Mutual fund industry needs an urgent fix: Dhirendra Kumar
Dhirendra Kumar May 20, 2014
You don't have to talk to many people to know that the Indian mutual fund (MF) segment is in crisis. It's not a crisis that has built over weeks or months, and it certainly will not dissipate over anything less than years. Broadly, the shape of the crisis is self-evident. If one leaves aside fixed-income funds, which are just a cash-parking device for corporate treasuries, then investor interest in MFs has now been in decline for at least half a decade. Every industry insider agrees that the number of investors, especially fresh investors, as well as fresh investments, is declining.
This kind of a secular decline doesn't make for a small crisis. It's something that eventually becomes a big, fat existential crisis. MFs could go on becoming less and less relevant till they are like delicate hothouse plants in the personal finance field, surviving as a niche product used by a handful of the so-called high net worth individuals.
But what is this crisis, exactly? What caused it and what can cure it? Many people will point to specific regulations or events or competitive factors. Perhaps it's because SEBI (Securities and Exchange Board of India) no longer allows entry loads, perhaps because some other products offer higher commissions for sellers, or maybe it's the long stagnation in equity markets. All these could be relevant and probably are. However, are they the whole picture? Are they the substantive reason?
A better way to understand the crisis would be to step back and approach it from a different direction.
Let's try and answer the question: "What should an ideal MF industry in India be like?" Then, let's look at the gap between idea and reality and see what understanding that brings.
Ideally, MFs should have the following characteristics:
(a) Asset managers would have a small number of well-differentiated, simple products. There would be no flavour-of-the-day schemes that seek to exploit a specific sector or theme;
(b) The connection between investors' different financial needs and the product design would be self-evident. Of course, to be self-evident, this connection has to actually exist;
(c) The commercial interests of fund companies and financial intermediaries who sell funds will be aligned to the financial interests of the investor;
(d) There would be a statutory push (in retirement savings and taxation rules and laws) for investors to commit long-term growth-oriented investment in funds;
(e) Operationally, it would be simple and convenient to invest in (and redeem money from) MFs.
So, where are we on these issues? The real world activity of investing in India's MFs is far - I would say very far - from the ideal I have described. And do note that this is not an utopian ideal - it's not as if I'm asking that politicians speak the truth and speak it politely during their election campaigns. For the most part, these are simple and doable things. Some of them have even been done in bits and pieces. For example, take product design. All fund companies - without exception - actually have a core of simple and easy to understand products. The problem is that most of them - especially the big ones with the marketing firepower and the reach - also have a distracting fog of hype-driven products that just obscure the good ones and confuse investors.
If you think back to the tactical reasons that are trotted out for MFs' problems, you will find that all of them would have been irrelevant had the basics been right. If investors had experienced long-term equity returns, they wouldn't have run away when the markets stagnated. If the interests of all players were genuinely aligned, SEBI wouldn't be constantly tinkering with micro-regulations. Striving for an ideal is not idealistic - it may actually be the most practical way to figure out what is wrong, and how to fix it.
(The author is CEO, Value Research)