Ashu Suyash, MD and Country Head of Fidelity Mutual Fund, tells Babar Zaidi how the removal of entry loads on mutual funds last year has affected small investors.
It has been a year since entry loads were banned by Sebi. Do you think it has helped the small investor?
We believe entry loads on mutual funds were abolished to benefit investors. The move would have been more effective had it been less disruptive for all concerned- investors, asset management companies and intermediaries. Over the past year, we have seen most investors turning away from mutual funds and losing out on wealth creation opportunities offered by, perhaps, one of the best periods in the history of the Indian equity markets. This is because the intermediaries do not have an adequate incentive to recommend mutual funds.
With the abolition of entry loads, intermediaries are expected to charge investors for their services, but are unable to do so in the absence of a pricing framework. It is, therefore, natural for them to take the easier path of recommending products such as unit-linked plans, structured products and fixed deposits, which are not subject to such regulation. This is where the outcome of the move diverges from its intention.
Should the new rule have been implemented differently?
We expected the no-load regime to be ushered in gradually, with steps such as distributor regulation and creation of a level playing field for all investment products. AMCs should also have been given time to shift to the new regime.
How can AMCs resolve the problems of distribution and reaching customers in small towns?
The past year has been a defining period for the mutual fund industry and a lot will depend on how we deal with the distributors' disinterest. We will continue to focus on our distributor network. Independent financial advisers and bank branches offer access in each neighbourhood and are key channels. Simultaneously, we will leverage new channels, such as stock exchanges and online platforms. PSU banks remain under-utilised and I see potential in using the insurance industry as a channel.
Mutual funds are the simplest, cheapest market-linked products. Despite this, Ulips had registered better sales than mutual funds even before the no-load regime. Why?
The playing field has been uneven for mutual funds and Ulips. This was so before the zero entry load regime and is worse now. If you remove the pricing anomalies and allow the two to be sold on individual merit as investment options, the question would be different. Ulips' liberal pricing regime has allowed them to be marketed aggressively compared with mutual funds, which have had caps on loads and expense ratios for several years.
Ulips also have the insurance aspect, which has an emotional appeal for most consumers. This is why customers continue to pay premiums for Ulips and discontinue SIPs in mutual funds in adverse market conditions.
There is scope for insurance and fund houses to work together and create quality products. A framework supporting such partnerships could go a long way in the growth of both industries. It is not about one industry growing at the cost of the other.
Nearly 22% of investors in equity funds exit within a year of investing. Is there a fundamental flaw in the way the Indian investor looks at mutual fund investments?
Unfortunately, investing in equity mutual funds is still viewed as an option to make quick gains and investors try to time their entries and exits with a view to maximising gains. Many are unnerved by a downturn or volatility in the equity markets. We have reiterated that time spent, not timing, is the key to success in equity investing. The only way to change investor behaviour is through sustained initiatives in educating them, complemented by distributor advice and hand holding during volatility.
How can AMCs help investors replace fixed deposits with debt funds?
In debt funds, institutional investors feature more prominently than retailers due to the big ticket sizes. Besides, low retail participation in mutual funds follows the low percentage of household savings that goes into the capital markets-less than 5%. Debt funds can be offered as a suitable option to first-time individual investors and there is a need to create this awareness. It could pave the way for long-term, sustained flows in debt funds.