Rapid Reinvention of Business

It has been a tumultuous couple of years for India’s mutual fund business. A host of regulatory changes, specially the abolition of entry loads has meant a rapid reinvention of the business. The Value Research CEO Roundtable was primarily focused on whether the investor is displaying a meaningful shift to investing over the long-term and what kind of changes are needed to kickstart growth. The participants were eight CEOs from some of the biggest AMCs in India

But if they are actually hawkers of products of every kind, there will be serious conflict of interest and that will lead to a very disappointing customer experience which might eventually get passed on to you.
Nimesh Shah:There are two angels to this. One is, what we say is long term and does not suit his business model. The distributor’s business model may be short term because the maximum revenue he can get is from the short term. Secondly, where are the distributors? They have been shrinking over the last two years.

Milind Barve:What I meant was they are much larger than our sales people. Larger than us.

Nimesh Shah:In a country like India, how many people are there who promote mutual funds? From an entrepreneur’s point of view, is his main business to promote a mutual fund or generate enough return on time invested out of this business, specially the retail. That’s the basic question.

Sandesh Kirkire:We can’t ignore the reality that after the entry load was withdrawn, the total available commission pot shared between the manufacturer and distributor has come down by 60 per cent.

Nimesh Shah:Whether 1.75 or 1.8 is sufficient in the long term for the manufacturer and distributor to make sufficient or normal profits? Is it possible or do we need to change our business models, both the manufacturers as well as distributors?

Saurabh Nanavati:If you go to the US or any developed economy, what tends to happen is that insurance and mutual funds are clearly identified as a core backbone of financial markets and they have passed laws which effect transfer of money into their account in a sustained fashion. So overseas there will be two business opportunities. One is structural business and one is the opportunistic business where you can launch funds, go retail, put up a good performance and become big. Unfortunately in India, you only have the opportunistic piece. All the other pieces have actually been closed down systematically. Earlier mutual funds were managing insurance money, you then had the regulations coming in and that window got closed.

Harshendu Bindal:According to ICI only 30 per cent of the US mutual fund industry’s customers have come directly. The rest have come through their pension or retirement investments. Every white-collar worker becomes a customer of the industry through the 401k plan. So the proportion of people who invest directly in funds is a low 30 per cent even in an advanced market like the US where funds have been in existance for a long time. This is the portion we are restricted to in India. I think pension money and insurance money should flow to mutual funds.

Mutual funds have a compelling case but there seems to be no representation for the industry.

Milind Barve:This industry’s problems have nothing to do with regulators, distributors or entry loads. Only one thing and that is image. Other than the people who have an interest in the industry - manufacturers and distributors - everybody thinks it’s their job to criticize the industry and they are given lot of credit because they get all the bites - audio or video, when doing so. Data is put in a manner that shows the industry in bad light, which is often not the correct picture. I am not saying the industry is squeaky clean, we have our shortcomings too. But this constant bashing has actually affected the image of the industry and the way people perceive mutual funds. And that is why, in the corridors of power, mutual funds are still associated with, “oh you guys are handling corporate money” and “why you are not going into retail market”. The efforts that we have made have gone unnoticed. Look at the demat accounts and the folios, we have more retail ownership than institutions like exchanges.

Deepak Chatterjee:Take the CRISIL report which states that majority of funds on a 1-, 5- and 7-year basis lag the benchmark. This is a point-to-point study. So the results are valid only at this point in time. The same study conducted in December 2007 would throw up a completely different picture.

Sundeep Sikka:We are so obsessed with returns. But see it from the investors’ point of view. If someone has stayed in the mutual fund industry for a 15-year period and made a return of 18 per cent, compared to the fixed deposit of 8-10 per cent, he is very happy.
There is so much of good work going on. We should look for support from the media. The Ministry of Corporate Affairs, which includes all stock exchanges too, last year did a total of 3,000 workshops. AMFI did 5,000 investor workshops! There is a lot of good stuff that is happening which needs to be covered.

Nimesh Shah:One good thing is that if there is performance, there are numbers. If you have done good work for investors, you are getting money on those funds. There is a direct co-relation between the top performing funds getting flows. There is no business model today if you don’t have performance. I am saying on a positive note that you must do well for the final customer.

It could be that you haven’t achieved scale, that you have conducted your business very badly, chased after money which was not sustainable…
Nimesh Shah:One of the allegations of the mutual fund industry is that we are paying out huge amounts of money to the distributors. If that was the case then why is the number of distributors evaporating from the system? The number of distributors who were selling two years back and the number of distributors that are selling today have dramatically come down. Now it might be that our business models are wrong, both the manufacturer as well as distributor. The distributor needs to have a business model whereby he will be able to collect from the final customer because the kitty of 1.75 or 1.80 is not enough for the manufacturer and distributor put together.

Milind Barve:We will make money only if we achieve scale, that should be true for every market participant, whether a distributor, even an R&T, even a custodian - it cannot be that he makes money from day one. There was the boom time during 2005 to 2008 during which many of us were opportunistic in raising large monies through NFOs. When we hit the 2008 crisis and the period after that, those values were below acquisition cost. I think it is a result of probably being more opportunistic in raising NFO money in large amounts. We are bearing the brunt of the NFO mania….

Investors are paying for it too...

Milind Barve:Investors are paying for it because they have not made any money. AMCs too are paying because the costs are not being recovered, upfront costs have been paid - money has gone out. In hindsight, this is something we must accept that should not have been done. I believe that is a lesson we all learnt. Regarding regulatory changes, some of the changes done post 2008 are exemplary. For example, making fixed maturity plans closed ended, changing valuations norms so that liquid funds are now genuinely liquid….. I think the risk for the industry is significant reduced.

Sandesh Kirkire:The abolition of entry load was perhaps the best thing that could have happened.

Really?

Sandesh Kirkire:If you look at the past data for, say, the years before when the industry was building, you had a huge cost ultimately based on the total corpus that stayed in the industry, paid for by the investors. No other product, financial or otherwise, makes you pay separately to the dealer through whom you are buying the product. The fact is if you really want to make the customer be able to decide how much he should pay for the services that he is charging, you have to move to a single cheque. And today, the stock market is a single cheque, when you are buying a stock, are you paying for the stock and the brokerage separately? You are paying to the same broker a single cheque. Unless you move to that, I find it very difficult to see the distributor community really significantly expanding its business.

Sundeep Sikka:It has to be commercially viable, whether it’s for the AMC or the distributor. We always keep talking about the investor, but it is very important from the long term growth point of view of the industry for the players to be profitable. I mean, at this point in time, the overall kitty is low and the number of players making a profit is also very small. You need more and more in a country like India. This will only happen if more and more people see a business opportunity. We keep talking about retail. Retail is a very expensive business model. Look at SIP, when you do a SIP of Rs 100 or Rs 1,000, the transaction cost is far higher than what you earn. So, what’s important to understand from a long term point of view is that it has to be a win-win for all the stakeholders and profits should not be seen as a dirty word.

Sandesh Kirkire:Before we went with the stock exchange model, there was another model being discussed by AMFI, which is now being reinitiated - the MF platform. When a person buys a mutual fund in some part of the country, servicing happens in another. All the paperwork, the delivery of the account statement and the courier cost would result in the industry paying somewhere close to Rs 200-250 crore. So is there a possibility whereby a customer can buy and sell a mutual fund with a single cheque, multiple funds, single account statement and the distributor being able to charge the customer based on what he decides with the customer. The entry load abolition was the best thing that could have happened, but please facilitate the distributor to be able to charge. We need to have a separate MF platform. A single level initiative which will transform this industry will be that platform, reduce the cost significantly and at the same time it will give power in the hands of the customer.

A Balasubramanian:The economic model which is generally not being realized is the power of compounding from the distributor’s point of view. For somebody who looks at a 5-10 year time frame for investors, the power of annuity is far higher. He will get to participate in the market which reflects in the NAV and that he gets his annuity which is incremental, in some sense also participates in the profit that is being generated. Any distributor cares about the long term revenue he gets and the power of annuity is far, far higher. I think everybody is missing this actually. Even if he sells a postal deposit to any investor, he gets a first time income, that’s it.

Milind Barve:If it’s a 15 per cent CAGR return fund, he automatically gets a 15 per cent CAGR increase in his income also.

Have the distributors not bought into the concept that their income will be rising and it is linked to...

Milind Barve:Let’s not beat around the bush. The fact is that the distributor understands this and he doesn’t even need to be told. I think there is virtually no bargaining power, if at all, between the distributor and the manufacturer today. I don’t think the industry bashes up each other, but we bash up each other commercially, on pricing. I think our industry, I do believe, is unnecessarily too competitive. And some times that competitiveness probably works to our disadvantage, in terms of how we are able to price the product. The fact remains that in any discussion, the distributor always had the upper hand in calling a second line of commissions and citing examples of those who are willing to oblige. There are divergences between all our short and long term objectives and sometimes the end result is very differentiated pricing. This puts an overall pressure on pricing, and that is pretty much an important issue if we have to achieve profitability even with scale. Otherwise scale will be nothing; it will just be higher value, higher payouts, money going out and nothing happening.