The robust growth of Indian mutual fund industry is
an indication that the country is an attractive investment destination. India is emerging as the big
investment destination, riding on a high savings and investment rate, as
compared to other Asian economies. The trend of rising personal incomes has
been witnessed not only amongst the young population, but also the high net
worth (HNI) segment, which have sizeable sums to invest.
PricewaterhouseCoopers (PwC) and the Confederation
of Indian Industry (CII) in a report titled Towards 2015: “Sustaining
Inclusive Growth - Evolving Business Models” had highlighted the low level
of retail participation and the persistent challenges which the industry is
facing. Limited reach in smaller towns and cities (beyond Tier 1 cities), cost
pressures and lack of investor education, are some of the most dominating
concerns, which fund houses are dealing with. The report emphasises the
predicament of the distribution community, after the restrictions on entry
load, and tries to identify viable measures to deal with this change. The
report also highlighted the regulatory front, enlisting the various changes
that have occurred over the last year, along with their impact on the business.
The regulatory trends across some other global economies like US, UK, Australia and China also have been looked
at to bring a perspective to local regulations vis a vis the rest of the
world.
Despite the growth of mutual fund industry,
penetration levels in India are low as compared to
other global economies. Assets under management as a percentage of GDP is less
than 5 per cent in India as compared to 70 per cent in the US, 61 per cent in
France and 37 per cent in Brazil.
U K Sinha, Chairman - CII Mutual Fund Summit 2010
and Chairman & Managing Director, UTI Asset Management Company Limited
commented: “The Indian mutual fund industry is passing through a transformation.
On one side it has seen a number of regulatory developments while on the other
the overall economy is just recovering from the global crisis of 2008. The
regulatory changes have been made keeping in mind the best interests of the
investors. However, like all changes these changes will take time to be adapted
by industry, intermediaries and the investing public at large. The industry is
looking forward to early resolution of certain inter-regulatory issues
requiring Government / Court intervention. Market participants are waiting to
see how the industry adapts to these changes, while trying to maintain its pace
of growth. Mutual funds are restructuring their business models to provide for
increased efficiencies and investor satisfaction. The industry also faces a
number of issues which are characterized by lack of investor awareness, low
penetration levels, high dependence on corporate sector and spiralling cost of
operations. The Growth rate of the industry therefore needs to be seen from
this perspective. Though, it is commendable to note, that, Assets Under
Management have managed to record a compounded growth of 28% over 2006-2010,
however, the AUM of Equity Funds and Balanced Funds where retail investors
invest have only grown by 20% in the same period. The net sales of
Equity/Balanced funds in 2009-10 have been one of the lowest in recent years.
India has vast growth potential
backed by a resilient economy, commensurate with an accelerated GDP growth rate
of 7.4%, high rate of household savings and investments”.
Since the 1990's when the mutual fund space opened
up to the private sector, the industry has traversed a long path, adapting
itself continuously, to the changes that have come along. Growth in Assets
Under Management (AUM) experienced has been unprecedented, growing at a CAGR of
28% over the last four years, slowing down only over the last two years, as a
fallout of the global economic slowdown and financial crisis. Although investor
confidence was significantly eroded and AUMs suffered a dent, the sale of
mutual funds has revived over the last few quarters, which implies regained
confidence of investors, striving to look at alternate investment opportunities
and any attendant higher returns, though the markets continue to be choppy.
In today's volatile market environment, mutual
funds are looked upon as a transparent and low cost investment vehicle, which
attracts a fair share of investor attention helping spur the growth of the
industry.
Investor contribution remains skewed towards the
corporate sector: Inspite of India offering an exciting retail environment, with abundant
growth opportunities, participation from the segment of retail investors
continues to remain at deplorably low levels. As of March 31, 2010, the participation from the retail segment
was 26.6%, a marginal increase from 21.3% as on March 31, 2009. Dependence on the corporate sector is
still pretty pronounced at 51%, which is not much of a change from last year.
Volatile market conditions, sound a note of caution for the industry, as high
dependence on the corporate sector may result in the fund houses being prone to
unexpected redemption pressures.
The rationale behind institutional sales claiming
such a large chunk of the AUM pie is the benefit of tax arbitrage and lack of
short term investment options. When compared with economies like US and China, investments
channelized through corporates, comprise only around 15% and 30% of the assets
under management (AUM), respectively.
Overall, the assets under management recorded an
impressive growth of 47%, as of March 2010 which was predominantly driven by
the corporate sector, posting the same level of growth. In the same period, the
retail sector also managed to report a strong growth of 84% in its assets under
management, followed by the HNI segment growing 24%. It has been observed of
late, that the HNI segment especially in Tier 2 &Tier 3 cities has expanded
creating a pool of investible surplus at the disposal of the mutual fund
industry.
Tectonic changes in Business Models have been
necessitated to sustain profitability: The restriction of entry load on existing
and new mutual funds last year marked a turning point in the functioning of the
mutual fund industry. This in effect, has spelt out a huge impact on the
commission structure of distributors, leading funds houses and distributors to
restructure their business and operating models in order to arrive at a
profitability solution. Intermediation has become painful for distributors who
are making the best of this current situation by turning themselves into
financial advisors, which would act as a positive step towards financial literacy
of investors. Another measure which is being adopted by distributors is that of
deeper segmentation of clients, wherein the lower rung of revenue earners is
being encouraged to transact online. In addition, retail strategies are being
modified to generate optimum efficiencies. There is also another category of
distributors which is using this regulatory change as a stepping stone to
acquiring new clientele by luring them with attractive mutual funds and then
selling them high margin products.
The various options for Business models that are
currently being explored are: discount brokers, directly from AMC and advisory
model. Discount brokers model will serve customers at a nominal fee, earning
commissions from the AMC in addition to receiving trail commissions. Directly
from AMC model is apt if the customer is able to identify the type of fund that
he wants to invest in. Advisory model functions on fees paid to financial
advisors for advice rendered by them. Liaison with an advisory model is more
likely to pave the way for long term benefits, aiding in gaining more market
share.
However, distributors seem to be daunted by a
common concern of lack of adequate investor education, impacting all these
models, as their success will depend extensively on the levels of financial
literacy among investors. The investor stand to reap long term gains, as all
the alternatives in one way or other urge investors to move towards better
awareness and product education.
Cost management, a key element of operating models:
All
business and operating models are central to meeting customer needs while
streamlining their business processes. In order to establish a sustainable
model, which will yield profits in the long run, cost management needs to be
dealt with a firm hand. The three major cost components of fund houses are
distribution cost, hiring cost and spending on marketing.
The industry should look for diverse range of
products, regulations for the distributors, eligibility norms of AMCs, trading
through stock exchange platforms and real estate mutual funds.
Other
key highlights of the report are as follows:
- Strong distribution
networks are crucial. Learning's can be taken from other sectors like
FMCG, telecom, to get a new perspective
- Assessment of
regulatory and business trends in other global economies, on similar
businesses
