The next phase of mutual fund growth
The mutual fund industry is witnessing an unprecedented pace of growth with total assets under management increasing sixfold to Rs20 trillion in a matter of 10 years. Given the market scope, there is an exciting buzz in the industry about the future. Last week at the Cafemutual Confluence 2017, the question of accelerating incremental growth was addressed by some of the industry’s chief executive officers (CEOs). Cafemutual.com caters to mutual fund industry stakeholders with information about the industry. A panel of six CEOs gave radical ideas on how to add investors at an even faster pace.
The industry currently has several stakeholders: asset managers, distributors, advisers, investors and the regulator. Although the objective should largely be around asset managers providing suitable choices and investors seeking performance, there are smaller debates which crop up. Some of the ideas talked about in the conference were an attempt to iron out such debates to enable faster growth.
No AMC sales team
Every asset manager has an internal sales team. While the institutional sales have largely been direct, retail sale has depended more on distributors. Over the last 4-5 years, however, with direct plan options, the asset management companies (AMCs) are also seeking retail investors directly. AMCs do not have to pay distributor commission on direct plans. They also save on the costs of servicing distributors. This helps investors too as distributor commissions are part of the total expense ratio charged to them. Without it, direct plan returns are higher than those of corresponding regular plans. However, this has created some friction between distributors and AMCs. According to a senior executive with a domestic asset manager, not authorised to speak to media, “Distributors don’t like low expense direct plans. Retail investors do come through distributors but AMCs also want direct clients.”
At the Cafemutual event, Sunil Subramaniam, chief executive officer, Sundaram Asset Management Co. Ltd, spoke about changing the perception. “It should not be ‘them versus us’, rather ‘us plus them’. We can do away with the AMC sales force completely and rely on distribution networks to reach investors. It can help save costs and focus on launching products that deliver what is promised,” he said.
An aggressive internal sales team may push for launching too many products, which aren't always relevant for long-term investing. On the other hand, the cost argument might favour direct plans for large-sized asset managers. Some asset managers now also have dedicated service to direct investors.
Technology can take over
Bring in technologies, like robo-advisors, and one can talk of doing away with internal sales teams, especially for smaller asset managers. This threat is real and impacts not only AMC sales teams but also distributors who haven’t adapted to change. Large distributors and clients, in any case, call for meetings with fund managers. The salespersons may have a small role in acquiring those transactions. Kailash Kulkarni, chief executive officer, L&T Investment Management Ltd, said embracing technology is inevitable: “With technology, each distributor can deliver service to 500 families rather than just 100.” Kulkarni said his company has undertaken a project to teach women in villages to use feature phones, which can in turn be used to buy mutual fund units.
Make experience important
Fixed deposit investors don’t know what to expect from market-linked mutual funds. To ease in new investors, Saurabh Nanavati, chief executive officer, Invesco Asset Management (India) Pvt. Ltd, said one should be able to experience the product before buying, alluding to free samples of FMCG products. “Along with investor awareness, we can...give free units to every new unique PAN that gets registered. These investors can then see the benefits of investing though mutual funds. New (distributors) can be given some of these new unique PAN folio holders as investors who need help and advice with future decisions.” Experience is also dictated by expectations. Many times too much focus on the market environment can create unattainable return expectations. Kalpen Parekh, president DSP Blackrock Investment Management Ltd, said, “In the last 20 years, I have always seen emphasis on market trends. Mutual funds need to be presented not just as market-linked products, rather as concepts and solutions towards a goal.”
Some of this is already getting done at industry level and by individual asset managers. However, measuring the efficacy of this strategy in adding new investors is not an easy task.
Unity of action
A combined effort by all the asset managers might see a faster pace of growth in assets and investor folios, some CEOs believe. Ashutosh Bishnoi, chief executive officer, Mahindra Asset Management Co. Pvt. Ltd, said that AMCs too need take risks and reach out further into the interiors of the country. This is being done to an extent. Internal distribution channels, through affiliated banks and non-banking finance companies, are being leveraged for better sales. Nilesh Shah, managing director, Kotak Asset Management Co. Ltd, talked of a collective vision: “Our vision can be to make each Aadhaar holder an investor, but the vision communicated to the government has to be that all Aadhaar holders need to be turned into income tax paying mutual fund investors. The caste system in MFs where some funds are Brahmins and others are Shudras needs to stop...start small then implement on large scale. Distributors too need to unite on one forum.”
It has happened that schemes that are perceived to be of better pedigree (or Brahmin) are more sought than others with comparable or even better returns but a lesser brand foothold. Practically speaking, asset management is not about having similar products on similar platforms. Each asset manager will come with its own processes, product ideas and distribution channel. Ultimately the investor will choose those which offer better in performance, service and overall experience. An industry which offers relatively easy entry for managers and distributors, is unlikely to see any major joint effort being undertaken on too many fronts.