Banks nudge investors out of MFs; smart HNIs stay for bull run

Banks nudge investors out of MFs; smart HNIs stay for bull run

Mumbai: Retail investors, advised by large banks and distributors, exited mutual funds (MFs) after entry loads on these were removed and even as the stock markets continued to rise. Meanwhile, high net-worth investors (HNIs; those who invest more than Rs5 lakh per folio) and those who invest directly with fund houses have stayed invested, benefiting from rising equity markets.

Bankers and wealth managers attribute this to the end of entry loads (costs charged to investors upfront at the time of investment, that were eventually passed onto agents as commission), which have meant that large sellers of MFs no longer have incentive to push the product.

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Thus, in the retail investor category, equity funds reported a net outflow (more money went out than came in) of Rs2,552.54 crore between 1 August 2009 and 31 July.

In the HNI category, they saw a net inflow of Rs1,096.92 crore (more money came in than went out). In the same period, the Bombay Stock Exchange’s benchmark Sensex index rose 25%.

Banks and large national and regional distributors seem to have churned their customers the most. Equity funds reported a net outflow of Rs1,275.93 crore in the bank channel, and Rs1,483.65 crore in the large national and regional distributor channel between 1 August 2009 and 31 July.

Curiously, although independent financial advisers constitute a hefty 29% of the total distribution base of the MF industry (banks and national distributors constitute 29% and 36%, respectively), this channel saw a nominal net outflow of just 185.35 crore in the same period.

India’s stock market regulator Securities and Exchange Board of India (Sebi) had banned entry loads last August.

Soft target

According to Nitin Rao, executive vice-president (private banking and third-party products) at HDFC Bank Ltd, one of India’s largest bank-based distributors, inflows have been impacted by the ban on entry loads.

“Distributor interest is definitely down," he says, adding that his bank’s assets under management in equity-oriented mutual funds have risen in the past two years.

“A lot of banks have also started to sell highly remunerative products such as portfolio management services of mutual fund and brokerage houses to their clients that fetch higher commission of about 2% to 5%, as against nil from mutual fund schemes," says the head of the wealth management unit at another bank.

This person, who did not want to be identified, adds that high-risk instruments such as private equity are also being hawked to investors as they command a longer holding period such as six-seven years.

Yet, there’s a contrarian view—that the exit of retail investors has been by choice.

People who subscribe to this theory, say the current rally on the markets has not seen much participation by retail investors.

“Those investors that had entered the equity markets in 2007 and stayed invested throughout 2008 had suffered a lot when markets (the Sensex) dropped from 20,000 levels to 8,000 levels. The moment their equity funds made the slightest profit, many of them booked profits and exited," says Aashish Somaiya, head (retail business) at ICICI Prudential Asset Management Co. Ltd.

He adds that while inflows depend on recent market performance, redemptions also happen on account of market performance over the past few years.

Looking closer

Still, despite claims by fund houses that the ban on entry loads has seen inflows drying up, such investments have only increased since last August, according to data provided by the Association of Mutual Funds in India, an industry body: Thus, Rs68,407 crore came into equity funds between 1 August 2009 and 31 July, up from Rs41,633 crore that came in between August 2008 and July 2009.

The industry is not impressed by these numbers and insists that they are lower than inflows in previous years. According to a marketing executive at a fund house who did not want to be identified, 2008-09 was an aberration when equity markets around the world crashed, which meant that few investors put money in equity funds. That makes 2009-10 look good, says this person.

“In two of the past five years, we have seen gross inflows cross Rs1 lakh crore," he adds.

Stock market regulator Sebi, however, is of the opinion that lower gross inflows can be attributed to a reduction in the number of new fund offers rather than the scrapping of entry loads.

As for HNIs, they have stayed invested in funds, and continued to also invest in them because of the larger ticket size of their investments, according to Rajeev Thakkar, chief executive officer of Parag Parikh Financial Advisory Services Ltd.

Fund houses continue to give agents and distributors so-called trail commission (these are like loyalty bonuses and are paid out for as long as investors stay invested in a fund, and are a function of the quantum of investment) and in the case of investments by HNIs this is enough to sustain them, he says.

“Servicing larger clients is not an issue. Servicing small investors is no longer remunerative for many banks and distributors," adds Thakkar.