan (STP). We found that people start with Rs 500 and then they convert themselves into an SIP or STP and get married to us," he says.
Secondly, we maintain transparency and even we tell investors whenever we do mistakes. "We tell them up-front that invest for a long term else don't come. Moreover, we candidly explain that we do not give fancy returns but returns which are satisfying,” adds CEO.
This is why, Quantum has 4 per cent as exit load if investors move out within 6 months, 3 per cent till a year, 2 per cent till 18 months and one per cent between 18th and 24th months. Interestingly, at a time when suggestions are being floated to re-invest the exit load amount back to the schemes, Quantum has already been doing it which has benefitted the continuing existing customers.
It's a long-drawn-exercise but assures sticky assets to fund house. "Fortunately, after five years we are seeing that inflows," observes Patel.
At a time when industry is witnessing continuous decline in folio numbers, Quantum saw its investor base rise by over five-folds. Moreover, during the last three years when industry saw 10 per cent erosion in assets, Quantum's assets got more than doubled from Rs 92 crore in 2010 to Rs 190 crore in 2012.
According to Chatterji, “Quantum stayed away from distributors and still managed to grow with decent rate as they continue to bank on low cost model. However, such a process takes considerable long time.”
Quantum has its in-house out-bound and in-bound teams which take care of customers and process their queries and applications. In Mumbai, the fund house has put up hundreds of drop boxes too where customers put their filled application forms. It is also trying to replicate this in Pune. Recently, it opened its Chennai office too to cater to the southern part of the country. Majority of its customers are from the West and the South.
However, such a model has its limitations. According to chief marketing officer of large fund house, who requested anonymity, “No doubt, Quantum has successfully managed to sustain its low-cost business model without distributors. Moreover, for a specific limited region or a city such models can be implemented but for a wider market, it may not prove successful. Such a model prevents the fund house from joining the league of rapidly expanding fund houses.”
Independent experts agree. “That is why Quantum’s presence is not much in tier-I or tier II cities and is focused on large cities,” they add.
To address the issue, over the last one year Quantum is aggressive on its online marketing which has now showing results. More than half of the transactions are happening through fund house’s online portal which is quite significant and helping in keeping the costs further low.
“It's a paperless portal where no papers or signatures are to be submitted,” says Patel. Investors can open their folios and can start investment. One just needs to have internet connection and payment gateway attached with your bank or debit card and pre-paid cards too. As of now, 49 banks have been attached with the portal for facilitating transactions.
This is helping the fund house to further cut its costs. But again as in case of the exit load, Quantum is planning to pass on the benefits to its customers.