New mutual funds order cometh

With 90% assets of mutual funds concentrated in top 15 cities,there is an urgent need to tap the huge opportunity elsewhere... and the ball is in the MFs’ court,says Ritu Kant Ojha The bleeding mutual fund (MF) industry is keeping a close watch on the final guidelines that the Securities and Exchange Board of India (Sebi) is expected to unveil in the near future. If all goes well,Sebi’s move will be a game changer for the battered industry and the the way business was being done till now will change completely. In its board meeting recently,Sebi took several far-reaching decisions that would improve their balance sheets and provide additional incentives on investments beyond top 15 cities aimed at increasing the MF penetration in the country. The MF industry was on a ball through most of the last decade. But towards the end of the decade,August 1,2009 to be precise,the party came to an abrupt end with the Sebi’s decision to ban the entry load – a 2.25% charge that was deducted from the investment for paying commission to the agents. However,while that addressed the churning of the investors’ portfolio to a certain extent,it hit both the financials as well as distribution of MF companies really hard. It took two long years for the government to realise that the MF business needed to be revitalised as the business was fast becoming unviable due to shrinking margins. FOCUS ON TOP CITIES As per the new Sebi decision,asset management companies (AMCs) will be able to charge additional total expense ratio (TER) of up to 0.3% depending on the extent of new inflows from locations beyond top 15 cities. “0.3% additional TER will be allowed if the new inflows from these cities/ towns are minimum 30% of the total inflows. In the case of lesser inflows,the proportionate amount will be allowed as additional TER,” Sebi said. There is a merit in why Sebi has stressed on top 15 cities. Sample this more than 90% of the assets under management (AUMs) of the industry comes from the top 15 cities. What is even more worrying is that investors in the top five cities in India contribute about 80% of the total AUMs that serious questions over the inclusive growth that the government harps upon. V Ramesh,deputy chief executive of Association of Mutual Funds of India (Amfi),explains the reason for this lop-sided growth,“the cost of customer acquisition in the smaller towns is much higher than in the bigger cities. There is a cost to make investors understand a product and the thin margins did not allow the industry to focus beyond top 15 cities.” Debashish Mallick,MD and CEO of IDBI MF,says,“once we decide to go beyond the top cities, there would be new expenses like CDs,brochures,events,branches,employees and investor education that will come up. Every AMC will have a different strategy depending on their own focus areas.” Compared to the smaller fund houses,companies like UTI MF, Reliance MF and HDFC MF would benefit the most since,by the virtue of their being in the business for a longer period,they have branches in a large number of cities as compared to others. “The older players will have an upper hand as compared to the new players in the fund business,as they already have a base in a large number of cities,” said Sanjay Sinha,founder,Citrus Advisors and a veteran in the mutual fund business. SEBI’s ‘GAME CHANGER’ The government had recently highlighted the need for channelising domestic savings from gold and fixed deposits into the equity investments in India. In a country of 1.2 billion,the total number of mutual fund investors remains just at over 20000000,less than 2% of the total population. This is in stark contrast to the situation in China. While the Indian mutual fund industry is now managing R6.85000000000000,with 26% of it (R1.8000000000000) in equity,the Chinese mutual fund industry manages the equivalent of R19.4000000000000,with almost all of it in equity. “In the context of the 100 years plus history of the Indian capital markets and the almost 50 year history of the Indian mutual funds,this is a shocking number. More so,when one realises that till 1998,there was no mutual fund industry in China,at all,” said Dhirendra Kumar,MD of Value Research,a mutual fund research company. Till now,the MF industry cribbed about thin margins and poor financials for not being able to target smaller towns. However,with this additional incentive coming in,fund houses may not have any reason not to penetrate deeper into the country. “While it is relatively difficult to acquire clients in non-metros,the money that comes from such investors ‘sticks’ for longer periods. Longevity of assets that come from beyond 15 cities is much higher,as churning is more of a metro phenomenon,” said Jaideep Bhattacharya,managing director,Baroda Pioneer AMC which is launching a countrywide campaign to attract investors from smaller towns. “Sebi’s move will be a game changer for the battered industry. The way business was being done till now will change completely and new distribution strategies will kick in,” he said. Top honchos of fund houses say their compliance divisions are keeping a close watch on the detailed guidelines by the Sebi and their short-term and long-term marketing strategies would be based on that. Better financials for the AMCs are expected to improve both the advisory as well as service levels which will benefit the mutual fund investors. —ritukant.ojha@expressindia.com