The year 2009 had witnessed a boom for mutual funds as banks, faced with the poor loan scenario post the economic slowdown, invested their surplus capital in income and liquid schemes that offered tax benefits, higher returns, liquidity as well as relative insulation from market volatility. The schemes were widely accepted, as is witnessed by the fact that about 66% of the industry’s corpus lies in ultra liquid and liquid funds, as per the December figures released by the Association of Mutual Funds of India. The liquid plus schemes in particular, were highly popular. These had been introduced in 2007, in response to the budget increase in dividend distribution tax (DDT) for corporates from 14.03% to 28.03% in liquid funds.

However, these schemes are now rapidly losing their attractiveness. Following a record high of Rs.807,556 crore in November, the average monthly Asset Under Management (AUM) of top fund houses in India dropped for two successive months to Rs 7,94,486 crore in December and down again to Rs 7,61,632 crore in January this year. Inflows dropped due to the banks’ capital adequacy requirements in December and the impact of RBI’s October 2009 review of the monetary policy directing banks to cap their investments in MFs. The sharpest cut has been Sebi’s notification last week, according to which debt and money market instruments with maturity of over 91 days will be subject to mark-to-market norms from July 1.

In the near future, some more measures seem to be in the pipeline. There have been musings about the government taking the tax benefits away from fixed income funds, as also focusing on increasing the retail reach of the funds.

SEBI’s move is likely to change the pattern of institutional investments into liquid-plus schemes – the probable volatility in these schemes, however nominal, will have to be factored in by a savvy treasury manager. In addition, the expected pick-up in credit off-take would affect inflow into mutual funds, as banks lend money to borrowers at higher rates.

These are interesting times for the mutual fund industry. Before the new valuation guideline comes into effect on July 1, the MF industry will need to have evolved further. Keeping volatility in mind, fund managers in these emerging times require to be sharp witted and quick to respond.

Clearly, the texture of short-end money market funds will have to evolve. Institutional money would be difficult to come by in a relatively plain vanilla commoditized liquid/ liquid plus scheme. The challenge is to create products that are relevant to evolving regulatory conditions and changing customer requirements. As standardization is brought into the industry and independent agencies monitor the methodology of valuing debt instruments, old products need to be tweaked to fit the new regulations, while new and innovative products need to be brought into the system.

The financial industry, meanwhile, can benefit from the innovative minds that are gearing up to make the fund industry more competitive and efficient.

Market expansion is the order of the day and for this, innovation, both in products and schemes, is key. The need is to strengthen distribution systems and retail penetration. Distribution now needs to get energized and service-oriented, with targeted products that cater to diverse end-customers such as temple and charitable trusts as well as individual customers.

There is likely to be a wave of structured products that would start catering to the emerging B2B segment. As institutional customers get more evolved and the options in the conventional MF space cramp up, there would be an impetus to adapt international products for the Indian markets.

Interest in structured products seems to be reviving, more than a year after the Lehman Bros debacle – taking, of course, into consideration the recent hard-bought wisdom that the more complicated the product, the less transparent the risks. According to research conducted by Barclays Wealth, 69 per cent of advisers considered that structured products had become more attractive to them in the past year. In India too, new structured products are finding more takers, marking the increasing confidence in such products

Along with the challenges to change and adapt, is the increasing potential waiting to be tapped, as the world of potential investors grows by the day. Client focus and forward thinking to fit new aspirations and a new generation of retail investors with increased levels of awareness could mark the emerging arenas in which the mutual fund business will have play.

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.

Make your money work for you

We slog for money, but do we make our money work for us? To create wealth, it is not enough to earn more, but it is also important to invest your money judiciously so that it creates wealth for you. With a market flush with financial products that suit different risk appetites and financial needs, all it takes to set out on the path of financial freedom is careful analysis and planning. So if you aren’t setting aside money for investment, or if your savings are sitting idle in your bank account, it’s time you make them work for you.

Analyse your goals and plan your investments

Your financial well being is an important determinant of your overall well being and hence financial planning deserves more than an ad hoc approach. Your financial needs and your ability to take on risk determine the right investment choices for you. I have seen people invest in a product because someone they knew did, or because of the product’s compelling advertising. Often such impulsive decisions take you away from financial freedom rather than closer to it. So if you haven’t given a thought to your goals yet, now is the time.

Consult a financial planner

Sound financial planning requires you to understand your goals, risk appetite and financial products available, and needs careful monitoring. Often people don’t have the time necessary for doing so, or the essential understanding. If that is the case with you, don’t just give up – choose an experienced financial planner who can help you wade through. Your financial planner will not only help you create a diversified portfolio suitable for your needs, but can also help you restructure and rebalance your portfolio periodically, in tandem with your changing needs and market conditions.

Invest for the long-term

Investments in equities and mutual funds are proven to deliver high returns in the long run. Often investors take short sighted view of investments and make purchase/sell decisions based on immediate market swings. Though volatility is the name of the market game, it has been proven historically that in the long-run, a well managed investment avenue will deliver superior returns. An investor who stays invested in a good stock or scheme for the long-term is likely to earn more than one who pursues quick profits.

SIP is the way to go in mutual funds

Investing in mutual funds through SIP allows you to benefit even from a volatile market. A recent article in The Economic Times says that while top equity diversified funds have returned 16-18% in three years, SIP investors have earned returns in the range of 25-28% (investing into the same funds) during the same period. With most fund houses allowing investors to invest amounts as low as Rs. 100 per month through SIP, even those with small investible surplus can begin their mutual fund journey.

Stay away from bad debt

Nothing disrupts your financial well being like a huge credit card debt or those personal loans you took to indulge in little luxuries. While good debt like a home loan or an education loan are essential to achieve your and your family’s long-term objectives, bad debts only push you into a vicious cycle of high interest payments. Use your credit card prudently. Money wisely spent is money earned.

The principles I have shared are not some breakthrough, novel strategies, but simple financial wisdom that have been known for long. They have worked well for me. Sometimes all it takes to get back on track is a gentle reminder and a signpost. I hope these signposts will help you successfully tread your journey towards wealth creation.

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.