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Got The Cramps

Overcaution will kill us, says MF industry

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Got The Cramps
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There are many who believe the mutual fund industry is facing its worst crisis ever and is on its way to a slow death. It all began, of course, when market regulator SEBI abolished entry loads in August 2009. Since then the industry has seen net redemptions of over Rs 5,000 crore. While it is premature to start mourning its demise, there is no doubt that there is more suffering in store for an industry that has seen over 25 fundamental changes in the past year.

SEBI will soon come out with radical guidelines on distribution, which will apply to banks that act as mutual fund distributors. Market sources indicate that SEBI is looking at a format where banks document a customer’s need, in order to ensure that mis-selling doesn’t take place. The regulator will also ask for far more detailed disclosures from banks on aspects like commissions, charges and so on. Also in the offing are heavy-duty entry barriers for distributors.

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Mind you, these changes are customer-friendly; they encourage transparency and greater disclosure. In the long term, experts like Value Research’s Dhirendra Kumar believe they will make mutual fund products far superior than what they are. Most industry experts too are in agreement. The grouse has more to do with coping with a new operational change practically every month. “It’s very difficult to imagine what the business will be like even three years down the line. It’s like the regulator has decided to wipe out the past and start afresh,” says the head of an asset management company.

The heart of the problem, however, is that thanks to the abolition of entry loads, the business of selling or servicing mutual funds is no longer viable for smaller players. The disparity in commissions has meant greater inflows into products like unit-linked insurance plans (Ulips). In the meantime, larger brokerages and banks have had a field day, charging customers heftily and fighting over trail commissions. SEBI is now also looking at a standard format for exit loads for retail and institutional investors. That’s why mutual fund houses feel their profitability can only erode even further.

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At a recent summit, SEBI chairman C.B. Bhave also questioned the need for so many products for customers. “The fact is that SEBI approved all these products to be in the market and if you look at the number of open-ended equity schemes, the number would come to 7-8 schemes per player,” says a mutual fund head. Expect smaller fund houses to soon shut shop when they find adjusting to these new changes difficult.

Meanwhile, the regulator itself is unwilling to accept that all these measures will lead to a potential “death” of the industry. “Investments are cyclical,” says a SEBI official. “The pattern shows that most people bought into mutual funds when the market was at its peak. They are barely breaking even now. Once the markets hit the same highs again, we will again see an influx of funds.”

For the customer, there seems to be greater clarity ahead, but SEBI will have to ensure compliance. Whether the customers’ gains will be at the industry’s cost will become clear once the market reaches a new peak. For the industry, the changes mean having to rethink and get out of the inertia they are used to. As of now, investors are happier (even if they are not showing it yet) and industry is not. The tricky question remains—is SEBI’s role restricted to investor protection or is it still committed to the development of the mutual fund industry as one of its key purposes?

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