The Securities and Exchange Board of India (Sebi) has constituted a panel to examine the grievances of the mutual funds (MF) industry and determine solutions. This panel is expected to come out with recommendations in a few weeks, and indications are that they will be implemented in quick order.

Abolishing of entry loads in MFs in August 2009 had two contrasting consequences in the retail market for these instruments. The positive effect was on those who were already investing in MFs—those who understood these instruments and its risk/reward equations. They welcomed the move whole-heartedly since more of their money would be used for investments. The negative effect was that adoption of MFs by new investors slowed down dramatically due to a significant drop-off in distributor interest in selling these products (a rational economic reaction). The penetration of MFs as an investment product was low to begin with and this slowdown in growth affected the industry further.

Don’t bring back entry loads

First, the temptation to go back to the entry-load era must be resisted. In this regard it must be welcomed that Sebi chairman U.K. Sinha in various interviews has all but ruled out such an action. A rollback of history and restoration of status quo ante would result in wholesale investor disenchantment with the product. It would mean a return to the days of folio churning and mis-selling that will ill serve the investors in the short term and the industry in the long term.

The solution lies elsewhere. The way to solve the MF distribution problem without bringing back entry loads is to enable distributors service a larger number of customers than they traditionally were able to. Doing so will simultaneously ensure that distributors’ revenues are restored to healthy levels and that more and more people become MF investors.

Technology can come to the aid

The way to make that happen is with technology. In the last 15 years, all over the world, problems with scalability of service delivery have been successfully solved with the use of Internet-enabled technologies. There is no reason why such a solution cannot be successfully deployed in India in this case. It must be noted that many service delivery issues, such as travel bookings and banking, have already been successfully solved in this manner. Indeed, several months back, an attempt was made in this direction by enabling MF transactions using exchange platforms. However, there was a mismatch between the way brokers and exchanges operated and the way MFs were transacted, leading to failure of its adoption in the market. This failure should not be viewed as a failure of technology but of how it was employed.

Also read | Srikanth Meenakshi’s earlier columns

Today, the important issue with adoption of Internet-based technology in the distribution of MFs is the regulation against use of a distributor’s Amfi (Association of Mutual Funds in India) registration code (ARN) in the transactions. This means that a distributor using an Internet platform will need to carry out transactions using a platform’s code, and this is rightly perceived as loss of identity (and, possibly, revenue) for the distributor.

To solve this issue, Sebi should come out with a framework for technology platforms to support distributors using their own ARN. This would significantly reduce the servicing cost for the distributor as well as the physical travel that they need to do to provide services. And it will enable them to service a lot more customers than what they do today, enhancing both their revenue and market penetration for MF products.

Simplifying processes

There are investor issues to be addressed as well. A lot has been said about educating investors and making them more aware about MFs. While such efforts are always welcome, one must note that such initiatives cost a lot but yield poor dividends in terms of getting new investors. A visit to an investor awareness seminar will show that it is attended mostly by people who already know about MFs and are there just to find out how the markets are doing or about a new product.

Such money is better spent in making better the systems that are already in place so that the process of investing becomes simpler. Easier KYC (know-your-client) norms, consolidated statements, flexible ways to manage investments and, most importantly, convenient ways to manage personal account details—these would go a long way in making MFs an attractive destination for new investors than any amount of seminars. After all, there is no better teacher of investments than the market, and there is no better way to learn about investing than by investing.

So, in short, keeping entry loads out and maintaining MFs as the best, lowest-cost method of investing for the long term, enabling the distributors to serve a lot more customers using technology platforms and improving the processes in a way that makes MF investing easier would be the ways to restore the health of the industry. I hope the Sebi panel agrees.

Illustration by Shyamal Banerjee/Mint

Srikanth Meenakshi is director,

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