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Business News/ Opinion / All hands have to be on deck
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All hands have to be on deck

Here is a look at how the MF industry can increase penetration

Shyamal Banerjee/MintPremium
Shyamal Banerjee/Mint

The theme of the CII Mutual Fund Summit, held in June, was to discuss frameworks for increasing mutual fund (MF) penetration. Listening to the various speakers, most of whom represented the product manufacturers (asset management companies, or AMCs), one realised that, as an industry, we are still living in the past and have excuses around assets under management (AUM) growth of under 11% over the past five years. Striking a different note, Uday Kotak, the executive vice-chairman and managing director of Kotak Mahindra Bank Ltd, spelt out the need for the industry to have a 10-year vision and run a marathon rather than a sprint with pre-defined goals and strategies.

In his maiden budget speech, finance minister Arun Jaitley made a reference to the tax arbitrage promoted by the MF industry to benefit a small segment of corporate investors. It is important for all participants in this industry to partner in changing these perceptions and creating a strong ecosystem for increasing penetration.

Addressing retail needs and product-risk ratings

One of the challenges faced by the wealth management industry has been the issue of mis-selling. If asset managers could design bundled instruments suitable for retail clients which take care of asset allocation at a product level, this could be a big starting point to address mis-selling. In the past, some such products have been launched, including life stage funds, monthly income plans, asset allocators, and so on. The regulatory framework should ensure that only these product strategies are distributed to the retail client base. To take a leaf from the Pension Fund Regulatory and Development Authority, the pension industry regulator, exposure to equities cannot exceed 50% in any of the National Pension System schemes.

To get these going, it would be imperative to implement a framework for product-risk rating. In the past few years, the MF industry has implemented colour codes to define product risk; the same may need to be expanded and explained to differentiate products suitable for the retail channel.

The “professional investor"

While designing products for retail segment should help widening the market, it is equally important to increase its depth through innovative product strategies which will attract investments from the high net worth and institutional investor segments. The Securities and Exchange Board of India (Sebi) has already created a framework for Alternative Investment Funds (AIF) in May 2012 to regulate complex products. This ensured that only investors with investment value of at least 1 crore could invest in these strategies. This could be expanded further by defining “professional investors". We could borrow from experiences of developed markets such as Hong Kong, where the regulator, Hong Kong Monetary Authority (HKMA), have defined professional investors on the basis of net worth and it ensures that only these investors can invest in ‘riskier’ products.

Multiple share classes to cater to different segments

Last year, the investment adviser regulations were formulated to segregate an adviser from a distributor. Even though this has been a step in the right direction, it has met with only moderate response. A significant issue is that an investment adviser does not have the option of choosing a lower expense product, which will compensate for the cost of advice. There is a ‘direct option’ but that has challenges of receiving feeds for client reviews. Coupled with that is the reluctance of investors to pay for advice. Even larger domestic and foreign institutional clients prefer separate account mandates due to higher MF expense ratios. As in many other markets, multiple share classes would ensure that different categories of investors could participate in the same underlying portfolio without complications of multiple structures.

Investor education

In 2012, Sebi directed all AMCs to set aside at least two basis points of the total expense ratio, each year, for investor education. With the current industry AUM at 10 lakh crore, this amount works out to 200 crore annually. Even with this significant budget allocated towards investor education, the Sebi chairman alluded to the fact that there hasn’t been action on the ground. It is obvious that if most investors understood asset allocation, they wouldn’t have been so significantly under-exposed to equities and lost in the recent upswing in the market.

Embracing technology

The MF industry has been much slower than banking and insurance sectors in embracing technology to simplify the life of an investor. Around 70% of all new subscriptions are still processed through paper applications. An industry level platform for subscriptions and redemptions and demat-holding statements integrated with bank accounts through online and mobile apps, is needed. The ease of transaction will ensure that investors and distributors would be able to seamlessly deploy surplus funds into MFs and have comfort that the funds would be available in their bank accounts at the click of a button.

Prateek Pant, executive director, products and services, Royal Bank of Scotland N.V.

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Published: 11 Aug 2014, 07:07 PM IST
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