After the market regulator came up with new regulations banning entry load from August 1, the Rs 7.5 lakh crore mutual fund industry has been grappling with the new set of norms. Advocating that stricter regulations are necessary given the risk of return that the fund industry runs on its investments in various instruments, AP KURIAN, chairman of the Association of Mutual Funds in India (Amfi), tells Chandan Kishore Kant that it is a question of time before things settle down. Excerpts from the interview:
Is the mutual fund industry over regulated?
Certainly not. This industry needs to be regulated strictly since we are investing in risk-return instruments. We don’t promise any returns, which can be zero, or capital, which can go down. Therefore, it is very necessary that there are strict rules and regulations governing investments. Transparency, disclosures, pricing and fees, all are absolutely required.
However, industry leaders are unhappy with the recent norms from the Securities and Exchange Board of India (Sebi). What’s your view?
It’s an inadequate appreciation. They are all coping up with this. Just one month has gone by. Fund houses, distributors and investors, all need to rearrange and recalibrate their businesses and understandings.
How long will it take?
The system takes time for any change that is dictated by protecting the interests of the investor. It will take another few months for new patterns to evolve during this transition period. Even mindsets need to be changed. It is a paradigm shift for the industry, where the investor needs to understand that if an advisor or an institution is devoting time, knowledge and abilities, they need to be compensated.
In a bid to incentivise distributors, fund houses are offering 50 to 100 basis points as upfront fees from their pockets. Can the fund industry, which has a low profitability, sustain this for long?
These are all commercial considerations... At first, a fund house should understand whether it should pay at all? If the regulator says that investors have to pay separately to the distributors, the big question before the Asset Management Companies (AMCs) is, should they pay at all? If they have to pay, from where and how will they pay?
Won’t this upfront payment decision hit the AMCs’ profitability?
Initially, yes. They are paying now, and they may have to pay for some more time till these new changes are accepted. And the whole business of distribution has to undergo a sea change. A distributor must give advice and help investors transact. He needs to understand that there are two dimensions to his role now and in doing this, he must be compensated.
Which section of distributors will be the most impacted?
The major impact of the new norms will be on the Independent Financial Advisors (IFAs). Since, these IFAs meet middle- and low-income group people, they will be hit initially.
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What are the major negatives of the new norms?
Investors paying to the distributors separately through cheques will prove to be a hassle. Both of them will have to face difficulties. That apart, why only mutual funds and why not the entire financial products? The Swarup committee has recommended a similar thing. If other products also follow, then there is no problem and we are only leading the change.
Would you agree with the central bank’s observation that the mutual fund industry has over-dependence on corporate money and less rural penetration?
These are half truths. It is true that there is an inflow of corporate money into mutual funds. But I don’t think there is anything wrong in it. We are like an investment vehicle giving several products to suit the investment needs of several customers. These could be corporate houses, institutions, trusts, societies and individuals. It is not that the inflows are only from corporate houses. Sebi’s data clearly show that at the end of March, 2009, individuals accounted for over 37 per cent of the total assets.
NRIs accounted for another 5 per cent, taking the total non-corporate money to 42 per cent. Is 42 per cent lower? However, it does not mean that the industry is complacent about it. Steps are being taken to increase non-corporate investment. Fund houses are increasing their footprints, either directly by opening offices in different locations, or indirectly by establishing franchisees, sales officers and places of acceptance. Otherwise, it was not possible to increase the number of portfolios from 14 million four years ago to 50 million today.
Will these norms impact the pace of penetration (as IFAs are going to be the worst-hit)?
Initially, yes. The speed with which we are reaching out to smaller towns and cities, and bringing in investors from the middle- and low-income people will reduce. But that, hopefully, will be a short-term phenomenon. Once the reality sets in, once people realise that this is the way business is to be done, it will pick up.
Almost 20 applications are lying with the market regulator for setting up new fund houses. Do we need more players?
Absolutely. We need more players. And we are just about 7 per cent of the total household savings. So, we have a long way to go, whereas bank accounts account for 50 per cent of the savings. Even insurance is far ahead of us. So, we have a long long way to go. We have millions of savers in the country who do not invest in mutual funds.