Monday, August 3, 2009

MFs to face greater obstacles with entry load gone

The mutual fund industry in India, although 15 years old, is still to develop into a 

credible competitor to other segments of the financial 
services industry, especially 
insurance. On the face of it, mutual fund investments (in equity schemes) seem more attractive than insurance products, but on the ground the reverse is true. More Indians trust life insurance companies with their savings than they do with mutual funds. According to figures from the Central Statistical Organisation (CSO), life insurance funds accounted for 12% of total household savings in India. In contrast equity & debentures only attracted 7% of household savings in financial year ending March 2008. 

There are 35 asset management companies (AMCs) in India managing Rs 6,70,012 crore, according to independent investment information provider, Value Research. The industry’s penetration is estimated at 4-5 % as against 10-15 % for insurance. There are around 3 million agents for insurance products and just 80,000 distributors for mutual funds. 

Both industries, which started almost half a century ago in India with a single player, now have several competing companies. Still, low customer awareness levels and poor financial literacy have largely stymied the popularity of financial products in India. 

But in the case of insurance, rampant misselling has made it more popular than mutual funds. While insurance is indeed an investment for covering your life, it is sold more as a tax-saving investment tool. In rural areas, agents mis-sell it as a fixed deposit and the idea has been so well rooted that in many Indian villages, it is still popularly known as ‘Lal FD’ . There is little scope for mis-selling in case of mutual funds - the mis-selling is limited to the extent that the agent assures investors a return that the fund may not able to deliver. 

In terms of selling, both mutual funds and insurance are ‘push’ products. However, a distributor has a higher incentive to sell the latter because of the opportunity to earn a higher commission. An agent selling insurance earns a commission of 30-40 % of the initial premium and a trail commission of around 5%. However, the commission in case of mutual funds is never more than 2-2 .5%. 

Insurance generally is a product that cannot be sold multiple times to one investor. Hence, the agent has to be given a high commission to push the product. In case of mutual funds, the agent gets multiple opportunities to sell more than one product to the same investor. 

As a result, distributors and mutual fund houses exhibit limited interest in continuously engaging with customers post closure of sale as the commissions and incentives are largely in the form of upfront fees from product sales. Limited use of the public sector banks’ network and post offices to distribute mutual funds has also impeded the growth of the industry. The insurance industry, on the other hand, has been able to leverage this to its advantage.

While setting up an AMC is relatively easy, getting business during a downturn and 

withstanding redemption pressures during times of low 
liquidity is the difficult part. 
The insurance business is one with a long gestation period and requiring sufficient capital to cover incremental actuarial liability. The breakeven time for an insurance business in India is at least seven years. In this scenario, the most important challenge for the company is to have a robust agency network. 

Mutual Funds have to face a stricter regulatory environment as the industry is regulated by the conservative capital market regular Sebi. As a result, there is limited flexibility in fixing fees and pricing. Insurance companies have a relatively less stringent environment as the industry is regulated by Irda, which is less conservative in its regulation. This allows more flexibility for companies to structure their products and fees.

Source: http://economictimes.indiatimes.com/Features/Investors-Guide/MFs-to-face-greater-obstacles-with-entry-load-gone/articleshow/4850274.cms?curpg=2

No comments:

Just click away from joining most active Mutual Fund India google group

Google Groups
Subscribe to Mutual Fund india
Email:
Visit this group

Aggrasive Portfolio

  • Principal Emerging Bluechip fund (Stock picker Fund) 11%
  • Reliance Growth Fund (Stock Picker Fund) 11%
  • IDFC Premier Equity Fund (Stock picker Fund) (STP) 11%
  • HDFC Equity Fund (Mid cap Fund) 11%
  • Birla Sun Life Front Line Equity Fund (Large Cap Fund) 10%
  • HDFC TOP 200 Fund (Large Cap Fund) 8%
  • Sundram BNP Paribas Select Midcap Fund (Midcap Fund) 8%
  • Fidelity Special Situation Fund (Stock picker Fund) 8%
  • Principal MIP Fund (15% Equity oriented) 10%
  • IDFC Savings Advantage Fund (Liquid Fund) 6%
  • Kotak Flexi Fund (Liquid Fund) 6%

Moderate Portfolio

  • HDFC TOP 200 Fund (Large Cap Fund) 11%
  • Principal Large Cap Fund (Largecap Equity Fund) 10%
  • Reliance Vision Fund (Large Cap Fund) 10%
  • IDFC Imperial Equity Fund (Large Cap Fund) 10%
  • Reliance Regular Saving Fund (Stock Picker Fund) 10%
  • Birla Sun Life Front Line Equity Fund (Large Cap Fund) 9%
  • HDFC Prudence Fund (Balance Fund) 9%
  • ICICI Prudential Dynamic Plan (Dynamic Fund) 9%
  • Principal MIP Fund (15% Equity oriented) 10%
  • IDFC Savings Advantage Fund (Liquid Fund) 6%
  • Kotak Flexi Fund (Liquid Fund) 6%

Conservative Portfolio

  • ICICI Prudential Index Fund (Index Fund) 16%
  • HDFC Prudence Fund (Balance Fund) 16%
  • Reliance Regular Savings Fund - Balanced Option (Balance Fund) 16%
  • Principal Monthly Income Plan (MIP Fund) 16%
  • HDFC TOP 200 Fund (Large Cap Fund) 8%
  • Principal Large Cap Fund (Largecap Equity Fund) 8%
  • JM Arbitrage Advantage Fund (Arbitrage Fund) 16%
  • IDFC Savings Advantage Fund (Liquid Fund) 14%

Best SIP Fund For 10 Years

  • IDFC Premier Equity Fund (Stock Picker Fund)
  • Principal Emerging Bluechip Fund (Stock Picker Fund)
  • Sundram BNP Paribas Select Midcap Fund (Midcap Fund)
  • JM Emerging Leader Fund (Multicap Fund)
  • Reliance Regular Saving Scheme (Equity Stock Picker)
  • Biral Mid cap Fund (Mid cap Fund)
  • Fidility Special Situation Fund (Stock Picker)
  • DSP Gold Fund (Equity oriented Gold Sector Fund)