What changes do you see in the distribution landscape?
I foresee three major trends in the distribution landscape. Firstly, the adoption of technology is going to increase. Secondly, there is a transition happening towards providing solutions – retirement, child education, etc.
Thirdly, I feel many distributors will graduate to fee based advisory going forward. We will also see a rise in the number of distributors registering with SEBI as Investment Advisers.
With the cap on upfront commissions, the industry has moved to a trail model. Have distributors been able to transition to this new commission structure?
Some distributors had moved to pure trail model even before the upfront cap was introduced. We have observed that the number of distributors opting for trail model has increased post the upfront cap. However, we still have a healthy mix of distributors who operate on a pure trail model and distributors who receive both upfront and trail because cash flow is important for such distributors.
A lot of robo advisory platforms are coming up. Do you think they will emerge as a big distribution category going forward?
Each type of distributor will have her own space in the industry. So robo advisers will also grow and they will be able to bring in new investors in the industry with the help of technology.
Having said that, I feel along with technology, touch and feel is also very important. So personal advisory with the convenience of technology will play an important role in the advisory business.
The industry is seeing sustained inflows in equity funds. Do you think the trend will continue?
I think the trend will continue because 50% of inflows in equity funds are coming through SIPs. As distributors are promoting SIPs among investors, we are seeing a healthy rise in SIP accounts. Currently, the industry gets Rs. 3,200 crore monthly inflows in SIPs which translates into more than Rs. 36,000 crore inflows every year. So the SIP inflows over the next three years will be on par with FII inflows which will provide stability to our market. The SIP inflows have gone up from Rs. 1,400 crore in 2014 to Rs. 3,200 crore now.
The SIP ticket size is also increasing. From Rs. 2,400 two years back, the average SIP ticket size has increased to 3,000 now. As a result, the industry now has more than 1 crore SIP folios.
However, the lump sum inflows have come down due to the volatility.
The balanced fund category is growing at a fast pace. What is causing investors to rush to this category?
The shift is triggered due to a number of factors. The change in tax structure of debt funds has nudged people to move to balanced funds. Also, the returns of balanced funds have been fairly good, that too at a lower risk as compared to equity funds.
The balanced fund category is currently at Rs. 57,000 crore and we believe it will be the second largest category in equity. We expect the balanced fund category to surpass mid cap category, which is about Rs. 65,000 crore, by the end of this financial year.
The ETF category is also witnessing growth in assets and folios. How are you promoting ETFs among investors?
The growth in ETFs is largely due to growing interest from institutional players like insurance firms, banks and EPFO. Low costs coupled with innovation in this category like smart beta ETFs, gilt ETFs has helped the category gain traction among institutional investors. So cost conscious investors like family offices and HNIs will start having ETFs in their portfolios.
Why are distributors not actively selling ETFs?
This industry is predominantly focused on returns. With the knowledge level of distributors growing they are now focusing on need based investments. So the ETF penetration is growing albeit at a slow pace.
Passive funds have not been popular because investors prefer to invest in active funds by looking at the past returns. Also, a lot of people are obsessed with ratings. Our analysis shows that of the funds which were rated 5 star four years back, 50% of them became less than 3 star funds and vice versa. In fact, the average returns of three start rated funds in the last four years have been higher than those of five star rated funds. So this incentivises churn.
The reason why ETFs are not popular is not because commissions are low in this product. Distributors have been selling active funds because investors are chasing past returns. This needs to change.
Moving on to some of your recently launched initiatives, how did the idea of introducing instant redemption facility in Reliance Money Manager Fund (RMMF) come about?
When we interacted with investors, we came to know that a large chunk of their savings lie in savings account which earns just 4% returns. While investors are conscious of returns their main concern is liquidity. They want to access money 24x7 at their will. This insight got us thinking how we can offer instant liquidity to our investors. So we launched this facility where investors can receive their redemption proceeds up to Rs. 2 lakh within 30 minutes. We are using IMPS to facilitate this.
How has been the response?
The response has been encouraging as the number of transactions in RMMF have doubled since we introduced this facility. Investors are happy to see that they are receiving redemption proceeds in 10 minutes. We are targeting five lakh folios by the end of this year in this fund. To make this fund more accessible to investors, we have launched ‘Simply Save’ android app to transact in this fund.
Are you looking to extend this facility in your other funds, especially equity funds, which still take three days to give redemption proceeds to investors?
Technically, it can be done in other funds too but at this juncture we are keen to tap the savings account market which is estimated to be Rs. 20 lakh crore. Since the money is invested for a longer term, liquidity is generally not a concern when people invest in equity funds.
Finally, what is your advice to distributors to grow their business?
They should focus on three things - technology, offering the right advice and invest in increasing their customer base. Over a period of time when the industry matures and the margins of both AMCs and distributors falls, it will become important to increase volumes. So technology will play a vital role in building scale.
