Mutually Sidelined (Mutual Funds in India)

India Infoline News Service | Mumbai |

In spite of the apparent opportunities in a country of our size and scope, Mutual Funds in India have not delivered anywhere close to potential. Is the industry listening?

In spite of the apparent opportunities in a country of our size and scope, Mutual Funds in India have not delivered anywhere close to potential. The corporate-centric focus still rules the roost in spite the retail-rich demographics of the country. Retail money in the industry still languishes far behind when compared to the US, where almost 85 percent of the total assets managed by fund managers come from individual investors (as per 2007 data). The figures bear testimony to the huge untapped potential in India. And yet, the state of MFs is enigmatic at best.

To make matters worse, regulation and competition pose new barriers by the day. The battle for MFs is clearly on many fronts. And the survival of existing AUM is at stake, much before its sustenance. Just to cite few prime concerns:

Following the removal of first upfront upload, the unorganised and small-sized MF distributor market was nipped in the bud. This resulted in huge untimely redemptions.

Close to budget period, there was a suggestion to end the tax arbitrage enjoyed by corporates investing in MFs (effective dividend distribution tax rate paid for corporates stands at ~22% for debt schemes). This wasn’t implemented (not yet at least), else would have impacted corporate investments (corporates account for 50 percent of the debt market AUM of MFs). The proposal doesn’t seem to be on the agenda for now, but you never know – it may return to haunt the industry.

RBI too, a while back, had cautioned banks to closely monitor their MF investments resulting in banks pulling out of the MF game.

Insurance products are competition too. The insurance regulator has been aggressively promoting ULIPs as one of the best investment options in recent times.

Competition is firming up too. Banks may soon offer 3.5 percent daily interest on savings account instead of monthly. This could adversely affect investments in MF liquid schemes.

Look at the insurance regulator. The IRDA has been aggressively promoting ULIPs as one of the best investment options in recent times. One may argue that the job of a regulator is to regulate, not to promote schemes. But it does make for a comparison of approaches adopted by the two regulators.

The writing on the wall is obvious. India needs to encourage MF investments in a big way. And the initiative should be fuelled by design, not default. I can tell you, at the moment, even the top-notch financial players are unsure of the right model and approach for the business. Fund houses seem rather casual in launching umpteen schemes by the hour, instead of creating tailored solutions in line with the real investment needs. 
 
And the retail market needs to be addressed through personalized marketing. Therein lies the big opportunity but sadly, we have not seen due acknowledgement of this fact from the supply-side forces as yet. MFs can take their cues from the insurance industry in reaching out to the common man by all means. Despite the monopoly of LIC and its humungous network, the private players took their campaigns to the remotest corners of India.

Along with the penetration, product innovation is the need of the hour. Schemes should be aligned with the typical long-term needs of the small investor as well - prima facie, the cost of acquisition for such schemes would be more but the long-term benefits are huge. This would probably deem as a shift in strategy, but it may make business sense. MFs need to think long term for sustaining their growth in an environment of intense competition from other products, lack of cohesiveness within the industry and weak support from regulators. 

If professionally managed, the mutual fund industry is godsent for the small investor to build a safe and diversified portfolio providing consistent returns.

The SEBI chairman had once remarked that large corporate investments in MFs could generate conflict of interest and “something more needs to be done to get more types of money into mutual funds"

It’s time to fuel that “something more”! Is the MF industry listening?



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