Most of you must be aware of UTI Mastershare Unit Scheme. It is the first market linked equity scheme, which did not guarantee returns. Earlier, funds like UTI Unit Scheme 64 either offered assured returns or indicated returns. However, it was industry’s first market linked product but was a close end scheme listed on stock exchanges. In those days, there was no concept of open ended, daily NAV and trail commission. Fund houses used to launch close end funds or interval funds to collect fresh money.
However, the course of Indian mutual fund industry has changed with private players. Kothari Pioneer was the first private mutual fund that many believe has laid foundation stone of the modern mutual fund industry. Be it an open end fund or SIP, this fund house has brought numerous innovations in the industry that we are today proud of.
In the beginning…
Talking about these innovations, Vivek Reddy, then CEO of Kothari Pioneer said that private fund houses have raised the bar of the mutual fund industry. “Though most of the innovations have originally come from international markets, executing these ideas was the most challenging part. However, there was excitement in the air. The average age of the team at Kothari Pioneer Mutual Fund was 30. There was enough room for new ideas. I remember those days when we launched India’s first open-ended funds titled Kothari Pioneer Bluechip Fund (now Franklin Templeton Bluechip Fund) and Kothari Pioneer Prima Fund (Franklin Templeton Prima Fund), many people wondered how we would manage open end funds with continuous inflows and outflows and how we will publish daily NAV of the schemes. However, our team used to work late night to ensure that investors got daily valuation of their units.”
Return kitna milega?
Sharing his experience, Rajan Krishnan, ex-CEO Baroda Pioneer Mutual Fund, who was then heading Sales at Kothari Pioneer told Cafemutual that marketing open ended fund was a challenge. “Those were the days when bank FDs and PPF gave 18% returns to investors. Only closed end funds were popular. I remember people standing in a queue to buy units of such funds during intervals (funds used to open for subscription for a few days). Also, even if you managed to convince distributors and investors about benefits of open end funds, they would ask ‘Return Kitna Milega’ since they were used to assured return products. People were not open to the concept of open-end structure and daily NAV. At times, we had a hard time explaining to distributors and investors why the NAV went up or down. However, the funds of Kothari Pioneer performed very well; people saw their money double within two years, which enhanced their credibility.”
Challenges in Fund Management
Fund management too came with its unique set of challenges. Sharing how fund management in India has evolved over time, Anoop Bhaskar, CIO, IDFC MF who was then a part of the fund management team at Kothari Pioneer said that the prospect of meeting large scale redemption in open end structure was a daunting one. “We did not have experience in managing open end mutual funds. Though we had collected inflows of Rs.50 crore in Prima Fund that time, we were worried about meeting large scale redemptions in open end structure. To mitigate these risks, we used to maintain cash levels of 10% then,“said Anoop.
However, the biggest challenge was doing research on companies. “There were no quarterly reports then. We used to wait for annual reports of the companies. A few companies were more generous as they came out with half yearly report. There were no concept of analyst meetings in companies. We used to approach company secretaries with our stock holding proof seeking appointment with the senior management of the companies. Also, we used to attend AGM just to ask questions to management. At that time, it was rare for brokers to share their reports with us,” explains Anoop.
In fact, there was a misconception in many minds about stocks with some equating stock market with gambling. “I remember in 1990s, newspapers used to carry stock market news and horse racing betting details on the same page. We used to spend a lot of time on research and collating necessary information on companies. This task was made doubly difficult since those we had just one PC which four of us used to share,” recalls Anoop.
Nascent Distribution
Vishal Kapoor, CEO, IDFC Mutual Fund who was then associated with ITC Threadneedle AMC recalls how there were very limited distribution channels offering mutual funds. “There were three broad categories of distributors then – stock brokers who largely sold mutual funds like IPOs, Fixed Deposit Agents who were focused on Company FDs, PPFs, Post Office schemes etc, and some UTI & LIC agents who started diversifying into mutual funds. Some of the existing distribution networks included organisation like Bajaj Capital, Integrated Enterprises, Eastern Financiers, Blue Chip etc. It was only a few years later that foreign banks such as Standard Chartered, Citibank and HSBC started offering mutual funds. Alongside, entrepreneurial efforts like NJ focused on this new category and expanded rapidly.”
Another significant feature was the high upfront commissions. Regulations allowed fund houses to charge 6% entry load in lieu of marketing expenses. Since distributors in other financial products such as insurance gave generous commissions, most AMCs used this load to incentivize distributors. Trail commission started after introduction of R&T agents such as CAMS and Karvy.
Giving a distributor’s perspective on 25 years of private mutual funds, Rajiv Bajaj, Chairman and MD, Bajaj Capital said that private mutual funds have bought product innovation. “Those days, I remember sitting with AMC officials to discuss marketing strategies. There were excitement all around. I remember there was a Kothari Pioneer campaign proclaiming, if making money is sin, welcome to hell’. This was during the launch of Prima Plus Fund. I would say a lot of innovations that we are witnessing today have come from private mutual funds. Right from open end funds and daily NAVs to sectoral funds, debt funds or even SIPs, private mutual funds have strengthened the foundation built by the public sector players,” says Rajiv.
Seconding Rajiv’s view, Mumbai IFA Sadashiv Phene said that private mutual funds brought structural change in the mutual fund industry. “I remember that the trail commission was not so substantial. It was just 0.25% in the beginning. However, the beauty was it was like profit sharing since it was given on NAV.”
Phene also feels that private players have created transparency in the mutual fund industry. “Private mutual funds were the ones to start the practice of sharing rationale for stock selection and holdings through monthly factsheets.”
Share your experiences in the comment section below on how the industry has changed after private players entered the mutual fund space.
