The indices are surging and assets under management (AUM) have crossed the Rs 8 lakh crore mark. Yet, there is no increase in the AUM of equity schemes. Why?
This is a challenge we are facing in a market that is very volatile but has given great returns in the past year. In fact, we have seen an increase in redemption in equity schemes in the past four to five months. Investors are probably waiting to see if the market is going to crash. There aren't many people who invest in funds, and those who do, are usually risk-averse.
We are conducting awareness programmes to educate people on how investing in a diversified equity fund can help them build wealth in the long run. Investing directly in equities may be disastrous since you have to study the market and buy the right scrips at the right price. This can be taken care of by professionals through a mutual fund. With systematic investment plans (SIPs) as low as Rs 100, anybody can invest.
How will trading in mutual funds through exchanges benefit the retail investor?
It's an order routing system according to which the broking community can now take orders for buying or selling mutual fund units, which is similar to trading on a stock exchange. With 2 lakh terminals across 1,500 locations in the country, this facility offers easy operation and has a wider reach. Also, a client doesn't need to open another demat or broking account. Mutual fund transactions can be conducted through his existing account.
On the cost front too, online trading proves cheaper for customers as the brokerage fee is only 25-50 basis points, which is much less than that paid earlier to distributors. The exchanges and depositories, such as the National Securities Depository, have waived fees till March this year to reduce cost.
When is AMFI likely to come out with its own mutual fund trading platform?
There is already an exchange platform and we have no plans of revisiting this area. Karvy Computershare and Computer Age Management Services (two of India's largest register and transfer agents, which service 95 per cent of the mutual fund houses) have launched an online transaction platform. We are considering whether there is space for us.
What is your view on the Swarup Committee's recommendation to phase out commissions for insurance agents? Also, should there be an umbrella regulatory body instead of various monitoring agencies?
The Swarup Committee's proposal should be uniformly applicable to all financial instruments. An investor must have a clear understanding of the commission he needs to pay. However, we also feel that to promote instruments that carry even a little risk, such as mutual funds, which invest in capital markets, an intermediary needs to perform an active role. This can be achieved by ensuring transparency in compensation. Instead of an investor paying a separate cheque to the distributor, he should authorise the fund house to pay the same from his funds. We are pursuing the idea of a single regulatory body, but it will take some time. Such a model exists in the UK, but ours is a big country with more complexities. So we need to adopt a system that suits us best.
Will the ban on entry loads make distributors shift their product preference?
The distributor plays an important role in motivating the investor and explaining the concept and features of financial products. He also identifies the advantages and disadvantages of each fund scheme and picks the one that suits the investor's objective. He, therefore, has to be compensated accordingly. The shift in the policy framework means that now he will be paid by the investor. It may take some time for distributors to adjust to the new format. The ban on entry loads has led to some distributors concentrating on unit-linked insurance policies, but the insurance sector will also adopt this system over time.
The draft Direct Taxes Code has proposed the implementation of the exempt-exempt-tax format in equity-linked savings schemes (ELSS). What's your opinion?
We are not in favour of such a proposal and have already sent our recommendations to the government. We have made it clear that ELSS should be included in the category of instruments that are eligible for tax deduction.
Do you think the Indian financial system was able to withstand the global financial crisis well?
India did not face any major issue other than the liquidity crunch in the financial system. Corporate investors had to withdraw from mutual funds as they could not get enough credit through the banking system. However, the mutual fund industry was able to face the pressure on redemption because the quality of our assets was of the highest investment grade. We had to resort to borrowing for a short period, but the RBI came forward with a special window, where we could pledge investments, borrow money and pay them. Within two to three weeks it was settled as we follow very strict norms regarding debt funds.
What does 2010 hold for mutual fund investors?
This year, investors will be able to go to a mutual fund Website and invest directly using their banking network or a credit card. The stock exchange platform will also make it convenient and easy for investors. There are other platforms that are being launched by CAMS and Karvy, as well as distributors like Bajaj.
In terms of products, investors can look out for more arbitrage products as well as children's products for educational needs, etc.
A.P. Kurian is Chairman, Association of Mutual Funds in India