Monday, August 17, 2009

Bumpy Quivering In Indian Mutual Fund Industry

As on July end, the Indian Mutual fund industry manages an asset base of RS 6, 86,946 crore which seems quite impressive in first impression but an in-depth introspection reveals this performances as below of actual potential of presently existing thirty six fund houses. It’s not less surprising that top five Mutual funds houses accounting for over fifty present of the total asset base, so there is huge scopes persist for entry of new players in Mutual fund industry.
According to a recent report of The Economic Times, twenty six funds waiting for approval of business before SEBI (Security and Exchange Board of India); expected potential for more players foraying into the Mutual fund space may lead this industry for stronger consolidation.Mutual fund industry despite having an existence of fifteen years has yet to secure its position as a formidable player in the domain of financial services.

Now the going away of entry load will leave greater obstacles before industry players in attracting the investors. Scrapping entry loads has apparently put Mutual funds at a disadvantage vis-à-vis viable products like ULIPS at the distribution end. Before August 1st, Mutual funds were charging an entry load of 2-2.5% and paying a commission of around 3% to their distributors that mean fund houses had to burn around the cost of 50 to 100 basis point. Such proportion of cost for Asset Management Company was quite low which now they wouldn’t longer afford in the wake of new SEBI ruling.
Even though withering of entry load by SEBI is logical for the sake of investor’s interest as previously availing with fixed nature of commission hardly compelled distributors and Independent Financial Advisors for better consultancy to investors. In absence of adequate information generally investors couldn’t secure there intended benefits from investment.

Now the Mutual fund distribution set to become more demand based rather than sales push, so the time is ripe for investors to be more careful as distributors might push other products such as ULIPS more at least in short term. Indeed the new ruling will lead market towards stiff competitive regime in which the investor will have greater voice although that would require a better financial literacy scenario which at present is quite unsatisfactory in India.
On the other end new SEBI ruling will adversely affect the Mutual fund industry as the overall distribution network is going to face severe challenges; risk has arises of small distributors losing their business and large distributors getting consolidated. Even before the implantation of new ruling Mutual fund industry lacked the distribution network to cover the entire country in a meaningful manner; some plans are in the air for establishing the grand distribution and trading platforms.

Such materialization would of course mitigate the long pending sluggishness of proper distribution network but that must not oust the IFA’s role; they must have to co-exist for further deliberation.In the new set of condition it would be quite imperative to have a triangular interface amidst the Mutual fund , investors and distributors with a consensus based settlement of commission and various other impetus; certainly it would be require disclosure norms more tightened and transparent. There must be a definite set of rules that apply equally to similar products irrespective of seller’s identity.
Apart from the challenges of new directives from SEBI, existences of some non-serious players in the business are equally posing serious concern over the maximization of its reach in financial market.

It seems quite astonishing after passing through the facts regarding very low requirements (Rs 10 crore) to start a Mutual fund unlike the Banking or Insurance business. Despite such hassle free monetary norms; leaders in Mutual fund couldn’t visualize the need for its pan Indian presence like the counterpart’s Bank and Insurance. Presently majority of Mutual funds business comes from corporate (around 70%); here the Mutual funds business urgently needed for some stringent regulatory mandate like rural penetration of business like the counterparts in financial services.
As per a survey of Value research ( An independent research and analysis institution), the industry’s present penetration is estimated at 4.5% as against 10-15% of Insurance business; there are around 3 million agents for Insurance products and just 80,000 distributors for Mutual funds. Indeed both have their own strength and weakness of business but at the moment Mutual fund industry required a tectonic shift in their products distribution in enhanced innovation and co-operation with Banks and Insurance sector.

Mutual fund industry by remodeling many products can leverage upon Insurance’s distribution networks since both are ‘push’ products. Structural changes in selling practices and better offers of reward in distribution network would be a crucial impetus in sustaining and rising of falling esteems in this business.
Today Mutual fund industry is standing at crossroads where it has to cope with many swiftly approaching challenges including a very consistent stiff competition from Insurance industry. Insurance businesses are in win-win situation in comparison of Mutual funds as they availing the traditional edge of being a tool of tax saving besides having a wide network of its distribution channels lead this industry to every threshold in both the urban and rural spaces in equal manners.

To gain an actual breakthrough, potential think tanks of Mutual fund sector should reassess their ongoing business model in terms of targeted breakthrough and further marched towards the comprehensive diversification. Diversification's in the sense, that it would reduce any adverse exposure from a specific sector and would mitigate other invisible travesty.Probably this lesson is most rational after suffering a chronic, meltdown of international financial system which not only raises question on the confined treatment of financial planning but also showed the solution in a diversified and transparent way of business behavior.
Indian market has a huge potential for the growth of Mutual fund business but it would require first to decipher the codes of investor’s expectation from the products. More and more adaptation with the Indian condition would harness the success story; fewer amounts of frills along with the greater amount of ethics and trust would be matched with the genuine plight of this growing sector.

Atul Kumar Thakur
17th August2009, New Delhi


  1. Mutual fund industry is indeed lagging behind from its genuine potential,a swift proposition is needed to curb such inertia from this industry.There is only good news future that direct tax regime is going to outbit the previously held products like ULIP would rationalise in future times and may Mutual funds would have different status after that phase.
    Amit Shah,Mumbai

  2. Thanks bhai for such a useful piece on MF. I am actually planning this time for investing in Mf's but not able to decide which.
    Prafull Jha