For an industry waiting with bated breath for the new regulator to indicate which way the wind will blow, the two-page circular uploaded on the Securities and Exchange Board of India (Sebi) website on 9 March 2011 (http://bit.ly/fMcM0o) quickly became the most emailed and forwarded document. Through the circular, Sebi has allowed mutual fund houses to use two sources of money to pay distributor commissions. One, they can use the accumulated load balances they are holding. Before August 2009, the loads (the distributor commission embedded in the price of the mutual fund scheme) were collected by the fund house and paid to the distributor. Not all such loads were paid out and the money undistributed was kept in a separate account. The older and bigger the fund house, the larger was this amount of accumulated loads. The circular is being seen in the market as of great benefit to the older, larger fund houses that are sitting on Rs250-400 crore each in these accounts. This is a reversal of the earlier argument within Sebi that was in favour of writing back this money to the scheme (that is to the investors). Two, fund houses can use the money collected as exit loads to pay distributors. Both the steps are being seen as a significant indication of what will happen next. The market now expects the two-cheque system to collapse into one and a gentler easing into the pre-August 2009 world when fund houses looked at the distributors as their primary customers and the real retail customer was not really on the radar. When you can buy the business, why spend energy in developing it?
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But how badly has the industry been affected by the banning of loads? How much was the bleed? I did a small dipstick and found that even informed people thought that the equity funds bled heavily and lost about half their money due to distributors refusing to sell funds and investors getting out in the 18 months since the no-load rule. The truth is a little different. I found (looking at Association of Mutual Funds of India data) that the worst month since August 2009, in terms of outflows, was September 2010 when a net of almost Rs8,000 crore bled out of equity funds, with a gross bleed of just over Rs13,000 crore and an inflow of almost Rs7,00 crore. But this Rs8,000 crore of net redemption was a mere 3.66% of the total equity assets under management (AUM) of Indian investors who hold over Rs2 trillion in equity funds. Right. At the worst point, less than 2% of the money bled out.
In fact, the September numbers prompted an insurance chief, who met me at an airport in mid-October, to confidently predict the demise of the fund industry by December 2010. “They’re dead!” he crowed, “and the business is all coming to us.” The good thing with predictions about the near future is that they can be remembered and validated. February 2011 became the fourth month with positive inflows into equity funds. With more than Rs7,000 crore coming in and almost Rs4,000 crore going out, the net inflows of Rs3,500 crore are 1.93% of the total AUM of equity funds in India. In fact, November to February has seen a spurt in inflows and a decline in redemptions. The reasons for this could be two. One, market volatility is making investors wary of exiting and hence the reduction of redemptions by half in February over the previous month. Or that fund houses are stabilizing into the new no-load world and investors are coming in using the systematic investment plan road. The gross inflows have picked up steam, with an average Rs7,000 crore coming in the last four months, against an average Rs6,000 crore in the 15 months before November 2010.
Could it be that the inflows are coming back in due to fund houses finally getting out of their Nariman Point and Bandra-Kurla offices and getting to the investors through direct sales pitches, through customized products, through investor awareness drives? Could it be that the AUM-focused fund houses in search for valuation are now trying to grow the retail business now that the corporate loopholes are mostly plugged? While it is too soon to say that the industry is settling down, there is clearly a new focus at least within some of the fund houses. From throwing money at the distributors, fund houses are actually thinking about how to get the retail investor. Maybe the new Sebi chief should allow fund houses some more gym time for workouts. They may realize that the crutches of loads are actually not needed.
Monika Halan works in the area of financial literacy and financial intermediation policy and is a certified financial planner. She is editor, Mint Money, and can be reached at email@example.com