Mutual funds tap in-house customer base

Mutual funds tap in-house customer base

As distributors increasingly shy away from selling mutual fund (MF) schemes on account of reduced income thanks to the ban on entry loads imposed by the capital market regulator, Securities and Exchange Board of India (Sebi), in August 2009, fund houses are increasingly turning to their main distribution partners to make headway. On the forefront are bank-sponsored asset management companies (AMCs) which are increasingly becoming dependent on their bank sponsors or in-house partners to help garner a tidy collection. Bank-sponsored fund houses are witnessing inflows of approximately 40-70% of new fund offer (NFO) collections coming from the sponsor bank’s customers.

High share of the pie

An analysis of data of NFOs that hit the market so far this year shows that not only bank-sponsored fund houses were among the highest collectors comparatively, their partner (or sponsor) banks have garnered a significant chunk of their overall collection. For instance, out of 440 crore that Axis Income Saver, a monthly income plan that closed its NFO in June, collected, around 75%, or 330 crore, came from Axis Bank Ltd. Similarly, out of 682 crore that SBI PSU Fund—an equity fund that invests in public sector firms—collected, State Bank of India (SBI) collected 40%, or 272.80 crore. Axis Bank and SBI were the largest distributors for NFOs launched by Axis Asset Management Co. Ltd and SBI Funds Management Co. Ltd, respectively.

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Fund houses that are not bank-sponsored, on the other hand, prefer to tie up with a few top distributors to help garner a decent collection. Known as anchor distributors in the MF distribution parlance, these agents would collectively garner a majority corpus of the total NFO pie. For instance, out of 670 crore that DSP BlackRock Focus 25 Fund collected in its NFO that closed in May 2010, people close to the development say that four large distributors collected 180-200 crore, or 27-30%, of the NFO’s collection.

Changing landscape

While sponsor banks were, typically, available in most bank-sponsored bank MFs earlier, fund houses are now realizing their true potential. After Sebi abolished entry loads in August 2009 and put the onus on the distributors to collect fees directly from investors, distributors found it a loss-making proposition to sell MFs. Distributors switched to selling products that paid them higher commission, such as unit-linked investment plans of insurance companies.

Further, though the number of distributors who have cleared the Association of Mutual Funds of India’s (Amfi) mutual fund examination—and also registered with Amfi—has gone up, market experts say that those actively selling MF schemes has gone down. In an interview earlier, Rajiv Deep Bajaj, vice-chairman and managing director, Bajaj Capital Ltd, a national distributor of MFs and financial products, had remarked that Delhi has only about 500 agents that sell MFs, down from 2,500 before. In Chennai, only about 300 agents sell MFs, down from 1,500 before.

A dwindling distributor army has forced the fund houses to look inwards. Says Srinivas Jain, chief marketing officer, SBI Funds Management: “Obviously, having a captive distribution helps in a scenario where the growth in the MF industry is decelerating instead of accelerating. Activity is at a low level and so captive distribution helps us bring in some money." Jain also adds that an in-house distribution arm also tends to appreciate the schemes of their MF arm better than those schemes sold by an outside AMC. With banks having a huge customer base, it becomes good business sense for MFs to tap into them. Out of 909 crore that Axis Equity Fund (AEF)—Axis AMC’s first equity offering—collected in its NFO period in December 2009, Axis Bank mobilized around 700 crore, or 75-80%, of the amount. Out of 138,000 investors of AEF, 95,000 investors came through the bank’s network.

Doesn’t performance matter?

Though an in-house distributor partner helps, old fund houses tend to rely on their performances and pedigree in the hope that more and more fund houses would want to sell them. DSP BlackRock Focus 25 Fund got one of the highest NFO collection so far this year. However, DSP BlackRock Asset Management Co. Ltd does not have a bank sponsor. People following the development, however, add that though a clutch of four distributors garnered a significant collection, ultimately its equity track record helped the fund house to collect a tidy corpus. “Distributors have realized that if they do not sell funds with a good track record, investors will switch to other distributors who sell MF schemes tailor-made to the investor’s requirements", says a fund official from a Mumbai-based fund house who did not want to be named.

Despite having HDFC Bank Ltd as an in-house distribution partner, schemes of HDFC Asset Management Co. Ltd are widely sold based on the pedigree. HDFC Bank also, on the other side, is only too happy to hawk other MFs along with those from its MF partner on a continuous basis. “We have an open architecture and sell funds based on their performance", says Nitin Rao, executive vice-president, private banking and third party products, HDFC Bank. However, Rao did add that with resources becoming scarcer than before, fund houses would obviously choose those distributors that would give them maximum mobilization, such as an in-house distribution arm. So while HDFC Bank may sell schemes from HDFC MF during their NFO stages or even when the fund house is promoting one or few of its top-performing schemes as part of an ongoing campaign, the bank will also sell schemes from other fund houses, albeit perhaps with a little less gusto during that period.

Unlike, another marketing official of a fund house, who also did not want to be named, added that one public sector bank does not prefer to sell any other MF scheme during the NFO period of their in-house MF arm.

Focusing on a handful

Tapping into a readymade investor base is not a new thing though. Fund houses such as HDFC AMC and ICICI Prudential Asset Management Co. Ltd had in-house banks at their disposal. However, when agents were used to high commission and generous incentives from fund houses, a wide variety of agents were only too happy to sell MFs. After Sebi abolished entry loads, fund houses have been focusing on a fewer cluster of distributors, preferably a handful who can garner a significant collection. Many fund houses, though, are open to sell across distributors. For instance, though about 70% of Axis AMC’s NFO collections come from Axis Bank, the fund house works with about 6,300 independent financial advisers at any point in time. Says Karan Datta, national sales head, Axis AMC: “We do not compromise our attention to other distributors who sell Axis MF schemes even though Axis Bank accounts for 70% of our sales. At the same time, we cannot underestimate or ignore Axis Bank’s branch network and reach. It is an inherent advantage for us."

As the 6.66 trillion Indian MF industry slowly comes to terms with life without entry loads, having a readymade distribution network will work wonders. And here’s where bank-backed AMCs will benefit. As per their present plans, the MF joint venture arm of Union Bank of India (UBI) and Belgium’s KBC Asset Management Co. Ltd aim to sell its MF schemes chiefly through branches of UBI. With, say, more than 15,000 SBI branches will be made available for SBI Funds Management and, say, about 3,000 branches of Canara Bank will be on offer to sell Canara Robeco Asset Management Co. Ltd’s schemes, clearly bank-sponsored fund houses or those that have a captive investor base will learn to swim quicker than the rest.

Illustration by Shyamal Banerjee; Graphic by Yogesh Kumar/Mint