The mutual fund (MF) business of State Bank of India has not been able to position itself among the top players despite having one of the largest distribution networks. The SBI Mutual Fund is expanding to attract more investors from Tier-I, II cities. Achal Kumar Gupta, managing director of the fund house, tells Chandan Kishore Kant that profitability in the current financial year will be under pressure due to the entry load ban, but won’t slip in the negative territory. Excerpts:
How has the journey been since the ban on entry load came into effect?
The entry-ban load has adversely impacted inflows in equity funds. The distribution business has undergone changes since the ban in August. Distributors are not as much enthused. Nearly 90 per cent of inflows in equity schemes come from distributors, who are feeling the pinch. Now it is clear that distributors will not get the type of commission they were paid earlier, as asset management companies (AMCs) cannot sustain it. Fund houses are operating on a very thin margin and several of them are incurring losses. There has been a net outflow in the equity asset category. However, it cannot be attributed to the entry-load ban alone. Markets too have gone up substantially and investors have booked profits.
Is the market regulator's persistent intervention making the fund market unstable?
If any move is ultimately going to benefit the investor, we have to welcome that, since investor is the ultimate king. But regulations will hit our business. There will be short-time blips, but the industry will surely find a way out.
Independent financial advisors (IFAs) find it tough to charge for their services from clients. Are other channels of distribution gaining prominence?
In this changed scenario, the banking channel has become more important to us. Currently, this channel accounts for 20-25 per cent of our business. The share of the State Bank group channel will go up to 35 per cent, and we are working hard for it. It is the top priority for us, as this channel is less price-sensitive.
You mean the network of smaller distributors will shrink...
Going forward, there is a possibility that the number of IFAs who sell mutual funds exclusively, may come down. We depend on the IFA channel for 30-35 per cent of the business. We are aware that this channel is the most hit by the entry-load ban. If an IFA equips himself with the knowledge and is providing quality service, he will grow faster than earlier.
Despite having one of the largest networks across the country, why is SBI’s MF business not among the top three?
Asset under management (AUM) should not be the only indicator to determine the ranking of fund houses. There are other important equally important parameters such as the number of retail customers, profitability, the level of customer satisfaction. On all these parameters, SBI Mutual Fund would be among the top three. Our large distribution network has helped bring in large number of retail customers. Both SBI and SBI Mutual Fund are making all possible efforts to tap the full potential of the distribution network of SBI. We hope to be among the top three players in terms of AUM by 2011-12, but our focus area would be retail customers.
Do you plan to increase your current locations?
At present, without taking into account SBI’s bank branches, we are servicing from 100 locations. We will add another 75 offices in two years, most of them in the Tier-I and II cities. We will expand in smaller cities as investors will come from there. At the same time, we cannot ignore the top 8-10 cities as they account for a major chunk of the business.
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How would you rate 2009-10 in terms of profitability?
There will be reduction in our profitability. If the regulation (entry load) had not come, profitability would have increased. Since some part of the commission is going from our own pockets since August, its impact will be felt. We will try to tap other avenues such as PMS portfolio to soften the impact. I do not know whether we will be able to make up for this loss, but we will not slip into the negative territory and will remain profitable. We still have reasonable profits.
Recently, Sebi reiterated the Association of Mutual Funds of India’s mandate not to compel investors for a no-objection certificate...
Some malpractices had set in raising doubts. We have to comply with the regulations. It is difficult to say what is going to happen with the trail commission once an investor shifts distributors. Clarity is required on this front.
There are arguments on both sides. Why should the trail commission stay with the existing distributor and why should it not go to the new broker? But there is no single answer to that.
