People in the mutual fund (MF) industry are feeling that the gods are surely conspiring against them. Bad news just does not seem to stop. First, the removal of entry loads last year meant that their ability to pay upfront commissions went away. Distributors today seem an unenthused lot. Net equity sales have dropped significantly. New fund offers launched recently have not done well at all. The proposed Direct Taxes Code may take away some of the tax benefits that exist today.
The Securities and Exchange Board of India ruling on unit-linked insurance plans (Ulips) a few months back made MFs believe, albeit for a brief while, that they were not alone in their misery. Finally, the government ruled that Ulips will continue to be under the regulatory purview of the Insurance Regulatory and Development Authority (Irda) and though the initial announcements made it clear that Irda will regulate commissions that can be paid on Ulips, this offers no solace to the MF industry.
A crisis is always a good time to ring in the new and the industry needs to look at trends which will help it plot its future. MFs are still relevant only to a small percentage of the investing population. Thus, the future of the industry is surely bright but to be able to capitalize on that, MFs need to take a hard look at their strategies and business models. Deferring action is a luxury that is no longer available.
Enough has been known and said about retail penetration, dependence on institutional money, importance of tier II and tier III cities and so on. What I list below are some of the core issues which need to be addressed by the individual MFs and the industry as a whole to shape and secure their future:
• Balancing the short term with the long term: Only a few fund houses have taken bold measures to build for the long term. While short-term pressures are a reality, it is imperative to invest for the long term
• Learning to work with lower margins: Ambitions have to be tempered by reality. Even in the earlier regime, there are successful examples of asset management companies operating on tight costs and succeeding. Competing on commissions offered to distributors cannot be a strategic lever
• Scheme performance will be even more important: In the initial stages while distributors get their act together, creating the “pull” for their products through consistent performance will be critical
• Working closely with distributors with an overall plan: For example, the independent financial advisers (IFAs) who have formed an important segment of the distribution scene thus far are going through their worst crisis ever. The questions that most IFAs face are: How to cope with their costs in the light of reduced margins? How to evolve to provide comprehensive financial solutions to their customers? How to move to a structure whereby they can start charging their customers? MF houses surely have a role in assisting them on this journey
• Effective channel management will be key to going retail: Everyone talks about wanting to go retail and ends up following the same formula. The one-size-fits-all approach may not work for new/small size MFs which will have to devise their own strategies—for example, investing in building state-owned banks’ distribution network today may reap rewards later
• Investing in building a knowledgeable sales force: Everyone knows that sales teams are the fund’s ambassadors out in the market. Specific product knowledge about their own products will no longer be enough; sales people will need to be equipped to talk about financial planning: How their product fits into the overall portfolio of the customer and how it compares with even products such as Ulips?
• The importance of leadership in nurturing and retaining talent: MF employees will look up to their leaders to provide them direction in these tough times. Higher compensation may not be sustainable
• Role of boards and trustees to provide high standards of corporate governance will be in sharper focus
• Use of technology: It will critical in improving accessibility and bring down transaction costs. Technology should also enable use of local language content which can provide the multiplier effect to efforts to improve sales and awareness in non-metro locations
• Use of data in improving financial literacy and creating general awareness by the Association of Mutual Funds in India (Amfi): While Amfi has been providing lot of data over the last few years, much more is needed to educate the public on various parameters—returns that funds have provided; why MFs? profile of fund owners; trends in fees being charged by MFs; and so on. The Investment Company Fact Book, US, is a good model to follow. Outside of the fund industry, there seems to be very few who understand their perspectives. Providing lot of data is a good way to start the demystification process
• All this means that sponsors will have to take a long-term view: Profits will come eventually but only after making investments and running a tight ship
The current crisis will segregate the men from the boys. The bigger funds will surely survive and prosper. The others, including the newer ones that are coming up, will have to be bolder or operate in a niche space to be able to do well.
Suresh Rajagopal has over 20 years of experience in financial services in diverse areas such as regulation, stock broking and mutual funds.
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