'From An Indian Context, The Real Challenge Is To Increase The Penetration Of Mutual Funds'
The Mutual Fund industry has taken off in leaps and bounds in the past couple of years. What factors would you attribute this stellar growth to?
This phenomenal growth is on account of a combination of factors. The mutual fund industry, which would include the Regulator, the AMCs and the Distributors, has been making sustained efforts over many years to educate investors and to increase the awareness about mutual funds. Systematic Investment Plans (SIPs) have proved to be a great route for retail investors to create wealth. Along with this, demonetisation brought a huge amount of money to the banking system. The abundant liquidity depressed the income from bank deposits and from other fixed income instruments but made mutual funds more attractive. Another factor was the subdued condition in other asset classes such as real estate and gold. On the whole, it is fair to say that the industry reached an inflection point with the awareness increasing, money coming into the system, investors making good returns from equity funds and other asset classes turning out to be unattractive.
Though the growth in recent times has been very impressive, I believe that the best is yet to come for mutual funds. Mutual funds are increasingly becoming a vehicle of choice for investors. With this trend continuing, the industry could easily double its Assets under Management (AUM) in the next three years or so.
When you were the Vice Chairman of AMFI, the ubiquitous “Mutual Funds Sahi Hai” campaign was launched. Would you say that the campaign has managed to achieve its objectives so far?
I believe that the campaign has been a great success. This is probably for the first time that at the industry level, we were able to engage in a sustained mass communication campaign. It has reached practically every nook and corner of the country and contributed significantly to getting people to make mutual funds a part of their conversations. Even people who were completely unaware about mutual funds have now started seeking more information about how to invest in mutual funds.
The share of Direct Plans seems to be growing across the board – but the number of Registered Investment Advisors (RIAs) isn’t taking off. Are you worried that the bulk of these direct folios may be from the first time, unadvised investors who do not understand the associated risks?
I firmly believe that retail investors, especially first-time investors, must seek the help of advisors. Mutual Fund investment is not just about picking up some schemes that have done well in the last one year. One needs to have a proper financial plan based on the income, risk profile, goals to be achieved etc. Many investors who come directly to funds feel vulnerable when there is volatility in the market and end up quitting mutual funds. One can think of it as the equivalent of taking antibiotics without consulting a doctor.
What trends do you see emerging in the distribution space in the times to come? Are Robo Advisors and Do It Yourself (DIY) platforms the future, or will good old brick and mortar distributors prevail?
From an Indian context, the real challenge is to increase the penetration of mutual funds. It is my firm belief that if one were to explain the benefits of mutual funds along with associated risks, most of the potential investors would end up investing. It could even be in Liquid funds, but the beauty is that there is always a scheme to suit the requirements of practically any type of investor. The key is to reach out to more and more investors. In our country, this can be best done through personal interaction. So, I do not think the brick and mortar distributors are going away anytime soon. On the other hand, a good chunk of the new folios that have been added in the recent years is thanks to their effort. However, technology is a great enabler and if properly used, it can increase the efficiency of the distributors substantially and allow them to reach out to a larger number of investors.
Anecdotal evidence would suggest that the industry’s recent move to pass on the Total Expense Ratio (TER) reduction to distributors has drawn ire from the community of Advisors… What are your thoughts on this?
No business can keep paying more than what they earn. If the margins of the AMCs get compressed, it would also force them to relook at their expenses. A relationship is sustainable only when both sides benefit out of it. So, I think all the players need to figure out the sustainable levels of remuneration.
What, in your view, is holding the implementation of the RIA model back? Is India really prepared to move beyond embedded costs and write cheques to their Advisors?
Various stakeholders had given their feedback about the proposals to SEBI. I believe that most Indians are not ready to pay separately for advice. Also, there are many small investors who may not be able to pay for the advice and as a result, may end up getting left out completely from the system. Similar results have been seen even in developed countries such as the U.K. So, we need to tread with caution on this.
Do you plan to capitalise on the 4,000 plus branches of Union Bank in the future? Do you see that as a lucrative, captive base?
We certainly intend to capitalise on the large network of branches that Union Bank of India has. They have probably more than six crore accounts and even a 10% conversion would be a fantastic achievement for us. However, we are very keen to expand our distribution outside of Union Bank and have been making concerted efforts towards that.
Lastly, what’s your advice to retail investors at this stage? An extended time correction of sorts seems to be in the offing. What sort of strategic and tactical moves would you recommend at this stage, besides the obvious move of resolutely continuing SIP investments?
The basic principles of investing for retail investors remain the same. Develop a proper financial plan and stick to it. SIPs would be a key part of it, of course. However, for lump sum investments, Balanced Advantage Funds as a category offer a very good opportunity since they are expected to have lower volatility compared to pure equity products and investors do not have to worry about timing the market.
Disclaimer: The views expressed or statements made in this document are purely the views of the author and do not necessarily represent the views of either Union Asset Management Company Private Limited or its affiliates.
