The mutual fund industry may have seen its assets under management (AUM) nudge Rs 8 trillion in 2009,double of what it was at the end of 2008,but much of this,as CRISIL points out,was because banks did not know else what to do with their deposits. And of course,with the stock market on a roll the BSE Sensex returned 80 per cent during the year the rise in share values helped. The bad news is that from August onwards,every single month saw money moving out of equity schemes. Its true that only for a very short period in the history of mutual funds has the ratio of money in equity and debt schemes been less skewed than the current ratio of 2:5 in favour of debt. But the fact that people are not keen to buy into equity schemes,at a time when the markets have been hitting new highs,is somewhat surprising.
Or maybe not. After all,mutual-fund schemes sales in India have always been driven by distribution. But distributors have lost out their fees since the capital market regulator decided in July that buyers would not be charged the 2.25 per cent of the value of the purchase. It was this entry load that used to be passed on by the fund houses to distributors as commissions. In the good days the top seven or eight banks earned Rs 150-200 crore apiece every year. The recent exodus of a wealth management team,from a foreign bank,shows how bad things are. Even before the entry loads were done away with though,life insurance companies were walking away with the bulk of equity investments. Over the past four years,investments into Unit Linked Insurance Plans (ULIPs),premiums of which are typically invested in equities,have dwarfed those into mutual funds. That happened because distributors were able to earn commissions,of anywhere between 20 and 40 per cent of the premium paid. All at the cost of the investor of course. Also,many investors believe that parking their savings in an ULIP is almost like saving for their retirement and the protection element brings added comfort. Even in big markets like the US,more than two-thirds of investments in equities are channelled through retirement plans such as the 401K.
back them are able to reach out to customers.
High-end and premium customers may not mind paying for advice but the smaller investors might. Consultancy firm McKinsey estimates that,under a certain commission structure,the profitability of mutual funds could drop to as low as one basis point this year,improving only gradually to 13 bps in 2011-12. Or it could range between 7 bps and 12 bps over the same period in a somewhat more affordable commission structure. That cannot be encouraging for an industry which is already in bad shape. Of the 37 AMCs in the market,about half are expected to post losses for 2008-09. And by a rough reckoning,there could be at least three or four that have been around for 10 years a fair length of time to be able to get ones act together and are still struggling. Given this,its not surprising that players like Bharti want out.
According to McKinsey,industry profitability,measured as basis points (bps) of the average AUM,dropped from approximately 22 bps to approximately 14 bps last year. Obviously,most funds havent been able to build corpuses that are large enough for them to be able to defray the expenses which can be high in an industry that has traditionally been driven by distributor commissions. To be able to cover expenses and come up with a surplus,a fund should have a minimum corpus of around Rs 10,000 crore,say experts,but barely half the funds can boast that kind of size. Now with the regulator doing away with entry loads,it will be harder to build scale. The bulk of the money,especially in the fixed income piece,is sourced from corporates,who are making the most of tax sops. Should the government decide that these large institutional investors need not be pampered,fund houses will be in even bigger trouble.
Duplicating a network of brick and mortar offices across the country is unlikely to be cost effective; somehow fund houses must team up to support smaller distributors. As it is,there are fewer dollars left now to spend on distribution. The Internet will become an important channel but only over time; right now,its the independent financial agents alone who can drive sales. Fund companies in Australia and parts of Europe have had great success with this model and seen disproportionately high flows from these platforms. It cant hurt for Indian fund houses to try.
The writer is resident editor,The Financial Express,Mumbai shobhana.subramanian@expressindia.com
