Fund platforms fail to profit from load reform

More than six months since the launch of mutual fund platforms by India’s two leading stock exchanges, the challenge remains to convince brokers of a new way of doing business.

The platforms enable investors to buy and redeem open-ended mutual fund schemes through the vast network of broker terminals, in a similar manner as investors trade stocks.

Previously investors in India could only buy mutual funds directly from distributors or asset management companies (AMCs).

The National Stock Exchange (NSE)’s Mutual Fund Service System (MFSS) and the Bombay Stock Exchange (BSE)’s BSE's StAR MF Platform were launched at the end of last year. However, after the initial euphoria, online trading of mutual funds is yet to take off.

Small scale

Despite some growth, the scale and volume of online trading appears small compared to the overall size of the mutual funds industry. In the first quarter of this year, the NSE and BSE platforms together accounted for a mere Rs252.6m ($5.4m) worth of subscriptions and Rs131.4m worth of redemptions.

“Volumes on the trading platforms have not been very significant,” comments Vineet Arora, head of product distribution at ICICI Securities, a leading equity house which runs ICICIDirect.com, one of the most popular e-brokerages in the country.

A key catalyst for the launch of trading platforms was the banning of entry loads on mutual fund schemes from August last year by the capital markets regulator, the Securities and Exchange Board of India (SEBI).

This decision had a huge negative fallout. Distributors, who were used to getting more than 2 per cent of an investment in commission, complained of losing the incentive to sell mutual fund products. Instead of directly charging investors advisory fees as SEBI recommended, they focused their attentions on pushing insurance products, where commissions remain highly attractive. Mutual fund subscriptions slumped.

To counter this, SEBI initiated efforts to extend the reach of mutual funds among retail investors through the stock exchanges. The NSE and BSE together have a huge presence in India with over 200,000 terminals spread across more than 1,500 towns and cities.

At SEBI’s urging, the exchanges launched mutual fund platforms that could be accessed by their existing broker network.

Brokers have however not latched on to the product. “It will take time for brokers, who have traditionally dealt with equities, to understand mutual funds,” remarks Mr Arora.

“Broker education is very important since selling stocks is very different from selling mutual funds,” adds Jaideep Bhattacharya, chief marketing officer at asset management company, UTI Mutual Fund.

Mutual funds are long-term investment products, while Indian brokers are used to regularly churning their clients’ equities portfolios to generate income. Additionally, with the mutual funds industry still grappling with the problem of providing adequate commissions to agents for selling the product, many brokers have abstained from getting too involved.

Increased access

UTI Mutual Fund was the first AMC to make its products available through NSE’s platform. The reason for going for this online solution, says Mr Bhattacharya, was to increase the number of access points for mutual fund investors.

“Banks have over 65,000 branches, insurance products are sold through over 2,500,000 insurance agents while for mutual funds there is only a small network of AMC branches and agents,” he explains.

“In India, mutual funds are a very push based product, not a pull based one. Distribution is very important for selling mutual funds,” notes Mr Bhattacharya.

Quoting a 2008 study by consulting firm McKinsey, he says 96 percent of customer investment decisions are based on distributor recommendation. Hence, the main aim behind making mutual fund schemes available

through stock exchanges was to leverage the network of stock terminals in the country and make mutual funds more easily accessible to end customers.

Nonetheless, less than 5 per cent of the investment in UTI Mutual Fund’s scheme is via the online channel, with distributors accounting for the lion’s share.

“Online trading is a new option for investors to buy mutual funds. Whenever they will get more comfortable with this channel, the volumes will increase,” remarks Mr Bhattacharya. UTI Mutual Fund recently launched a huge investor education initiative to increase the level of financial literacy in the country.

Mutual fund investors are comfortable with the existing way of operating and don’t necessarily wish to change, states ICICI’s Mr Arora. Through ICICIDirect.com investors can invest in 3000 mutual fund schemes. While the firm has offered this service for some years, he says, it is in the last two years that online investing in mutual funds has gained traction.

“Our customers are used to our way of buying and selling mutual funds so our business has not been affected by the trading platforms. Initially a few customers requested us to route orders through them but at present there is no demand,” says Mr Arora.

From a distributor perspective too, ICICI Securities has seen few operational benefits of routing orders through the trading platforms. There is a recognition that online trading can help distributors reduce the costs of mutual fund processing by streamlining and ensuring paperless transactions.

“Online trading has the potential to reduce the transaction cost for distributors but it needs to be further developed,” he says. Payments is one area for instance, that remains beset by inefficient paper-based processes.

New customers

“I feel increased awareness about mutual funds in general and online investing in particular can go a long way to attracting more and more new customers to it,” says Ashu Suyash, managing director and country head for India at Fidelity International.

“Expanding the options available to customers for making payments online should also be a great enabler as currently only those customers who have an internet banking account can pay online,” she adds.

Fidelity was among the first asset management companies in India to launch an online platform for investing in its mutual fund schemes. In December last year, Fidelity offered the new fund offer (NFO) of its Fidelity India Value Fund (FIVF) through NSE and BSE becoming the first mutual fund to offer an NFO through the stock exchanges.

However, for most customers, the costs of opening a new paperless account remain prohibitive. Most investors continue to hold mutual funds in the physical format.

Yet industry analysts believe these are relatively early days. The capital markets regulator is still strongly backing online trading. Once the operational hiccups get ironed out, experts believe the pace of online trading will pick up and will be regarded as a viable route for investing in mutual funds in the country.