Banks planning wider product portfolios

Buoyed by the booming stock market and rising foreign participation, the $140bn Indian mutual fund industry has experienced exponential growth for the better part of the past decade. Over the past five years, for instance, Indian mutual fund assets grew four-fold, outpaced only by Russia and China. Penetration levels, nonetheless, remain extremely low. Market research firm, IIMS Dataworks estimates there are only 5.3m retail investors in mutual funds in India. This is a fraction of the 190m wage earners in the country that have some form of regular savings. Mutual fund activity is also limited to a handful of Indian cities. A recent study of the Indian asset management market space by consulting firm McKinsey showed three-quarters of retail investments originate from the top eight cities. The study indicated that mutual fund assets account for only 8 per cent of India’s GDP. In a mature market such as the US, mutual fund assets account for 79 per cent of GDP. The skewed penetration of mutual funds reflects to a large extent the state of fund distribution in the country. “Fund distribution accounts for over 90 per cent of the industry’s flows while distributors have negligible presence in tier two and three cities and rural areas from where the next wave of mutual fund investment is expected to arise”, remarks Manoj Kumar Vijai, executive director at KPMG India’s financial services practice. K. Venkitesh, managing director at Geogit Financial, a leading broker/dealer and mutual fund distributor, agrees: “Over 85 per cent of our business comes from the top 10 cities. This is true for nearly all distributors.” In a vast country like India, distributors are daunted by the prospect of high set-up and acquisition costs in smaller towns and cities, explains Mr Vijai. A few fund houses have tried to leverage the reach of the Indian Post, which has more than 1.5m outlets spread across the country, but achieved limited success and thus far this channel remains relatively under-developed. Regardless, the fund distribution space has seen the emergence of three strong channels: banks, national distributors (NDs) and independent financial advisers (IFAs). “Fund distribution is divided almost equally amongst the prominent channels,” remarks Nimesh Shah, MD of ICICI Prudential, one of the leading fund houses in the country. He however notes that while banks have a larger share in the top cities, IFAs are becoming critical in tier two cities. Among banks, leading foreign and Indian private sector banks such as Citibank, HDFC Bank, Standard Chartered and ICICI Bank are the main distributors of third-party products, while non-banking financial companies such as Bajaj Capital and IL&FS dominate the ND segment. IFAs constitute the unorganised segment of the business, but play an extremely important role in reaching out to retail customers. It is estimated that nearly half of all flows into equity funds, extremely popular with the retail clientele, comes through these advisors. As such, equity funds are the most popular type of funds on a flow basis, although local market reports suggest that equity assets have shrunk by nearly a third on the back of the stock market decline and equity fund inflows in June fell to their lowest in June since August 2006. Banks, especially foreign banks, have a more diversified product offering. At Standard Chartered, which has over 200,000 investment customers, only 40 percent of flows come from equity products. Sandeep Das, general manager, Wealth Management at the bank explains: “Until around three years back, our portfolio consisted mainly of long-only India equity products. But since then we have consciously tried to diversify our product basket to include broader emerging market, money market, bonds and principal protected products. We are pioneers in the area of real estate funds.” Apart from the three main channels, the online channel too has made its appearance on the Indian fund distribution horizon. Fidelity International, which has been offering mutual fund products in the country since 2004, recently launched its online fund platform which is already well established in four countries – the US, UK, Germany and Taiwan. In the US, at the end of last year, FundsNetwork had $766bn of third party assets under intermediation. Speaking about the local market potential of its platform, Ashu Suyash, managing director and country head – India for Fidelity International, says: “Today only 4 per cent of household money goes into funds. In the next five t0 10 years, there is a clear case for this to double. In that horizon we would hope to get a 5 per cent market share.” FundsNetwork is an open architecture fund platform that will offer online a range of third party funds and expects to cover around 60 per cent of the fund provider market. The platform is focused on self-directed individuals and IFAs, providing the latter comprehensive training as well as practice management tools. The aim, says Ms Suyash, is to up-skill agents. Fidelity has already signed up 800 advisors. Nearly 70 per cent of these, though new to the mutual fund industry, are life insurance agents certified by the Insurance Regulatory & Development Authority (IRDA). To sell mutual fund products, they would need to be certified by Association of Mutual Funds in India (Amfi). “Market development and penetration of mutual funds in India has been severely limited by the smaller number of agents selling funds especially when compared to the insurance industry’s strength in number of agents”, states Ms Suyash. The challenge, she says, has been further aggravated by poor acceptance of mutual funds among insurance agents. “A critical challenge faced by the distribution space is the lack of qualified financial advisers in the industry,” concurs Mr Das. As against over 2m life insurance agents, in the country, there are only around 65,000 Amfi certified agents servicing mutual fund customers. Profitability Notably, the main reason for such a disparity in the number of life insurance and mutual fund advisors, suggest industry experts, is not the fact that life insurance agency has a much longer history in India. It is profitability. “For distributors, the commission structure for life insurance products is much better than for mutual funds. For example, with insurance products like Ulips, unit linked insurance policies, distributors can earn up to 35 percent commission, but for mutual fund products the commission is only 2.5 percent. At Geogit we are shifting our focus to insurance distribution,” says Mr Venkitesh at Geogit Financial. Ulips are essentially market linked investments, in many ways similar to mutual funds, but with an added insurance cover and are also eligible for tax benefits. Ulips have strongly appealed to the risk-averse temperament of the average Indian investor and currently account for nearly 60 percent of new premium into insurance policies. Distributors on their part are able to earn hefty upfront commissions on first year premiums with Ulips. Additionally, while selling Ulips, they do not need to follow strict KYC (Know Your Customer) norms that have recently been made mandatory for mutual funds. “Regulation has made Ulips more attractive for distributors than mutual funds,” states Srinivas Jain, chief marketing officer at SBI Funds Management, a joint venture between State Bank of India and Société Générale Asset Management. “There is a strong case to create a level playing field between insurance and mutual fund products that have a similar structure. It is easy to see why an independent financial advisor, who has an option to sell both insurance and mutual fund products, would be incentivised to sell Ulips as against mutual funds,” adds KPMG’s Mr Vijai. Geogit’s Mr Venkitesh claims that the regulatory regime is becoming tougher for fund distributors. Apart from the implementation of stringent KYC requirements, he points towards the removal from January 1 this year of “entry load” or commission on fund products for investors who invest directly with the asset management companies (AMCs) rather than through an intermediary. The directive is an effort by the regulator to end malpractices such as fund churning and also make fund products more easily accessible to the common investor. Interestingly, despite considerable concern by a majority of the fund distributor community about the removal of “entry load” on their business, the initial response by investors has been lukewarm. The reason, explains Robin Roy, associate director, financial services, PricewaterhouseCoopers (PwC), is a combination of the Indian investors’ existing comfort levels with their fund advisors and lack of financial education in the Indian populace. “There are definite cost advantages to investors from entry load removal. They can save between 2-2.5 percent of the fees on open-ended schemes or 5-5.5 percent on close-ended schemes. But most customers do not bother about this perspective. They prefer to go with the recommendation of their fund advisors. This directive will benefit informed and savvy investors of which there aren’t too many at present.” “SEBI’s latest move of no load for direct investment is a good step for the well informed and savvy customer,” says Mr Das at Standard Chartered. He acknowledges, however, that low levels of financial literacy is a big hurdle for the fund industry. “We not only need to reach out to more customers, but need to spend time educating these people on the benefits of mutual funds and the way they can be used to create wealth over a long terms.” Awareness levels Lack of investor awareness is as such one of the biggest challenges faced by mutual fund distributors, notes Ms Suyash of Fidelity. “While high net worth individuals are savvy, their numbers are too few. The main target market for mutual fund products is the mass affluent group, but here awareness levels aren’t very high.” Another key issue, she adds, is that most distributors also do not provide adequate advisory services, a problem most prevalent among IFAs. Despite its challenges, Ms Suyash is extremely positive about the future of the Indian mutual fund industry and the fund distribution space. This belief in the market potential has been the main driver behind Fidelity launching its Fundsnetwork platform. “India is a high savings market and also very young. You could say it is a baby boomer market. Customers can be started at the low end of the product spectrum and moved up gradually,” she says. According to a recent McKinsey report, the total AUM of the Indian mutual fund industry could grow to $350-440bn by 2012, expanding 33 per cent annually. Distribution and branding will make the difference between winners and losers, says McKinsey. AMCs need to manage distribution partners with care, since customers choose an AMC primarily on the recommendation of a sales person, followed by fund performance and brand strength. ICICI Prudential’s Mr Shah agrees. “In India, distributor recommendation acts as one of the prime influencers in investor decision making process,” he says. With investor awareness being one of the bottlenecks for category growth, he adds, the distributors’ role is extremely critical in both ensuring reach and offering the right advice.

‘Today only 4 per

cent of household

money goes into

funds. In the next

five to 10 years,there is a clear case for this to double’

Ashu Suyash,

Fidelity International