There is much talk about how to compensate agents, who lost interest in distributing mutual funds (MFs) after the entry load ban. What are your views?
Intermediation continues to play a critical role even in developed markets like the US; India is no different. Ever since the entry load has been abolished, distributors are not keen on selling MF schemes, mainly due to lack of compensation. We need to find ways to compensate them. The industry is in talks with the Securities and Exchange Board of India (Sebi). We look forward to some meaningful solutions.
The government has allowed foreign individuals to invest in MF schemes albeit with certain conditions. Comment.
It’s a welcome move. We are awaiting the final Sebi guidelines. This will act as a cushion against foreign institutional investors’ behaviour.
Rajan Krishnan, Chief executive officer, Baroda Pioneer Asset Management Co. Ltd
But certain aspects remain unclear. For example, we are not sure what would be the compensation model for distributors abroad. Also, (there’s no clarity on) whether regulators of other countries will allow us to market our products.
Recently, K.N. Vaidyanathan, Sebi’s executive director, in a conference in Mumbai, said MFs should launch fixed-income exchange-traded funds (ETFs). Do you think there is a market for such products in India given that gold and equity ETFs are gaining popularity?
Fixed-income ETFs have gained popularity globally after the 2008 crisis. ETF as a category is slowly gaining preference among Indian investors, primarily for their index and gold-based investment strategies. Fixed income would be a welcome addition to the ETF category. However, do not expect investors to take them in a big way from day one. The point of inflection for ETFs is still some time away.
Given the rates bank fixed deposits (FDs) are offering, do you think retail investors should buy debt funds such as capital protection funds and fixed maturity plans (FMPs)?
Yields offered by longer duration FMPs are comparable with the prevailing FD rates. MF investments tend to score higher on account of their tax efficiency.
As compared with diversified and debt schemes, capital protection-oriented schemes and FMPs carry low risk on account of their investment strategy. Those who are risk averse can look at these schemes and later move to higher risk products when the market conditions are more favourable and as their risk appetite increases.
Many experts expect the equity market to fall by another 5-10%. Is it better for MFs to remain in cash at the moment?
Given the current volatility, portfolio managers may look to increase their cash holdings in the short term. However, holding too much cash could also be counter productive if the markets take a U-turn. In practice, a very high proportion of cash holdings goes against the mandate given by the investor while choosing a particular scheme. If you were to analyse scheme performance over the years, many schemes have outperformed their benchmarks during periods of volatility without resorting to managing cash levels. Scheme’s performance depend on a variety of factors and not just on cash holdings.
A PricewaterhouseCoopers study of the industry’s assets under management shows that around 80% of the resource mobilization is coming from top 10 cities, leaving tier II and III cities unexplored. How do you plan to expand your reach?
Strengthening distribution to cover tier II and III cities would be one of the key challenges for the industry in the next few years. However, it would be incorrect to assume that the top 10 cities have been saturated. We need to find the right balance to adequately service all urban centres across India and then extend to rural centres and markets.
We are working closely with Bank of Baroda to extend our coverage to as many branches and locations as possible.