'Survival of new and smaller players is under threat'

Q&A: Sundeep Sikka

After the ban on entry load on equity schemes took effect from August 1, the Rs 7.5 lakh crore domestic mutual fund industry is feeling the pinch. In this paradigm shift, several smaller players are finding it difficult to remain in business. Sundeep Sikka, chief executive officer of Reliance Mutual Fund, the country’s largest MF house, talks to Chandan Kishore Kant on the scenario. Excerpts:

How has been the journey since the abolishment of entry load?
One and a half months is too little time to give a view. Though the collections are down by around 50 per cent as per AMFI data, I will not attribute it to the regulatory changes. Whenever the markets are high, people who want to invest hold back their investments and those who are invested try to redeem. The industry is here to grow big time. For an investor, mutual funds (MFs) are one of the best and cheapest investment avenues, whether on the taxation side or on management fees. And, anything good for investors is good for industry players, whether distributor or manufacturer. If norms are good for the investor, anybody in the chain will survive and grow.

What impact will the new norms have on the industry?
The new norm is definitely a game changer. Manufacturers and distributors need to reinvent themselves. The distribution side will now have to move to the advisory model. Factors including brands, fund performance and overall customer experience will play an important role for Asset Management Companies (AMCs). It is not only the push of products that will decide the growth for any fund house.

Which factors will play an important role?
In a changing industry scenario, the brand and the track record of a fund house will play a crucial role. It is not going to be just about returns. In times to come, investors will become choosier.

Is consolidation expected? Will smaller players survive when profitability is squeezed?
It is inevitable. Since October last year, when the crisis began, the top players have been increasing their market shares. So, in the mind of an investor and distributor, the consolidation has already started. Physical consolidation is not very far away. A lot of players will either exit or choose to continue with the business as it is. The new and smaller players will find it tough, and there will be a question mark on their existence. The MF industry is a scale game. If you do not have a basic minimum mass, survival will be difficult. New AMCs will come and try to find their own niche and operate as a niche operator. However, consolidation will be there and bigger players will get even bigger.

Are 36 players too much in the industry?
I am not saying that. But, all will find it hard to be profitable. Even at this point, a handful of AMCs are making profits.

How long can industry sustain giving upfront fees from their own pockets?
A feeling is sinking in that everybody will have to live with lower revenues. And what important is, everybody will have to work to increase the volumes to cover up this loss of revenue.

Will you want a similar kind of entry load abolishment in case of other products, like insurance?
The needs of an investor in MFs are totally different from that of insurance. All investment avenues have their separate niche and an investor understands that. It is hyped when we say mutual funds versus insurance.

Both will co-exist, as the needs are very different and independent. It is not possible for a MF investor to entirely change the portfolio to insurance. So, brokerage isn’t the only thing which will decide what has to be pushed and what sold.In this new environment, it is very important to understand what an investor wants.