A study conducted by SEBI’s Development Research Group has recommended strengthening the mutual fund distribution network to attract retail investors to the Indian capital markets.
According to rough industry estimates, there are only about 10,000 active mutual fund distributors across India. Experts say that the low commission structure is the main reason why new distributors are not joining the MF industry. “Today, MF distribution is not an attractive industry for somebody to join because of low commissions. If new distributors don’t join the industry, we can’t increase MF penetration. If you look at any industry, it is the commission borne by investors which helps expand the market. While the industry has added new distributors, the growth is still miniscule given the size and population of our country,” said Sunil Subramaniam, CEO, Sundaram Mutual Fund.
To attract more feet-on-street distributors in the industry, SEBI had asked AMFI to give ARNs to a new cadre of distributors such as such as postal agents, retired government and semi-government officials, retired teachers, retired bank officers and bank correspondents to sell simple and performing mutual fund schemes. However, this has not taken off in a big way which is evident by the low enrollments. According to industry sources, there are only about 340 active new cadre of distributors in the industry. “The contribution of new cadre of distributors in the AUM of the MF industry is not encouraging. Since these distributors are generally retired PSU officials and may be getting decent retirement benefits for livelihood, they are not taking mutual fund distribution seriously,” said C. VR. Rajendran, CEO, AMFI.
Apart from building a distribution network of IFAs, the study also made a case for fund houses to develop transparent products and expand their reach through bank branches spread across the country. “Since AMCs are important means of market engagement for retail investors, they must be encouraged to develop appropriate, transparent products that serve the asset building goals of smaller investor and build wide distribution network through banks,” said the study.
It may be recalled that SEBI in its long term policy for mutual funds had nudged public sector banks to take active part in distributing mutual fund products. “Apart from traditional banking products, PSU banks have recently been very successful in distribution of third party insurance products. However, the same success is not reflected in the case of mutual funds. All PSU banks may be encouraged to distribute schemes of all mutual funds,” stated SEBI long term policy.
The study recognized the need to improve the quality of content in investor awareness programs. The study suggested strengthening and widening SEBI’s investor education programs by incorporating evidence-based research in its IAP content. “The issue is not merely that of educating investors on equity investment opportunities and using SEBI support for making informed decision but also that of encouraging sensible investment practices that ensure returns to retail investors. Needless to say, SEBI cannot take on an investment advisory role. SEBI can educate investors based on evidence-based research showing investment strategies which have yielded better results in the past. For example, if the argument that remaining in the market for the long haul ensures better returns is valid, this must be demonstrated with historical evidence and that evidence based recommendation must be incorporated into investor education modules,” the study suggested.
The study titled ‘The elusive retail investor’ recommended identifying and removing the obstacles faced by retail investors while investing in markets.
