Ever since January 1, 2008, when the Securities and Exchange Board of India (Sebi) announced zero entry loads for mutual fund schemes, there have been a series of initiatives by the regulator to empower the investor. We decided to seek the opinions of six experts on these and other related issues as part of the second Money Today Round Table on Mutual Funds.
The panellists included Vikramaaditya, CEO, HSBC AMC India; Ajit Dayal, director, Quantum AMC; Vikaas M. Sachdeva, country head, business development, Bharti AXA Investment Managers; Sudip Bandyopadhyay, managing director, Reliance Money; K. Venkitesh, national head, distribution, Geojit BNP Paribas and Suresh Sadagopan, CFP. They discussed how variable pricing will help investors and that there should be exit loads depending on how long an investor stays in the fund. Excerpts of the discussion.
Q. Do you think that more investors have entered the mutual funds arena after the entry load was waived for direct investments in funds?
I do not think so. When we set up Quantum, we wanted to stop malpractices in the distribution channel. We see ourselves as asset managers and not asset gatherers. Unless the two are distinctly defined and kept separate, there will be room for all stakeholders. The future will see consumers investing directly in the fund schemes of asset management companies (AMCs) and no-load funds will be the norm. Sebi’s move to allow zero loads highlights the consumers’ need for transparency on costs. But it doesn’t mean that there is no role for distributors. They have a key part to play, and that will need value addition on the service end.
|Click to see performance of top mutual funds|
There is no data to prove either inference. I think there is a greater issue of financial literacy that needs to be addressed. Fundamentally speaking, empowering the consumer, for any financial intermediary, market and industry, should be about enabling him to make the right optimal choice. This may come at a price. However, if it is the optimal choice, it will benefit the investors in the long run. Distributors have a role to play in this regard as much as AMCs. The no-distribution, direct-AMC model of Quantum may work in a few cities. For the fund industry to grow beyond the top 8-10 cities, distributors are still the key.
Making It Easier
|The teething troubles consumers face when investing in a mutual fund scheme|
|SIPs accumulating above Rs 50,000 being asked to comply with know your customer (KYC) norms.|
|Ambiguity over KYC norms practiced in the industry.|
|Difficulty in getting no objection certificate (NOC) from distributors for direct access to the fund.|
|Fixed maturity plans (FMPs) being sold as tax savers that earn higher returns than bank fixed deposits.|
|Difficulty in consolidating folios within the same fund scheme.|
|The five steps that Sebi has taken to empower investors|
|No entry load for direct investors from Jan 1, 2008.|
|Allow investors to move from distributor to direct account access.|
|FMPs to disclose monthly portfolios.|
|Simplification of mutual fund offer document.|
|Variable entry loads for investors.|
I am a fee-based financial planner, so I am slightly different from the regular distributors. However, in this matter, I am in their favour. Intermediation is not new in mutual funds. It is happening in insurance too, and I have reservations about the way insurance firms are distributing their products. I usually earn about 2-2.5% commission as a fund distributor. Perhaps, the big distributors get 5-6%. Compare this with the commission on a unitlinked insurance plan (Ulip). On an average, it is 25-30% and for some products it goes above 90% in the first year. There is no level playing field as far as mutual fund distributors are concerned.
Q. But insurers argue that their products are only for retail consumers whereas mutual funds are for the corporate sector, high networth individuals (HNIs) and small investors. Hence, the higher commission. Also, there is transparency to some extent. For instance, when an insurance agent has to take consent at the time of selling a policy. He also shows a sales illustration with indicative future earnings. There is no such standardisation in the case of mutual funds.
Today, the distributors for insurance, funds and other financial products are not very different from each other. What will happen if you do not allow a distributor to sell mutual funds in a profitable manner and ask him to, more or less, shut down the business? He will probably move to pushing insurance products. This has started happening now. If mutual fund distributors are not adding any value at all, why should people who are promoting Public Provident Fund (PPF) and National Savings Certificate (NSC) earn a 0.5-1% commission? What is the value-addition that they offer? After all, we all know about NSC and PPF. Intermediation does have an important role to play.
We are looking at things from the point of view of the insurance and mutual fund industries alone. Let us consider what the people across the country need. The mutual fund industry gathers more than 90% of its corpus from the top 10-15 cities. Compare this with about 70-80% of the country that does not even have access to proper banking. What are we trying to debate here? Whether a distributor should get a 2% commission or not? Look at it from the point of view of the average customer and not just the one sitting in South Mumbai. For him, the way to access financial products is through distributors who are present where he lives. An intermediary must have a remuneration and incentive to reach out to him. An AMC cannot have a network of 10,000 touch points; it needs the intermediary as much as the consumer. One can understand this better by the reach of LIC and post offices. The penetration they have has done many small investors great good.
Q. Vikaas, yours is a new AMC. What initiatives have you taken to reach out better to consumers?
Vikaas M. Sachdeva
From being the poster boys of the financial services industry, mutual funds have become the whipping boys in barely two-and-a-half years. Just as we could do no wrong then, we cannot do anything right now. There are many issues and debatable points, but being one of the few people involved in training the distribution fraternity, I believe there is no right or wrong solution. We are an economy where each of the financial services’ arms is growing. There may be a model we can use as a benchmark but we cannot ape any existing one. I have been in this business since 1995-96 and I have seen the distribution fraternity evolve. I am extremely convinced about the role that a distributor has to play. I think they have matured in the past few years and are far more cognisant of their social responsibilities. There are bad apples, but just showcasing them and saying this is what the industry has degenerated to, is a mistake of huge proportions.
Q. Venkitesh, the ball finally rolls into your court. What do you believe has been the impact of no loads, especially as you have operations largely in the tier-2 and tier-3 centres?
Regarding Sebi’s premise that distributors are mis-selling, I ask myself, “Why should I missell only a fund scheme when I am selling a range of products and can do that for everything?” Why single out the fund distribution fraternity? As distributors, we play a very important role in expanding the market as AMC costs are controlled. In tier-2 and tier-3 towns, we are aggregators. We thought we may lose out on business after direct access to AMCs was allowed. But today, 18 months later, only 5% of investors have taken this route. Out of this, the bulk is in debt funds, and then the corporates investing directly. There is an additional challenge that small towns pose—if you are to do business there, you can’t charge them more and not offer value-added services.
Q. We receive many mails from readers who seem to have been sold too many NFOs or funds on the same theme. Where is the transparency when it comes to selling?
As AMCs set up, they launched new schemes which resulted in a lot of churning. But that happens across all businesses. For instance, if you went to a shop to buy an air-conditioner, what does the salesman do? A multi-distributor will try to pitch that AC which gets him the maximum commission. We have to live with that. I do not think that regulations can really improve the situation. But this cannot go on for long. A distributor banks on the service his customers experience. I can’t afford to suggest a product that performs poorly and expect the customer to come back to me later. It is in my interest that I advise him correctly.
Distributors are very discerning and no longer can an AMC launch a product and expect distributors to sell it. Distributors do not touch new AMCs until there are proven results.
I think the entry barrier for becoming a financial advisor is very weak. Finance is a simple subject and so anyone can claim to be an expert. AMCs start introducing funds and distributors start spreading them in the market. I see no need for so many exotic sounding funds. We have a simple bouquet of products and believe that is what an investor is looking for. Creating hype and pushing exotic schemes means that distributors are bound to push hard to make a quick buck.
We have different models for different markets and that has worked well for us. We analyse the performance of the funds that we distribute and suggest them to customers who seek advice or come with specific demands. If I don’t give him what he seeks, he will go to someone else who will. We want clients to come and interact with us on a continuous basis for multiple products. I think this is pretty much the same for all the large distributors. They have a track record, they have credibility and I am sure they behave in a mature manner. Yes, there are crooks, but they are present in every walk of life. We cannot single out an industry.
This is not true. As in the past, we continue to advertise our existing products rather than indiscriminately launch new funds. The one fundamental question for us, as an AMC, is identifying the driver to look at a new product. We continuously evaluate how our products address the requirements of investors. These requirements do change. The product does not always require a significant or a vtotal revamp, but there are tweaks or enhancements that you might want to introduce. Perhaps, you would like to position the product a little differently based on the environment and to suit the needs of the investor.
Q. Will the proposed variable load structure help investors?
I think Sebi feels that the current fee structure does not give investors any control over the fees that the distributor gets, especially if he is not satisfied with the latter’s advice. But this will pose serious problems for investors as well as distributors. For investors, it will become an experience that is price-driven and not value-driven, and for distributors, it will be an incentive to not sell funds and, instead, pitch other financial products that offer better commissions.
In the long term, variable pricing will empower the consumer, but it may be too early to rush into it now. There is a need to get clarity on how this system will work and what will define unsatisfactory services by distributors.
I think distributors of different types will exist and offer variable discounts. At present, this will only complicate the fund industry. It may be better to re-introduce transparent rebating that the Association of Mutual Funds of India (AMFI) and Sebi had banned in 2002.
I think we need to be realistic when we are talking about these things, and we need to understand the situation in which we are living today. For instance, a doctor charges you a fee depending on his expertise and your ailment. That is variable load structure. You go and buy the medicine from a pharmacy, there is a fixed price that you pay. These are two-tier structures. Yes, the MF industry can graduate to that, but I think we are far, far away from it.
Q. Now that the markets have started to go up, have investors returned? Are they investing in existing funds or do they prefer NFOs?
In March when we were suggesting that people enter the market, there was fear that it will fall further and many even discontinued their SIPs. However, now they are back and investing.
I think the behaviour of investors around the world is pretty much the same. When the markets are down, they get really scared. They do not want to put money. When markets are moving up, they want to invest. No matter how much you try to empower consumers, you have to deal with this phenomenon.
Investors have a herd mentality, however much you explain the correct way to them. I, too, had clients who wanted to stop their SIPs when the markets were down, but then they saw better sense in continuing them. You are right, the last few NFOs have suddenly seen investors wanting to re-enter the markets when, instead, they should be investing in funds with a good track record.
It is extremely important for investors to start looking at existing funds which have performed well rather than jump into NFOs. But, this does not mean that they should ignore NFOs. They must be discerning while evaluating a new fund and where and how it fits into their investment plans.
Q. There is also the issue of KYC norms. Has it created more entry barriers?
Yes, it has. It is amazing how financial products are treated differently. Take, for instance, insurance policies. There is no need for a KYC that policyholders have to follow. Enforcing such norms for mutual fund investors creates an entry barrier that poses problems.
KYC is interpreted differently by fund houses. I have had instances when clients have beenasked to furnish KYC details when their investment in a particular fund scheme goes above the Rs 50,000 limit. However, the same is exempt when the investor has two folios for the same fund adding to less than Rs 50,000. There is no standardisation of rules.
I agree with Suresh. The difficulty is compounded when you have investors from smaller cities. The moment you ask them for proof of identity, they become cagey and avoid investing in funds. However, the same is not true when they are investing in an NSC or a Ulip.
It’s again about the absence of a level playing field. I think KYC is needed but with a definite clarity on how, when and for who it is applicable for. The definition of KYC has seen so many changes that it has become confusing for all market participants, especially investors.
Q. We advocate long-term investing as the tool for wealth creation, but do little to achieve it. For instance, why not introduce exit loads and annual fee depending on how long an investor holds a fund?
For a fund manager to be able to perform well, long-term investing is the key. You are right, there should be exit loads depending on how long an investor stays in the fund. It happens in the developed markets. But such a business model will not suit a lot of people. The brokers will be up in arms. This is a radical change that we are talking about. If you really want to empower the investor, you have to change the way the industry functions because the investors do not need a lot of the stuff that we give them today.
I agree with Ajit. I think this is the way to go. The market is not a casino. You can’t treat it like one. We must try to convince the retail investor to be in the market for the long term. It will also allow fund managers to think better and not look at monthly AUM figures.
Maybe, we should have an exit load. I think, to an extent, the fund managers in the life insurance industry have a more peaceful state of mind when they are handling a corpus because there are exit loads and a three year lock-in for Ulips. That is definitely what the industry should look at.
Performance is what everyone is talking about and they are willing to pay a fee, as long as a fund earns them a return that is commensurate to the charges it deducts. After all, a fee is what you pay somebody for what that particular entity or individual is worth. One should reward long-term investors in funds. To a certain extent, closed-ended schemes did penalise early exits.
I think the fundamental point to keep in mind is that for any market and industry to succeed in the long term, we need to be able to have a situation where sustainable business models can be created for all people involved in that industry. Remember, the fund management industry is actually one of scale and there is a high element of fixed costs. Therefore, at present, comparing ourselves with markets which have a far bigger scale may not be the most appropriate thing to do. We will reach there some day, but as of now, we are an emerging industry. There will be a transition path, a long period before we can achieve that scale and enjoy those economies.
If you look at the total number of mutual fund folios, it is about 4.8 crore. I think it is very, very low compared to the number of bank accounts in the country or even the number of insurance policies sold. I think we have a long way to go before we debate or argue about some distributor commission or intermediary involvement. We should all work towards ensuring that there is proper penetration so that we can reach out to more people. Vikramaaditya’s point is valid that if the industry has a size, it can pass on a whole lot of investor benefits. If the industry is very small, there is very little that we can do. He is absolutely right that we need a lot of money to be spent on investor education.
Our panellists clarify some common concerns of investors
|Has the zero entry load attracted more investors?||Is there scope for different distribution models to co-exist?||Should fund schemes be simplified?||Will variable loads lead to confusion?|
|Vikramaaditya, CEO, HSBC AMC, India||There is no conclusive data.||Yes.||Yes.||The real issue is their implementation.|
|Ajit Dayal, Director, Quantum AMC||Our model is based on this format.||Yes, but they need to offer value addition.||Yes. Why have complex funds?||Yes, but this will be the way in the future.|
|Vikaas M. Sachdeva, Country Head - Business Development, Bharti AXA Investment Managers||Not significantly, as yet.||Yes.||Yes, some new funds are confusing.||It will initially pose tough challenges.|
|Sudip Bandyopadhyay, Managing Director, Reliance Money||Not really.||Yes.||This will be very beneficial.||There is not enough clarity now.|
|K. Venkitesh, National Head-Distribution, Geojit BNP Paribas||Not in tier-2 and tier-3 centres.||Yes.||Yes, simplification will help in choosing.||Distributors will have to offer value-addition.|
|Suresh Sadagopan, Certified Financial Planner||It has given more flexibility.||Yes.||For certain AMCs, definitely.||It will need time to get desired results.|
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