If one were to go by the spirit of recent SEBI guidelines, this new avenue for conducting mutual fund transactions empowers the investor with more choice.

Let’s look at some of the advantages for the investor :mutual fund

• It opens up a convenient investment option for the investor. It will now be possible for investors to go to their nearby broker and conduct a mutual fund transaction, just like they do for their share transactions
• The guidelines for investing are exactly the same, or that’s what it looks like. The cut off time for the NAV applicable will still be 3:00 pm – ie, a mutual fund “trade”/ investment executed by the stock broker before 3 pm gets the same days NAV
• Units get credited to the investor’s demat account. Bye bye lost account statements, hello convenience

There are some advantages from the AMCs perspective as well. These are :

• This is the first serious attempt at dematerializing mutual fund units, thereby leading to a saving of costs. No more couriering account statements (they cost over 15/- per transaction) leading to a whiff of fresh air – just a whiff, mind you – in terms of profitability for AMCs
• Broking houses are an additional distribution channel now. With this new rule if you have a stock terminal and you have a local sub-broker you can start selling mutual fund once you are AMFI certified
• This new point of sale will deepen mutual fund penetration and above all it allows AMCs to get into their fold a huge segment of KYC cleared people already dealing in stock markets

As with any new regulation, there will be an adjustment process with this one too and it will be some time before we can fathom the actual change it has brought out. At the outset, investors will not immediately queue broking houses nor will AMCs immediately enroll a ready set of KYC cleared investors.

Some of the issues which need clarification are :

• The stock market investor and the Mutual Fund investor are two distinct species, given their risk appetite/ Why should a stock market investor, with his penchant for high risk, high returns invest in Mutual Funds?
• The million dollar question is – why should a stock broker, who makes a sizeable amount of money by churning his client’s portfolio, recommend a mutual fund which has an exit load component as well?
• There seems to be clarity that the current regulations go beyond ETFs – however, it needs to be spelt out more explicitly for all stakeholders concerned
• There is no clarity on the fees brokers would charge their clients and how these would affect distribution costs of AMCs

While the rule opens a new vista of potential investors, fund houses have the usual convincing to do. You still need to educate the investor about mutual funds and now also about the need to open a Demat account. Even with the seemingly easy target – stock market investors, AMCs will have to develop a different pitch to attract them, as the expectations of this tribe regarding returns and in terms of investment horizons are usually different.

This renewed attempt at market expansion through financial literacy would be intense, to say the least and would further drain the already meagre margins the AMCs enjoy.

Net net, it looks like existing mutual fund distributors need to have an additional service component up their sleeve – providing a demat account to their investors, if they don’t have one already.

For distributors who have a broking arm, the rule will have a little impact. Till the time they condition themselves to the immense possibilities of mutual fund investment dynamics.

Let me end with a small example. My father has historically been a FD/ NCD investor. The only equity he has is what his friends and yours truly pushed him to subscribe to in the good old share certificate days.

It was a Herculean task dematerializing those units – it has been a nightmare explaining to him why he needs to pay up small amounts like demat charges when he paid nothing for his share certificates.

Finally, I found a solution. I have asked him to sell off all his stocks and get into a Systematic Transfer plan in Mutual Fund schemes. All of us seem to be at peace now.

What I shudder to think of is the hundreds of thousands of people like my father, who were confused about stock marketing investing in the first place,  now get further confused by a bunch of eager beaver stock brokers and Mutual Fund distributors armed with the latest guidelines. There are thousands of people like him across all age groups who need to be handled with kid gloves.

Overall, I think SEBI’s new rule is a positive development – I also feel that is a little ahead of its time and one should not rush with deadlines to implement these.

As I have always said, people need to be comfortable, rather than convinced about investments. If pushed too aggressively, SEBI might confuse rather than clarify and thus alienate investors for quite some time to come.

Disclaimer: All views expressed in this blog are my personal and in no way express or implied, of that of the company I work with, or have worked with in the past.

Rural markets present a unique challenge. While the aspirational levels of people there are extremely high, particularly amongst the “rural middle class”, the propensity to splurge on necessities is very low.

Hence, we’ve had FMCG organizations come up with small pouches, telecom companies had affordable handsets and small top ups to offer – even mutual funds have launched daily SIPs/ STPs with very low denominations.

Talking about mutual funds, how do financial services stack up in the overall investment basket of a typical rural consumer?

Financial services, especially mutual funds, have a long way to go in rural penetration. Given the fact that penetration of financial services like insurance and mutual fund is still low in urban India, little needs to be said about its rural reach. Current mutual fund penetration in India covers only about 7-8% of households.

Traditionally, investments are at the top end of Maslow’s financial hierarchy, if you will. A house, farm, consumer durables, property, gold etc are priority for the rural customer.

The average Indian investor, whether rural or urban, still shies away from equity and prefers post office schemes and bank FDs as investment instruments. Most of it has got to do with financial illiteracy than anything else. So for penetrating any financial product, banks in rural areas are the first point of entry.

The road to financial inclusion in a rural household usually follows the path: savings account, fixed deposit, agriculture credit, insurance, auto loan etc. in that order. Investments in mutual funds are towards the end of this path. It’s a journey from “needs” to “luxury” for most rural households.

So investor education is crucial. Also, many Indian investors, especially rural are still skeptical about private financial institutions. A savings account can act as a natural stepping-stone to other financial products. Bank branches play a crucial role in financial planning education in semi-urban and rural areas; they already know the pulse of the population and have the necessary infrastructure.

An incident comes to my mind at this stage. It has always been a sore point that my father was always vacillating when it came to investing in mutual funds, inspite of the fact that I had already carved a niche’ for myself advising people to invest in the same !

One day he told me that he wanted to invest in SBI Blue Chip Fund NFO. I was a little surprised and also a little irritated that he chose to begin his mutual fund investment with some other fund house than mine. On probing why he specifically asked for the fund by name, he told me the cashier at the SBI branch that my father regularly transacts with suggested that this SBI fund was a good investment option. And my father’s conviction was that if the SBI cashier has suggested it, “it must be good” !!

Such is the trust an average Indian places in national banks that it took an SBI cashier to convince my father to invest in mutual funds. I have learnt that in the financial sector trust is more important than conviction, and banks score on this point. And who can give you that comfort more than your banker, especially if you are not aware of financial products on offer.

Having said that, tapping the rural market requires building/ supporting a huge distribution network as well as promoting investor education. Given the current margins for most products, it does not make economic sense to go full throttle on expanding rural distribution network.

Compare this, with over 70,000 bank branches, nationalised banks not only have an extensive branch network but also have the trust of the common man. Most Indians feel their money is safe parked in a nationalised bank than anywhere else. Also, RBI’s thrust on banks to extend credit to agriculture sector under priority lending has brought the banks closer to the rural Indian.

Again, there is a sea change in the mindset of a typical PSU bank manager. He is competing with other banks in the same space, and with the private banks, thereby aggressively looking at diversifying investor portfolios and adding more fee income.

Typically, it is the banks which go into the “Wild wild west”, set up frontiers for the others to follow. While IFAs and national distributors are equally strong in catering to the reasonably financially literate customer, it is only a bank that can lead the way to market expansion in full throttle.

Lastly, one more interesting development is afoot. Technology always throws up opportunities. I am of the strong belief that mobile phones and their resultant technology, ease of use and empowerment of the consumer will lead to the next big “trust factor” propelling financial product sales. Don’t be surprised if you find a person in rural India busy investing in a liquid fund through his mobile phone soon !

I believe the internet revolution will be bypassed pretty soon in rural and semi urban India – it will be the m-commerce revolution which will sweep through. Costs will come down with more users; simultaneously, dependence on the mobile phone will increase.

Rural India is home to around 70% of Indian households. The sheer volume of this market coupled with increasing purchasing power and rise in aspirations makes it a market hard to ignore for any of us. It’s not surprising therefore that product re-engineering and unique marketing and distribution channels are cropping up for “Bharat”. For financial services marketers, the road into the heart of rural hinterland is by tapping banking channels and technology partnerships.

Disclaimer: All views expressed in this blog are my personal and in no way express or implied, of that of the company I work with, or have worked with in the past.

The truth of the matter is, the guideline is there, and it has to be adhered to. What is important is how you adapt to it, which brings me to my objection to the word ‘impacted’. I don’t believe in the word ‘impacted’. A regulatory or any significant external change does not impact a business but forces it to re-look at business models and adapt and innovate.

The questions should be ‘how will revenue models be changed’ rather than ‘how will revenue models be impacted’, ‘how will customers and distributors adapt’ rather than ‘how will they be impacted’.

I believe that in every industry there comes an inflection point every few years, which in the short-term creates some uneasiness in the industry. The Indian mutual fund industry too has had its share of upheavals. And each time, the industry has shown its inherent strength by adapting and adopting those changes to move ahead with a faster than before momentum. In the late 90s, Sec 54EA/ EB of the IT Act was a huge contributor to the growth of assets of the mutual fund industry. Hundreds of crores of long-term money was pouring in, particularly in the Equity fund segment. By a stroke of the pen, the act was abolished in 1999-2000, if my memory serves me right, leaving the industry gasping. The subsequent dot com bust had a pincer like effect on the growth of the industry as equity monies really shrunk. But eventually the industry evolved, got into income funds and MIPs and a whole new world of products and opportunities was opened.

There could be another school of thought that could say that just because the industry is so malleable, should it be subject to regulatory upheavals every few years? The recent SEBI guidelines have prompted this school of thought into action. Only time will tell how the recent SEBI guidelines (find them on www.sebi.gov.in) will pan out. In the interim, this is yet another point of inflection for the mutual fund industry. So how exactly is the industry adapting to this change?

• With the commission structure undergoing a dramatic overhaul, there is very little incentive for a distributor with a conventional business model to sell mutual funds. I have noticed some interesting trends in how distributors are reacting.
  • Some distributors are looking at using mutual funds as a client acquisition exercise. All said and done, mutual fund schemes are one of the most “user friendly” financial avenues around. These new clients will then be sold a heavy dose of high margin products like life insurance and their like.
  • Some distributors have started segregating clients based on the revenue they earn from them. Most low revenue clients are being shifted towards an online investment management experience.
  • Quite a few distributors, however, are using this opportunity to hone and display their asset allocation skills. They are now re-emphasising the virtues of better asset allocation in pursuit of long-term goals. This segment, to my mind, is already charging or is all set to charge clients for their services.
  • In terms of national level distributors and banks, most of them have already designed effective online/ offline retail strategies and are looking forward to consolidate their AUMs in light of the current regulations.
  • SEBI’s decision is an opportunity for distributors to reposition themselves as financial advisors, to build trust among investors and initiate investor education. In the long-term it is going to be good for their business – an investor who trusts a distributor with his mutual fund investment is likely to trust him with other investment products too.
• Quality of service has become a key parameter now. I have always believed that people invest when they are comfortable, not convinced about an investment avenue. Quality of service is going to be a key parameter in determining the comfort level of future investors. Remember, if the investor is comfortable, the distributor could charge a fee for his services as well.
• Fund houses and distributors will have to innovate and rework their business models to make this new equation profitable. We have a lot of commoditized products, and with each new entrant, the proliferation of such products is only going to increase.

My sense is that innovations in product, customer service and technology are going to be the key drivers towards growth. Performance will soon be relegated to a secondary level, particularly in mark to market products. This will also ensure more long-term assets. Effective use of technology would also be able to drive down costs while increasing volumes simultaneously. Definitely an impact on the P&L in the short term, but for fund houses with the vision, strategy and gumption to take this challenge head on, there couldn’t be a better time.

Investors, for whose benefit, the decision has been taken too have some thinking and hard work to do. After all, negotiating a commission for a service requires one to understand and determine the quality of service. So while some sceptics ask whether the mutual fund industry is mature enough to handle this change, I think it is wiser to ask whether Indian investors are mature enough for this change.

Investors are being empowered, but can they handle it, are they awakened? It’s a wait and watch situation. It’s like when a child passes out of school and goes into college, he is suddenly free of many restrictions, no uniforms, no strict school rules etc. There is a new-found independence and freedom, but whether she/he is mature enough to handle this freedom responsibly is something parents have to wait and watch. You don’t stop your child from moving out of school and entering college because you aren’t sure of his/her maturity to handle change. If it is absent, it has to be gradually taught.

It is also a misnomer to think that investors will come flocking to the industry just because entry loads have been abolished. In fact, the role of the distributor becomes even more critical in the current context. With a plethora of investment avenues and terabytes of information available, there is a serious chance of the investor getting overwhelmed and erring in his investment decisions.

How will the entire fraternity shape up? It’s early days yet. The adjustment process is on and I think it will be another three to six months before we actually know whether investors are benefiting in a non-tangible way. My feeling is that by March, we will get a clearer idea of how the distributor-investor equation is working out. A change is usually challenging because it forces you out of a set order. It throws you into uncharted waters. But once the initial resistance falls through, a process of innovation and adaptation begins and things gradually fall into place. I believe that fund houses that will go beyond the traditional distribution models, will be able to substantially expand their investor base. The process is slow, but the one that will create stronger business models.

Changing guidelines and external shocks are not new to the financial product industry, especially mutual fund industry. Adaptability of this sector is phenomenal. There will always be a new product to sell or a better way to service clients. In the Indian mutual fund industry, there has not been a single year that the AUM has fallen dramatically. During the recent financial crisis, when equity collapsed, debt picked up and when debt started flattening, equity picked up.

Call me a hopeless romantic, or a man who’s seen the industry evolve over the years – I believe that these guidelines are building a bulwark for a robust and aggressive growth of the industry. We have already given the world a lot of things to learn in the AMC space – in the next five years, the world would be benchmarking us for all their initiatives.

Disclaimer: All views expressed in this blog are my personal and in no way express or implied, of that of the company I work with, or have worked with in the past.