Monday, July 9, 2012

8th CII Mutual Fund Summit 2012 : Evolution and not Revolution

Inspite of managing close to 5,50,000 crores of money ( ofcourse down from 7,00,000 crores an year back), Mutual funds donot have any big identity like stock exchanges. AMFI which calls itself as an association of Mutual funds does not come up with any forum to discuss, debate or analyze the MF Industries Growth and progress.

Hence the Confederation of Indian Industry's Mutual Fund Summit is the SINGLE Biggest Annual event for Mutual Fund Industry. PriceWaterhouseCooper Private Ltd (PWC Ltd) has been customarily publishing a report on the MF Industries progress - outlining the growth path for next few years.


Few of their observations are:
  • Asset under management shrank by 16.5% from Rs.7,03,669 Crores to just Rs.5,87,659.
  • Sensex rose from 14000 ( Feb 07) to 21000 (Jan 08), plunged to 9000 (Mar 09) despite the fact that GDP grew by 9.3% in FY 07-08 and 6.8% in 08-09.
  • Between 2007-2009 many funds have delivered positive returns which many investors are not aware of. Inspite of this fact, the AUM has shrunk.
  • After the compensation norms have been altered ( abolition of entry load ), the push for MF product has weaked.
  • Number of mutual fund has grown from 32 to 44 in last six years, where as the number of schems have grown from 779 to 4473.
  • 18 new joint venture or acquisition has happened : which include Nomura, KBC, L&T, Goldman Sachs, Natixis Global, T Rowe Price, Pramerica. This demonstrates that there are many significant global and local players that consider the Indian MF Industry to be attractive.
  • Top five cities (Mumbai, New Delhi, Bangalore, Kolkota, Chennai) contribute 71% of AUM with Mumbai alone accounting for 42%.
Key Challenges of MF Industry:
  • Unlike LIC model where in the agents were well compensated for their deep penetration, MF Industry operates on OPEN ARCHITECTURE. Here the bond between the AMC and Distributor is relatively weak. An AMC didnot spend beyon a cretain level, since the distributor could then easily use these improved skills to sell other competing products.
  • Average size of retail investor folio has been about Rs.35000. And an average corporate Investor folio is about Rs.59 Lakhs. Hence a distributor will need to reach around 170 retail investor to get the same AUM of a corporate folio.
Product Relevance:
  • Most investors look at product catering to the following needs : Protection, Retirement, Returns, Upside. Typically Insuarance is for Protection, Bank FD's.PF schemees cater to retirment needs. Hence a MF product is looked purely from returns and upside point of view.
  • Following are few aberations which have occuredin connection with products:
  • Lack of through analysis of investors needs leads to inappropriate response in term of investment recommendation.
  • Preception that long term refers to a period of two to three years, as opposed to more rational view of long term means FIVE to TEN Years.
  • An overlap among products make MF's appear that while MF's carry an element of risk, the returns are not differentiated enough from the returns of Fixed Deposits of Banks. The communication by MF Industry has lacked on clear cut differentiators between product classes.
  • A commission structure that places MF products at a disadvantage when compares with some other investment products.
Conclusion:
"EVOLUTION and NOT REVOLUTION"served by adopting a cluster of key initiatives in the areas of cost efficiency, productcapacity creation.
  • The Indian asset management industry has answered existential questions.
  • However, the present scenario demands vigorous innovation and reinvention.
  • Wholesale or drastic changes may not be warranted;
  • Instead, the purpose may be better
  • design and positioning, alternative distribution models, revenue diversification and
  • We believe a sensitive regulatory environment will support the evolution going forward.
  • Mutual fund products are a natural component of options for all class of investors and will remain so.
  • The evolution is more towards gaining a larger mindshare with all key stakeholders including, most importantly, the investors.

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