This article has been written by Kaustubh Belapurkar, Director - Fund Research, Morningstar India. It initially was published in Financial Chronicle.
The Indian mutual fund industry has been in existence for close to 30 years, but it has been truly over the past 8-10 years that we have seen exponential growth in the assets under management (AUM), with industry assets doubling over the last four years.
Traditionally, mutual funds have formed a very small portion of household savings, with the bulk going into bank deposits or physical assets like gold and real estate. Over the last decade, the regulator along with the asset managers and the distribution fraternity has been actively involved in trying to increase the popularity of mutual funds as the investment vehicle of choice. But there is still a long way to go.
Mutual funds have traditionally been distributed through the channel of independent financial advisers (IFAs), national distributors and banks. Originally, there were multiple share classes, retail and institutional, with the institutional share class requiring a much larger minimum investment and a lower expense ratio.
Early 2013, the Securities and Exchange Board of India (SEBI) did away with multiple distributor share classes and instead introduced a direct share class, with a lower expense, which could be subscribed to by anyone irrespective of their investment amount. With the launch of a direct share class in 2013, several institutional investors moved into the direct share class by directly making investment applications with the fund house. Individual investors though still largely remained in the distributor share class, as the value of financial advice coupled with ease of transacting, consolidated portfolio statements kept them within the distribution realm. A majority of the applications in mutual funds are still paper-based despite rapid penetration of technology in our daily lives.
In order to increase penetration of mutual fund products and to energise the distribution network, while protecting the interest of investors, the regulator has been proactively making changes to the regulations. From the launch of advisory regulations that allow investors to get into advisory-only arrangements with financial advisers, to the capping of mutual fund commissions to prevent mis-selling, to special commissions for mutual fund distribution in “below 15” cities (B-15) to increase the penetration of mutual funds in smaller cities. These moves have brought about a change to the distribution landscape in India.
Meanwhile, technology has come to the forefront, with asset management companies (AMCs) and the registrar & transfer agents (RTAs) launching applications/technology platforms to make investing more seamless for investors. One such innovation is the mutual fund utility (MFU), which allows investors to place orders with multiple AMCs and transfer funds seamlessly, all through a single window.
The promulgation of right distribution practices and advancing technology needs to be coupled with effective client documentation mechanism to make the process truly seamless. The introduction of e-KYC using Aadhar is a right move and could prove to be game changer for online investing.
Despite these advancements on multiple fronts, online investments haven’t yet taken off in a big way. Many clients still prefer to go through traditional distribution channels. This is primarily due to the fact that many investors do not have the wherewithal to make investment decisions and prefer receiving professional advice. Traditional distribution channels though have often been accused of product push and frequent portfolio churn, without really taking a holistic view of the client’s portfolio. Here is where new age platforms like robo advisory will play a part.
Robo advisory largely takes away human intervention from the portfolio construction process. These platforms offer a seamless online experience in making investments. From assessing client risk levels, to gauging client’s current financial situation and investment needs, to making portfolio recommendations to the final execution can all be done online without the need for any human intervention.
Robo advisory is a popular concept in the developed markets and is definitely catching the eye of Indian investors as well. Robo advisory will certainly prove to be an effective mechanism to take clients online. A second such step taken by SEBI is the proposal to allow sale of mutual funds through e-commerce websites.
E-commerce websites have a fairly wide reach and are very well accepted among the Indian consumer. The ability to seamlessly place an order, transfer money and provide KYC details through a single window should help increase the reach of mutual funds by leaps and bounds. What will be important to see is if there is a differential pricing for these units compared with the existing share classes and how receptive are investors to making investments online with little or no advice. We certainly believe the more savvy investors would be keen to use this platform, provided it is priced appropriately.
This is by no means is a death knell to the traditional distribution models, if anything, they will get stronger with the increased visibility that mutual funds would receive. Many traditional distribution set-ups too are working towards integrating technology onto their platforms to streamline delivery and make it cost effective.
The online model as well as the traditional adviser/distributor models would continue to coexist, with the biggest beneficiary being the end investor. We do believe we are in for exciting times in the mutual fund industry and these steps taken by the regulator can help achieve a cost-efficient industry that can grow several times in size over the years.
