H N Sinor, chief executive of AMFI, is at the helm of the industry body when mutual funds are wading through difficult times. In an interview with Ravi Samalad, Sinor said the fund industry plans to bring in greater transparency in the manner in which it incentivises mutual fund distributors. Following are the edited excerpts from the interview:
The mutual fund industry seems to be visibly tense. The AUM slipped to Rs 6 lakh crore in December 2010 from Rs 8 lakh crore in April 2010. Similarly, the folio numbers (investor accounts) have declined by more than seven lakh.
Yes, we are worried about the things panning out in the industry. We find that while the economy is growing and almost all the sectors are growing, the only one industry which is showing a sign of de-growth is the mutual fund industry. Banking, insurance and FII inflows are all showing positive signs but the MF industry has shrunk.
Companies and financial institutions are major investors in mutual funds. Almost half or Rs 3.86 lakh crore of AUM consists of Liquid and Income schemes. The AUM of retail investors, who primarily invest in equity schemes is at Rs 1.81 lakh crore. Equity, balanced and ELSS schemes together add up to Rs 2.27 lakh crore of AUM.
If some corporate money moves out of the industry, that’s not a worry for us. We are consistently witnessing loss in retail folios for the last eighteen months. The loss is in the region of two lakh folios per month. These are largely retail folios consisting of equity, balanced and ELSS schemes. Fund officials have attributed the loss in folios to redemptions by investor due to market appreciation but the continuous folios loss remains an area of concern.
The mutual fund industry has been complaining that it is reeling under the abolition of entry load.
We have no qualms about the entry load ban as the decision is in the interest of investors. The worry is about the subsequent fast-paced changes introduced by SEBI. The regulatory changes have come about in a very speedy manner. Every industry has to settle down with a new regulation. The game changing regulations need to have a review. We need to tweak some rules to ensure that the industry grows. The industry has not settled down even after more than a year. Every regulator has two responsibilities. First, is to regulate and second, to develop. I agree with SEBI’s view that it should be an orderly development. You cannot have haphazard development. We need to have a boundary line like we have one in a cricket match. For orderly growth of business, we also need to have a boundary line. If some of the regulatory perspective needs to be reviewed and wherever there is a need for giving some more time for the system to adjust, it should be done.
On scheme expenses and distributor commissions
The SEBI mutual fund committee had discussed the issue of capping the expenses of equity, debt and index funds. Mutual funds resisted this proposal by saying 2.50 per cent is a nominal expense which they are charging. The industry is operating at a total expense of 2.50 per cent. I think it is a very efficient ratio. Apart from scheme expenses, an incentive for distributors to continue selling mutual funds is vital for the growth of the industry. We need to incentivise distributors. It’s not a charitable business. A large number of distributors are IFAs. We are creating self employment in the system. You can’t leave distributors high and dry. The major irritant is the upfront commission paid to distributors. We are examining various issues. We have not crystallized any thought process. We have to talk to our board of directors and other members and then take it forward. The crux of the problem lies in finding out how to incentivize distributors who are selling the products. We have been working around this aspect.
On the options for incentivising distributors
One of options being weighed by AMFI is whether commissions could be displayed on the AMFI and AMC websites. This would bring in more transparency in distributor-client dealing. Distributors find it cumbersome to collect two cheques from clients. AMFI is evaluating whether commissions could be embedded in the application form itself.
On the efforts made at increasing investor awareness
Mutual funds were primarily bringing business from 20-30 cities in India. In order to reach out to more investors across tier two and tier three cities, AMFI has formed a special committee which looks after the investor awareness campaigns. The industry body has asked fund houses to conduct at least five awareness campaigns in a month, which translates into some 2,000 campaigns in a year taking in to consideration all AMCs. The committee is working on three areas - reaching out to investors through road shows, running commercials on televisions and simplifying the investment process. In just four months, we have been able to conduct more than 4,000 investor awareness programmes covering three lakh potential investors against our estimated target of 2,000 programmes.
An alternative exchange for mutual fund trading
AMFI, along with the industry players, is evaluating whether the stock exchanges or a separate mutual fund trading platform would be more convenient to investors. Each platform has a cost implication but we should choose the platform where investor servicing becomes more efficient and cost effective
On regulating distributors
Distributors are spread across the length and breadth of the country. The main area of discussion is whether AMFI or SEBI should be the right authority to regulate distributors. The industry should seriously look at this issue. I think the time has come where mere code of conduct and enforcement of a code of conduct will not work. We need to seriously look at regulating distributors.
On AMFI converting itself into a self-regulatory body
AMFI has submitted a proposal for gradually moving towards becoming an SRO. AMFI plans to achieve SRO status by 2014-15.
