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| Is the business model of mutual funds flawed? |
| Business Standard / New Delhi Sep 02, 2009, 00:16 IST |
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The Reserve Bank of India has pointed out that mutual funds remain very dependent upon institutional funds and have had limited success in the retail market.
 D R Dogra
MD & CEO
Credit Analysis & Research Ltd
Mutual funds have been facing significant challenges in recent times. In 2008-09, about half of the existing Asset Management Companies (AMC) are believed to have posted losses. Over four lakh Systematic Investment Plan (SIP) accounts have been closed over the last four months. A key challenge will be to sustain interest of distributors in the wake of recent regulatory stipulations that have done away with the entry load charged by mutual funds. Compensatory arrangements may come into play and this could put further pressure on industry players.
Given this, the RBI has raised some important issues like the inadequacies in penetration, the structure of fund mobilisation and consolidation. Only about 4 to 5 per cent of national household savings are diverted towards mutual funds. Assets Under Management (AUM) comprise about 5 per cent of GDP in comparison to 70 per cent in the US, 61 per cent in France and 37 per cent in Brazil. If we look at the number of households covered, it is about 7-8 per cent in India vis-à-vis 50 per cent in the US and 17 per cent in the UK. If we look at metros vis-a-vis smaller urban, semi-urban and rural areas, we find penetration skewed towards the metros. Despite 45 years of being in the business, certain significant factors constrain the expansion of the mutual fund sector.
While some things are beyond the control of the AMCs, some part of the problem may be due to the large dependence on institutional funds or funds of companies and financial institutions — about 55 per cent of the corpus of mutual funds are sourced from institutional funds. The popular perception of risk against lending to industry has made banks park surplus cash with mutual funds. The banking sector has invested Rs 1,36,619 crore in mutual funds (July-end, 2009). The prevailing structure has meant that much of the funds mobilised have a short-term perspective. Given this, the AMCs need to refocus on the retail segment by investing more significantly in their distribution network. Also, the share of equity-oriented schemes is presently less than 25 per per cent of the total assets — this needs to be increased in order to improve penetration in the retail segment.
Care should be taken to protect investors’ choice. Entry barriers to newer entrants could significantly increase due to increased costs of competing with stronger incumbents. In a country like India with low penetration, improved investor choice of products becomes crucial. At the same time, uncontrolled proliferation of schemes should also be checked.
Regulatory measures to protect investors’ rights are justified and so AMCs need to look at measures pertaining to better money-management, reduce dependence on the current system of third-party distributors and reassess their current product profile for better expansion and sustenance of business in the long run — some possibilities include introducing loyalty-based incentive programmes, adopting the Australian model of Independent Financial Agents (IFA), etc.
For an efficient and stable business system, in the long run, a more balanced fund structure from retail and institutional sources along with an increase in equity-linked schemes is necessary. This, of course, has to have a supportive policy environment of incentives to improve penetration. Under the present circumstances, revisiting of the existing business model would greatly help in the expansion of the mutual funds sector in the country.
 Sundeep Sikka
CEO
Reliance Mutual Fund The RBI’s conclusion that the mutual fund industry has not done enough to penetrate the market is compelling. But at the same time, such an interpretation does not give due credit to the effort the industry has made over the last 15 years. The heterogeneity of the population presents a marketing and penetration challenge for even the most basic of products and services — toothpaste has a penetration of under 20 per cent. For a mutual fund, there are additional challenges like illiteracy, predominance of cash-transactions, attitudinal issues towards money and its investment and, of course, complete lack of knowledge of mutual funds as a concept. Despite this, mutual funds have managed to reach most A, B and C class towns in the country. Every year, over one crore new folios get added to the industry!
The industry is partly to blame for this perception since the benchmark we use to measure growth is Assets Under Management — though an important barometer, it does not fully define the industry’s growth. Over the last decade, the industry has undertaken many initiatives to increase penetration and the reach of mutual funds since that is the only way to survive and grow. The essence of financial management is to spread the risk over a larger number of people, so getting in more investors is not a matter of choice, it is a matter of necessity. However, in the absence of a uniform data dissemination and collation system, such developments often go unnoticed and lead to a myopic view of the industry. Some of these things we have done are listed below — and keep in mind that we are a regulated industry and have to follow procedures like KYC and PAN:
Addition of 10 million folios every year from 2005 to 2008, taking up the total to 48 million folios as of today;
A network of 95,000 empanelled AMFI-certified Independent Financial Advisors who are present in over 8,000 PIN codes across the length and breadth of the country;
To further enhance the distribution reach, the industry has leveraged the presence of public sector banks and post offices to reach out to a larger audience of retail investors;
Almost 2,000 touch points by way of AMC branches and R&T service centers have been created in the last 3 years. A majority of these centers are from Tier-II & Tier-III cities;
The introduction of Systematic Investment Plans (SIPs) has helped facilitate a greater retail and rural penetration. The SIP movement has grown from two lakh SIPs to 35 lakh in a very short span of time with approximately Rs 8,500 crore of Indian household savings coming into capital markets through mutual fund SIPs.
Substantial initiatives have been made by the industry to enhance distributors’ and investors’ awareness for mutual funds — several AMCs have started in-house academies, which are focusing on improving investor and distributor education. And the scope for increasing the number of customers is tremendous — we have over 30 crore bank accounts and more than 40 crore mobile connections but just four crore mutual fund investors. Recent studies have shown that the assets of mutual fund industry could triple by 2014 helped by faster growth in the profitable retail segment.
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