 
Prashant
Jain ANOOP
BHASKER RITESH
JAIN |
The future of New Funds
MAHALAKSHMI: The other major problem with NFOs is that they spawn excessive churning, which affects investors. In several new funds, what has been observed is that when the schemes opened for sales and purchases after the initial launch period, significant money flowed out. Have you done anything to streamline distributors or say ‘No’ to the distributors who indulge in excessive churning?
SAMEER: Well, who is going to penalise the fund house that launches funds quarter over quarter, year after year? We have done a study internally and found that there is the relationship between the funds that have launched a large number of NFOs and their ability to retain their assets is completely inverse. A lot of work needs to be done with regards to distributors. I believe if we keep the investor as our sole focus, something good will definitely come out of it. Till the time commercial considerations remain the top priority, we will continue to see the same situation. I think one of the ways out of this conundrum is to look at reducing the upfront that a distributor makes. I would prefer a system where you have a higher trail or retention. As Abhay said, the cost of acquiring a customer is quite high and if he were to move out or churn the portfolio in a very short time, it is actually a loss to us. So, what is desirable is a system where if an investor stays for a fairly long time horizon, the fund house should actually make it worth a while rather than a quick fire strategy of just paying something upfront and then forgetting about the whole deal. INITIAL EXPENSES MAHALAKSHMI: How much ever one may talk about the myth of par value or the financial literacy rather the lack of it being the main driver of new fund launches, the real reason, as all of us know, is that with new funds were allowed to amortise initial issue expenses of up to six per cent over a period of five years (see detailed story on page 22). Over the past one and a half years, around Rs 3,000 crore has been charged as initial issue expenses, obviously borne by investors, and this is going to hurt investors over the next five years. With the new Sebi regulations, if one thought this menace will come to an end, it does not seem so. The NFO rush continues in its closed-end avatar now. It is worse because these so-called close-end funds allow weekly and monthly exits. So, the reality is that while funds seem to be adhering to the rules, they aren’t keeping the spirit.... ABHAY: Well, there is a good new fund right now from Principal which will invest in emerging markets. By changing the six per cent amortisation the Sebi is forcing people to take a relook. You know the Newton’s third law: ‘A body continues to be in a state of rest or motion unless acted upon by an unbalanced force’. In this case, the unbalanced force – the Sebi – took a little more time to act. Well, there was a specific reason behind the idea of having a close-end fund, but if one tries to make that a monthly or a weekly option under the garb of liquidity, I don’t think it makes much of a sense. It is a short-term measure, and nobody, over the long term, will take that very well. MAHALAKSHMI: Dhiren, your take on the new regulation to end the problem. Has it, contrarily, magnified the problem? DHIRENDRA: It’s about attitude. When a whole spate of close-end funds came out all these years, nobody really thought about it. But now suddenly, after the rules got changed, everybody has started inventing product ideas only in the close-end structure. This is simply because it allows you to spend money in it – and you can do that conveniently. The close-end structure has the merit of giving the fund manager a very clear premise to plan his portfolio. But in the current structure, it could be injurious. If someone builds a portfolio in a close-end structure, which is a one-way street – half closed, then the fund manager is forced to sell what can be sold at any given point. So, what is left of the portfolio will be simply garbage or rubbish and the most patient investor will suffer the most. We are trying to create a close-end structure for the long-term investor and you end up with garbage. GOVIND: Okay, now I would ask you to give us a quick, one-minute wrap-up in the context of what you see happening either in terms of new products or new market initiatives.... MAHALAKSHMI: ...just to add to that, now that the Sebi has allowed capital guarantee scheme and investing in real estate and gold funds and there are a lot of opportunities to invest in markets abroad, do you really see the NFO market changing dramatically? Do we see more product innovations, structured products etc and a moving away from this flurry of equity fund launches – of look-alike funds? ABHAY: I think, all said and done, the way the market has evolved is pretty good – both in terms of transparency and regulation. Also, I agree with you and say even two years down the line, you will definitely see a whole set of different issues, not the existing ones. VED PRAKASH: I would say dramatic changes have happened in the last five years, and dramatic changes will happen in the next five years too. NFO as a product innovation tool will continue to remain a fact of life for some time to come. I guess the industry will be more careful in positioning new products in the market. DHIRENDRA: Yes, the glass is half full, not half empty. We have come a long way, in 15 years. Today, the Indian investor has a choice – he isn’t deprived of any key feature or a product that will help him achieve his goals. SAMEER: The future is really exciting for the Indian investor. We have, uptill now, done only an asset allocation between equity funds and fixed income funds. Now, the regulator has allowed real estate funds, commodity funds, gold ETFs, international offerings and capital guarantee funds, which means there will be scope for better asset allocation for retail investors. The advice to investors would again be not to invest in NFOs if they don’t see any differentiating factors. SANDESH: I see a massive explosion for the asset management business, going forward. We are really going to see domestic investors participating in global assets and global markets. NAGANATH: Currently, the top ten cities account for about 80-85 per cent of the domestic mutual fund industry’s total assets, and as banks expand rapidly and many distributors establish their national footprints as opposed to regional focus, I think we are going to see a lot more penetration into smaller towns and cities, which should obviously add to the growth of the whole industry. GOVIND: Okay, on behalf of Mahalakshmi and myself, and Business Standard, thank you all very much for joining this interesting discussion.• HOME Business Standard • FUND MANAGER • October 2006 |
SANDESH:
It is a good point. I think, from the manufacturer’s perspective,
the industry has taken an initiative in introducing an exit load.
Still, you need to understand that the customer ownership in this
business remains with the distributor. All that the manufacturer
probably can do is penalise him if he has to get out. Beyond that,
I don’t think we, as manufacturers, can do anything.