The past year has seen a flurry of regulatory changes in the mutual fund industry. These have been primarily directed towards making mutual funds a truly retail product. The regulator has made efforts to bring in transparency and protect the rights of the small investor. However, this has also resulted in the exit of the small distributor.
In a bid to fill this vacuum and reach out to the larger market, the Securities and Exchange Board of India (Sebi) has permitted trading of mutual fund units on recognised stock exchanges. While this has dramatically increased the number of potential points of sale for mutual funds, it has not translated into actual sales.
This is because everyone does not understand mutual funds and their complexities. Besides, few share brokers want to allocate time or resources to a segment that preaches buy-and-hold investing. So, is this the end of the road for the small investor as far as mutual funds are concerned? Will Sebi’s efforts at financial inclusion be in vain? Not really.
There is another channel that can act as a link between investors and mutual funds- public-sector banks. Till now, these banks have played a limited role in the distribution of mutual funds and can easily fill the gap. They enjoy the trust of their customers, which is very important for attracting investors. Who better to approach for investment advice than the friendly neighbourhood bank manager? They also offer a tremendous reach, with 55,000 bank branches spread across the length and breadth of the country. Some public-sector banks do offer mutual funds to their customers, but this is done in a limited way and is confined to a few branches.
They ought to learn from their private-sector counterparts, which have been selling mutual funds successfully for several years now. These banks have only 7,500 branches but account for 29% of the total mutual fund sales, while public-sector banks manage barely 5%. Roping in public-sector banks to sell mutual funds could be a win-win situation for all parties involved. Distribution and reaching out to new investors are the biggest challenges facing the Indian mutual fund industry. With public-sector banks stepping in as intermediaries, mutual funds will be able to cover the last mile to the investor. For investors, it will be an easy and accessible point of purchase for what is arguably the simplest, cheapest and the most regulated way to create wealth. They will benefit from informed decisions, with local banks helping them understand the products and concepts. This will provide new options for channelling the savings of a large number of investors.
For banks, this will be an additional source of income and another service to help them move up the value chain. However, all this depends on the willingness of public-sector banks to play this crucial role. Their staff will need to be trained to sell mutual funds. If the sales force is not adequately guided to advise investors, it could lead to mis-selling. This can cause disenchantment with mutual funds, defeating the very purpose of the arrangement. In some cases, banks may need to foster a new work culture very different from the existing one. Some publicsector banks, such as the State Bank of India, have managed to overcome these inherent roadblocks through strong leadership and clarity of vision. Now, others need to follow suit.
(Manavendra Prasad is Head of Products, SMC Wealth Management Services. These are the personal views of the author.)
