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India's Best Mutual Funds
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Instead of passing through investor acquisition costs, asset management companies (AMCs) had to rework customer acquisition strategies and cost structures. Most importantly, the Sebi move also changed the power equation between investor (or customer), the distributing intermediary (including financial advisors) and the manufacturer of financial products, the mutual fund.
Nineteen months down the road, each of the parties has come to terms with the changed climate. True, several issues remain to be worked out — investor awareness, for one, and how mutual fund products will be sold (how the presence of online distributors will, for instance, change the game). But the collapse of the industry that many cried would happen, is a fear that will not be realised.
Admittedly, on the one hand, the kind of investor inflows that marked the boom-boom years of 2006-07 have declined. On the other hand, the economic slowdown following the global financial crisis resulted in continuous redemption from several funds, reducing their overall corpus. The decline in equity values reduced retail investor faith in most markets, but was, perhaps, most visible in the mutual fund segment because of redemptions.
But mutual fund companies also gained some valuable insights; for one thing, they moved to curb their dependence on distributors. Second, some leading mutual funds decided to go direct to the investor, following in the footsteps of others who had tried it successfully. Franklin Templeton, for instance, runs small seminars of about 30-40 people on investor awareness; those seminars also become a trust-building mechanism for the fund.
Third, many pushed systematic investment plans (SIPs) as the instrument of savings choice for retail investors. In a sense, investors who knew the old bank recurring deposit — you put aside a fixed sum of money each month into an account — liked the idea, and found it easy to understand. Of course, bank progeny such as HDFC Mutual Fund, where the parent is primarily retail-focused, were able to leverage their capabilities well on this front.
But several challenges remain to be met. For one thing, mutual funds may be negotiating better with distributors, but the latter still have the edge. If they do not get enough money, their interest in pushing mutual funds tends to fade (it also drives them into the arms of the insurance companies that sell a mutual fund-like product, the unit-linked insurance plan or Ulip, but that is a story by itself). Second, many mutual funds are yet to get their act together on improving investor awareness.
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Third, mutual funds are a so-called push-product, which means they have to be sold, or marketed. In selling products to investors, there are shades of ‘mis-marketing'; this does not imply that investors are being led up the garden path, but that matching investor needs with products is less diligent than it should be. AMCs will have to deal with that to grow. Finally, mutual funds have to perform, or deliver results that are better than the market or what the investor could have done on her own. In subsequent pages, we will be recognising those who delivered value to their investors.
Playing The Piper, Calling The Tune
For better or worse, distribution is key to market penetration for mutual fund products. More than interest, it is incentives that get distributors to sell mutual fund products. And therein lies a problem. "If one looks at the numbers, you might believe that the business was being conducted almost entirely for the distributors," says K.N. Vaidyanathan, executive director, Sebi, whose ambit in the market regulator covers mutual funds. "The ban on entry loads was the first step to correct that."
Some back-of-the-envelope calculations done by Businessworld highlight the startling numbers: in 2008, AMCs as a whole made about Rs 250 crore in revenues. Distributors — if one includes marketing expenses shared — amounted to Rs 6,000 crore. In the next year, the market pullback was still in effect, so reduced numbers showed that while AMCs made roughly the same amount of money, distributors' take was halved to roughly Rs 3,000 crore. The entry load ban was introduced in August that very year.
In 2010, markets picked up again, and interest in mutual funds came back with almost a bang. AMCs, on the back of improved negotiating with distributors and cost control, made about Rs 1,000 crore; the distributors amassed Rs 4,000 crore. That also suggests that roughly Rs 1,500-2,000 crore that would have gone to distributors went back to the investors in the form of higher net-asset values (NAVs) of their mutual fund investments