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.