It?s been a tough year for the mutual fund industry. A volatile equity market, distributor apathy and limited retail participation in the debt market have put the industry on the back foot, believes V Ramesh, deputy chief executive of Association of Mutual Funds in India (Amfi). In an interview with Ashley Coutinho, Ramesh says the industry body is in the process of setting up an online platform to improve penetration in smaller cities.
The mutual fund industry is struggling. How do you view the situation today?
The situation is challenging. The equity market is going through a fair bit of turbulence and a lot of investors have concerns about investing in the capital market. Distributors have become reluctant to push MF products as they get better incentives in selling other financial products. The distributor today sells a basket of products and the commission structure and incentives for selling other products such as insurance and company deposits is higher than that for selling mutual funds. Typically, a distributor will be least interested in selling the product that gives him the least revenue. Unlike broking, which is completely dependent on the equity market, the MF business is expected to be more stable. That is because normally, when the equity market is going through a turmoil, the debt market tends to do well. Therefore, when equity market is bad, investors can invest in debt schemes.
At least, that?s what is supposed to happen. Somehow, most of the retail investors seem to equate MFs with equity and don?t consider investing in debt products such as liquid schemes, income funds or monthly income plans.
There has been talk of hiking the expense ratio of late. But small fund houses don?t seem to be too happy about the proposed hike?
We have been talking to all the fund houses and getting feedback on these issues. There has been no such apprehension to our knowledge. Since the expense ratio is a percentage of the AUM, the size of the AUM will have its impact in terms of the amount in absolute terms. The funds with smaller AUM will benefit from scale as they grow bigger.
Are you unhappy that the Mutual Fund Advisory Committee did not greenlight the suggestion to introduce single cheque payment?
A single cheque system would have been a big help, no doubt. We don?t have a culture of paying for advice. And distributors, in particular the smaller ones, find it difficult to get separate cheques from clients. The single cheque payment system will make it easier for the distributor to get the advisory fee that is due to him, as agreed between him and the investor. The system could have brought in more transparency as well. Today, we don?t know how much a distributor is charging an investor. Proper disclosures can be made part of the single cheque system wherein the amount that goes to the distributor can be mentioned in the account statement so that the investor is aware how much is paid.
Not too many distributors have opted in for the transaction charges introduced by Sebi in 2010? Why?
About 7,500 distributors have opted in for the transaction charge. It?s a small number. The amount, perhaps, is not enough to adequately compensate distributors for the cost they incur in reaching out to investors. The charges, though, will be very useful in the smaller cities.
Any particular areas Amfi is looking at to widen the reach of the mutual fund industry?
We are in the process of launching MF Utility, an online portal, which we believe will help in improving penetration. The online model does away with the need to have a physical presence in the smaller towns. There will be a separate category of distributors and certain distributors would be able to straightaway login and put in the transaction details on behalf of their clients. We believe that this will go a long way in improving the penetration in the smaller cities.
There is talk of Amfi taking up a regulatory role. What is the progress on that front?
There is a very thin line between being a trade body and being an SRO (self-regulatory organisation). Trade body voices the concerns of the members; an SRO regulates them. There?s a kind of conflict there. We are in touch with Sebi and they will decide the kind of role they want us to play. There is a lot of work to be done on this front as yet. Therefore, I cannot say too much about this at this juncture.
It seems the mutual fund route will not be used for investing in the Rajiv Gandhi Equity Scheme. Are you disappointed?
It?s not a question of being disappointed or not disappointed. This scheme is targeting first time investors who have no exposure to equities. It?s risky for first-time investors to take a bet on a company at a particular time. Even with the best of companies there is a risk of losing money if the timing is not correct. MFs mitigate such risks by offering diversification and professional fund management. So, in principle, it is ideal for first time investors to enter the capital market through mutual funds. They can move to direct investment into equities once they understand market behaviour and gain the necessary expertise.
