H N Sinor, CEO, Association of Mutual Funds of India, tells Tanvi Varma that mutual funds should be viewed more as 'investment managers'.
Of late, the mutual fund industry has seen some degrowth, especially in equity funds. What according to you are the reasons and how does the industry plan to tackle this?
We are concerned about this. While most of the segments under the financial services industry i.e. banking, insurance, NBFCs, have seen an annual growth of 15-25% during the last 2 years, the mutual fund industry has seen a decline in business during the period.
We have seen a lot of volatility in institutional participation, but we are more worried about low retail participation. We have seen stagnation in equity, balanced and tax-saving schemes that most retail investors invest into.
There are various reasons for this including low investor awareness, mindset of investors, fundhouse performances and the role of the distributors and financial advisors. Investor awareness is a long-term issue and is essential in bringing in more participation. Investors still identify mutual funds with capital markets and are apprehensive, while the fact is that funds help to spreads one's risks, especially when you don't have the expertise, and generate better returns.
What is the role of the financial advisor or distributor in servicing an investor, post the entry-load ban?
Mutual funds need to be pushed and that is where the distributors come in. Post entry-load ban (which came into effect from August 1, 2009), we are still trying to figure out what will be the change in the business model, which can be a win-win for all stakeholders-investor, manufacturer and distributor.
Unless all are in sync with each other, the industry cannot grow and the investor will not benefit. Earlier, the investor used to pay the financial planner by way of entry load, which was embedded in the money one invested. This is the practice in markets such as the US and Europe. But now, a financial advisor has to collect his commission directly from the investor. It is difficult for a distributor to go to individual investors and get a fee from him, unless the investor is an HNI and a portfolio management fee is charged on an annual basis. This model has not worked.
Do you think we can go back to the entry load system?
I doubt it.
How is the Indian mutual fund industry doing compared to those in developed markets?
Internationally, the mutual fund industry has come about by way of investments from compulsory saving instruments that get tax breaks like the 401k retirement savings in the US. Pension and provident fund investments automatically flow into mutual funds, which are actually called 'investment managers'. In India, mutual funds are voluntary investments and often face competition from other products such as bank deposits, insurance, unit-linked plans, other pension products, etc.
We have simple things to be done. All compulsory savings should come naturally to investment managers. We don't need insurance companies to have their own treasuries. All money pooled by insurance companies and pension money should come to investment managers (let us not call ourselves mutual funds) to the extent that they are required to be invested in the capital market.
Further, there have been turf wars in the investment community. Pension regulators want pension under them, the Forward Markets Commission (FMC) wants the commodity Exchange Traded Funds (ETFs) under them. We cannot have fragmented regulators. Ideally we should have a super-regulator at some point, though I think this is wishful thinking.
How cost-efficient is our mutual fund industry?
We are extremely cost-efficient compared to global markets. The annual expense ratio in the US, for instance, is around 4%, while our mutual funds (equity) work on 2 to 2.5%. In fact mutual funds work on a shoe-string. This business gives only 10 to 15 basis points on the entire assets under management (AUM).
Now-a-days we don't see many new fund offers (NFOs) hitting the market. What has changed?
The regulator has not seen NFOs in good light and permission is tough to come by. They believe that we have too many schemes and that manufacturers should focus on their mother schemes.
How adept are the financial advisors or distributors of mutual funds in advising investors?
Both financial advisors and agents have to pass the same exam, whether he is a commerce graduate or a doctorate. Ideally, an advisor should be put through a tougher examination. For agents also, the Associatoin of Mutual Funds of India (Amfi) is trying to ensure that only serious people are in this business. We increased our fee from Rs 500 to Rs 5,000 for individuals. Earlier, large number of agents did not even update themselves in terms of skill-sets. We are changing that by making certification tougher.
There are a lot of new funds houses in the mutual fund space. What would your advice be to the retail investor?
Although there are no entry barriers, there is a licensing arrangement in place, which comes with strong duediligence by the regulator. Investors must take it for granted they have been properly scrutinised and are not fly-by-night operators. The ultimate aim of regulators is to ensure that small investors' money is protected. So, one should not worry about new names. What is more important is performance, the kind of offering etc.
Will the new Direct Taxes Code change the way people make investments?
Immediately, we could see a negative impact. Having said that, people will get used to it. We have been trying with the Revenue Secretary to get some leeway on investments in equity-linked savings scheme (ELSS). In spite of the changes, people should continue with their mutual fund allocation and think of it as a long-term plan. Systematic investment is the best route of investment for the middle class, salaried person.
Source: http://businesstoday.intoday.in/story/mutual-funds-fail-to-lure-retail-investors/1/15756.html
Of late, the mutual fund industry has seen some degrowth, especially in equity funds. What according to you are the reasons and how does the industry plan to tackle this?
We are concerned about this. While most of the segments under the financial services industry i.e. banking, insurance, NBFCs, have seen an annual growth of 15-25% during the last 2 years, the mutual fund industry has seen a decline in business during the period.
We have seen a lot of volatility in institutional participation, but we are more worried about low retail participation. We have seen stagnation in equity, balanced and tax-saving schemes that most retail investors invest into.
There are various reasons for this including low investor awareness, mindset of investors, fundhouse performances and the role of the distributors and financial advisors. Investor awareness is a long-term issue and is essential in bringing in more participation. Investors still identify mutual funds with capital markets and are apprehensive, while the fact is that funds help to spreads one's risks, especially when you don't have the expertise, and generate better returns.
What is the role of the financial advisor or distributor in servicing an investor, post the entry-load ban?
Mutual funds need to be pushed and that is where the distributors come in. Post entry-load ban (which came into effect from August 1, 2009), we are still trying to figure out what will be the change in the business model, which can be a win-win for all stakeholders-investor, manufacturer and distributor.
Unless all are in sync with each other, the industry cannot grow and the investor will not benefit. Earlier, the investor used to pay the financial planner by way of entry load, which was embedded in the money one invested. This is the practice in markets such as the US and Europe. But now, a financial advisor has to collect his commission directly from the investor. It is difficult for a distributor to go to individual investors and get a fee from him, unless the investor is an HNI and a portfolio management fee is charged on an annual basis. This model has not worked.
Do you think we can go back to the entry load system?
I doubt it.
How is the Indian mutual fund industry doing compared to those in developed markets?
Internationally, the mutual fund industry has come about by way of investments from compulsory saving instruments that get tax breaks like the 401k retirement savings in the US. Pension and provident fund investments automatically flow into mutual funds, which are actually called 'investment managers'. In India, mutual funds are voluntary investments and often face competition from other products such as bank deposits, insurance, unit-linked plans, other pension products, etc.
We have simple things to be done. All compulsory savings should come naturally to investment managers. We don't need insurance companies to have their own treasuries. All money pooled by insurance companies and pension money should come to investment managers (let us not call ourselves mutual funds) to the extent that they are required to be invested in the capital market.
Further, there have been turf wars in the investment community. Pension regulators want pension under them, the Forward Markets Commission (FMC) wants the commodity Exchange Traded Funds (ETFs) under them. We cannot have fragmented regulators. Ideally we should have a super-regulator at some point, though I think this is wishful thinking.
How cost-efficient is our mutual fund industry?
We are extremely cost-efficient compared to global markets. The annual expense ratio in the US, for instance, is around 4%, while our mutual funds (equity) work on 2 to 2.5%. In fact mutual funds work on a shoe-string. This business gives only 10 to 15 basis points on the entire assets under management (AUM).
Now-a-days we don't see many new fund offers (NFOs) hitting the market. What has changed?
The regulator has not seen NFOs in good light and permission is tough to come by. They believe that we have too many schemes and that manufacturers should focus on their mother schemes.
How adept are the financial advisors or distributors of mutual funds in advising investors?
Both financial advisors and agents have to pass the same exam, whether he is a commerce graduate or a doctorate. Ideally, an advisor should be put through a tougher examination. For agents also, the Associatoin of Mutual Funds of India (Amfi) is trying to ensure that only serious people are in this business. We increased our fee from Rs 500 to Rs 5,000 for individuals. Earlier, large number of agents did not even update themselves in terms of skill-sets. We are changing that by making certification tougher.
There are a lot of new funds houses in the mutual fund space. What would your advice be to the retail investor?
Although there are no entry barriers, there is a licensing arrangement in place, which comes with strong duediligence by the regulator. Investors must take it for granted they have been properly scrutinised and are not fly-by-night operators. The ultimate aim of regulators is to ensure that small investors' money is protected. So, one should not worry about new names. What is more important is performance, the kind of offering etc.
Will the new Direct Taxes Code change the way people make investments?
Immediately, we could see a negative impact. Having said that, people will get used to it. We have been trying with the Revenue Secretary to get some leeway on investments in equity-linked savings scheme (ELSS). In spite of the changes, people should continue with their mutual fund allocation and think of it as a long-term plan. Systematic investment is the best route of investment for the middle class, salaried person.
Source: http://businesstoday.intoday.in/story/mutual-funds-fail-to-lure-retail-investors/1/15756.html
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