Sudden and intense policy changes have sometimes adverse repercussions in the long run. The decision of 'entry load ban' taken by the SEBI (Securities and Exchange Board of India) in September 2009 did not go down well with the mutual fund industry. The decision of entry load ban was implemented in a cut-and-dry manner instead of in a slow, phased manner. This thus resulted in a difficulty for the mutual fund industry to adjust to this new business model.

Citing this difficulty, the Association of Mutual Funds in India's (AMFI) Chief Executive - Mr H.N. Sinor has expressed his concerns, and plans to initiate a discussion with SEBI to review its 2 year old decision of a complete ban on the entry load. In an interview with the Economic Times, Mr Sinor raised a few points to express his concern for the mutual fund industry.

Explaining the fragmented structure of the Asset Management Companies (AMC), Mr Sinor said that unlike banks, the AMC business has a fragmented structure - "it's like a three-legged stool. You have manufacturers on one side, distributors on the second and transfer agents on the third. And on top of this three-legged stool sits the investor. You've to create a 'win-win' situation for all the three legs of the stool. There has to be something for everybody in this business. If you need mutual funds to reach out to larger geographies, we will have to review the cost structure. And if there's some push there, perhaps, we may again see some good days."

Bringing out the need of financial inclusion through mutual funds so that the mutual fund houses and distributors look beyond top-20 cities, Mr Sinor brought out the fact that the distributors are not interested in selling mutual funds. "Manufacturers are finding it difficult to expand or penetrate beyond 20 cities. It does not make a business case for manufacturers to go and sell the product in Timbuktu to collect just Rs 5 - 10 lakh of investments. In such cases their costs would be very high. Why will manufacturers go to far-flung towns when they can garner a much larger amount at a lower cost from Ghatkopar? It doesn't make sense for fund houses to go beyond the top-20 cities within the current expense ratio," he explained.

 

Our view:

We are of the view that bringing back the entry load is not the only solution. SEBI along with the AMFI should chalk out an action plan to revive the industry and at the same time not hurt the investors' interests.

We recognise that incentives go a long way in motivating the distributors as well as the fund houses to penetrate into other cities; but the fee-based model which is prevailing at present could make the manufacturer and distributors of the mutual fund industry more mature, which in turn is in the larger benefit of investors'. Moreover, instead of bringing back the entry load, the AMFI and SEBI should fork out a plan wherein the distributors can encourage investors to stay invested with a long term point of view (depending upon the performance of the respective mutual fund scheme; may be by increasing the trail commissions for the distributors. However, investors also need to be educated over importance of paying for a prudent advice, and how to evaluate what is a prudent advice. A sense of realisation has to be infused that there are no free lunches. Thus for the long-term development of the mutual fund industry, AMFI along with SEBI should actively engage in investor education programs, which in turn would help the objective of financial inclusion.

 

Disclaimer: This newsletter is for Private Circulation only and not for sale, is only for information purposes and Quantum Information Services Pvt Limited (PersonalFN) is not providing any professional/investment advice through it and, does not constitute or is not intended to constitute an offer to buy or sell, or a solicitation to an offer to buy or sell financial products, units or securities. PersonalFN disclaims warranty of any kind, whether express or implied, as to any matter/content contained in this newsletter, including without limitation the implied warranties of merchantability and fitness for a particular purpose. PersonalFN and its subsidiaries / affiliates / sponsors / trustee or their officers, employees, personnel, directors will not be responsible for any direct/indirect loss or liability incurred by the user as a consequence of his or any other person on his behalf taking any investment decisions based on the contents of this newsletter. Use of this newsletter is at the user's own risk. The user must make his own investment decisions based on his specific investment objective and financial position and using such independent advisors as he believes necessary. PersonalFN does not warrant completeness or accuracy of any information published in this newsletter. All intellectual property rights emerging from this newsletter are and shall remain with PersonalFN. This newsletter is for your personal use and you shall not resell, copy, or redistribute this newsletter, or use it for any commercial purpose. The user accepts the terms of use on this web site.

Add Comments

Comments
alyse_cadez@nps.gov Jun 17, 2012 You know about property business ? If know about it then should understand what property is best for utilize source of your money.In my opinion dubai property is in crisis and prices are very much down in dubai surely that is good time for investment there. Was this answer helpful?

 1