Time To Take Stock
Recently, as two international funds closed their maiden schemes, it was apparent that their performance would have a significant repercussion on the future of the mutual fund industry itself. The industry's confidence had touched an abysmal low after the disaster resulting from several tax-savings schemes flooding the markets early this year.
So what are the great lessons to be imbibed from the recent high-profile entry of two mega players and what are the ground realities? Given below is a brief synopsis:
Mutual funds continue to be the most misunderstood of investment avenues. It is generally assumed that even if the stock market index were to take a nosedive, the NAVs of the equity mutual funds would soar. It is imperative therefore that while marketing schemes one should state the limitations and the downsides with as much emphasis as the sales hyperbole.
UTI's Unit 64, unwittingly enough, has created the myth that mutual funds can guarantee returns, since Unit-64 is generally acknowledged as the master fixed return instrument with an indefatigable capacity to provide stable returns year after year, irrespective of market conditions. It is therefore imperative that mutual funds explain that while they may be low on risk, they are not risk-free.
There is no denying that the negative fall-out of the performance of some mutual funds has been gigantic. Investors are not going to overcome such deep disenchantment soon.
As a consequence of these factors, the cost of entry for new asset management companies has increased substantially. It is therefore important that mutual fund companies position themselves differently, and perform upto expectations raised. How can the industry build up trust once again?
The challenge before the industry is to expand the market size. Gathering market share can follow later. Mutual fund companies now need to complement each other, not compete needlessly amongst themselves. They have to position themselves against other competing financial instruments. On the performance count, newer players like Birla, JM, Reliance, Tatas and Alliance have performed well against their respective benchmarks, and have also introduced transparency into the business which was hitherto absent.
Distribution should be the key focus area for the future. It is as clear as daylight that conventional channels and traditional strategies have not worked because mutual funds cannot provide a speculative flavour. Mutual funds must develop a new breed of marketing intermediaries who can effect sales through direct investor interface. But this will call for higher upfront investments.
The press has an extremely significant role to play in terms of a dispassionate assessment of mutual funds. It is time, however, that some reduced their pet obsession of bashing mutual funds, simply because they are the favourite whipping boys. For instance, there was this atrocious piece which stated that the recently launched mutual fund schemes were shunning small investors simply because the minimum application size was in the range of Rs 2000-Rs 3000. Arguments given to the contrary were naturally given the go-by. It would have been worthwhile instead to look at minimum sizes for the bond issues, to gauge which was more retail-friendly. Worse still, half-way through the issue (and the maximum response comes in the last few days) there were adverse reports about low investor response to the funds. There were several small investors who refrained from investing because of such casual reporting. Incidentally, there is no necessary correlation between a fund's response and the quality of the issue. Remember Infosys?. It received a lukewarm response in its public issue. The rest is history.
Such distorted misrepresentation needs to be strongly repudiated by the industry. In a nutshell, there are challenging times ahead for the mutual fund industry. The market is changing, and so are the players. This is not the time to be parochial, and take a myopic view. Neighbour's pride could after all well be your own..
Sanjay Jha is vice president, ITC Threadneedle AMC . The views are the author's own.