"Nothing is permanent but change". This quote is a truth that needs to be embraced by all. As history shows us, it is change that has taken civilization forward. What stagnates... starts to decline.
Yet this phrase does not seem to be well accepted in the Indian finance industry. May it be any regulation or guideline; it takes a while to bring change. For instance it took years for RBI to give banking license to companies. The hesitant RBI has only recently started to allow corporates, professionals to form small banks or payment banks. The change, in this case at least, seems to be a good move.
Similarly when it comes to the mutual fund industry, which is one of the most regulated industries in the country today, there is a lot of scope for change that could encourage more investors to invest in mutual funds. But with SEBI's minimum Rs. 50 crore net worth rule for AMCs, the industry is only shrinking. The intention of SEBI was to remove the "non-serious" players from the industry, while one may try and understand such a draconian rule, one also needs to also consider that less mutual fund participants would mean fewer options for investors.
While AMCs have been given 3 years to fulfill the minimum net worth criteria, some AMCs managed to pump in capital with the help of their Sponsor. But does this make them "serious" enough to run an AMC?? Suddenly more money locked in the balance sheet is an indicator of seriousness! While some AMCs have chosen to infuse capital, others were forced to exit the Indian AMC business.
The regulator seems to be of the view that, India has too many mutual fund houses. A situation like this reminds me of the law of supply and demand. Ironically where there is a lot of demand we are running short of supply. With consolidation happening in the mutual fund industry, we seem to be going the opposite direction. Is the Industry moving to scenario where like Banks there will be a few dominant players who then the Regulator would classify as "Too Big to Fail AMC's" with a different set of Regulatory Conditions?? Hope this situation does not occur.
To think about possible solutions...
In my view the Regulator and the industry should work hand in hand to increase mutual fund penetration in India; whether by allowing individuals to start AMCs or even lowering the minimum net worth requirement. Here are a few serious suggestions for the 'serious' Regulator of the industry.
1. Leverage Technology
Adapting technology well helps any business to grow and serve its customers better. It helps to reduce costs (and hopefully reduce the requirement for huge net worth), and also cut process times.
E-KYC, for which guidelines are still pending from SC/Regulator, is a step in that direction. Digitization of KYC could bring down account-opening costs by half, and the account-opening time would come down to a couple of days from 8-10 now. At Quantum, we use e-IPV in certain circumstances, for instance, in case of outstation/NRI clients. However apart from digitizing KYC, the entire KYC process as it exists today needs to undergo a complete overhaul. To cite one example of a simplified process for payments, Bharat Pay, the Bill Payment portal being developed by RBI has no mention of payouts being facilitated to Mutual Funds. Mutual funds can never emulate the success of e-commerce, IRCTC, or the Pradhan Mantri Jan Dhan Yojana (as SEBI chief Mr. U K Sinha had exhorted the industry, earlier in the year) unless the hurdles of KYC are simplified to bring in new investors through the online route.
Direct sale of mutual funds ought to receive greater impetus. The investing population of the country may be broadly divided into two age groups of 20-39 years and 40-59 years. As rightly pointed out by Mr. U K Sinha recently, of these the first group is tech-savvy, well-educated and motivated to make financial decisions early. The second group consists of those who are not so comfortable with technology for financial transactions and have saved money in the latter part of their lives. According to the latest available data, the proportion of both age groups in the population is:
| Age group |
20-39 years |
40-59 years |
| Share in total population (all age groups)* |
34% |
19% |
| Share in investing population |
64% |
36% |
*Source: Statistical Report, Registrar General of India, 2013
Thus, the population demographics of the country are conducive to greater use of technology for investments. Therefore both the Regulator and the industry, along with RBI, must work together to encourage online investments and build infrastructure that support them.
In the banking industry, RBI has done a laudable job in allowing companies, individuals to set up Payment Banks. The list of entities that got the license to run Payment Banks, include those ranging from telecom companies and prepaid payment instrument issuers (PPIs), to supermarket chains and non-banking finance companies (NBFCs), individuals and is decently robust. The primary objective of opening up Payments Banks is to further financial inclusion, using a secured technology-driven environment, by providing small savings accounts and payments / remittance services. One of the important conditions laid down by RBI for these new variant of banks is that, "
the operations of the bank should be fully networked and technology driven from the beginning."
Alibaba, the Chinese e-commerce giant, made news globally when it launched a money market fund. Offered by Ant Financial, Alibaba's financial arm and sold through the Alipay Wallet app, the fund Yu'e Bao offers higher interest rates than banks. It raised more money than any other Chinese mutual funds in seven months, as of August 2015 (standing at RMB 668 or US$ 108 billion), according to a source
#. Incidentally, Alipay the immensely popular flagship online payment product of Ant Financial controls more than 82% of China's online payment market, according to reports.
Of late, Ant Financial launched an app named Ant Fortune, which takes over 900 of China's mutual fund products to the lay investor. Investors need to have an account on Alipay to be able to purchase mutual funds through the app. The firm will use its data bank, analyzing users' investment demands and risk appetite when recommending fund products and providing other services such as investor education.
With a regulatory environment that fosters innovations, which has led to a boom in internet-finance in China, many wonder if could it disrupt and dismantle the traditional banking and financial services in that country. Could very well be the case! What about back home? According to a recent report by BCG that compares adoption of online shopping and online banking by customers, banking lags behind shopping by 2 years. How much farther would mutual funds be? There is no clarity as to whether a Payment Wallet can be used transact in Mutual Fund units in India or that payment from and to an account can be from a mobile account.
Moreover, the application of technology in the Asset Management industry must go beyond mere acceptance of online payments. Digital technology can be used to improve the customer experience by increasing connectivity, providing tools for portfolio analysis, suggesting asset allocation and targeted investor education. Right from the stage of funds selection, the investing process, post-investment services, Mutual Funds should rely more on technology to expedite & simplify processes. Innovating in various functions will allow AMCs to offer convenience, faster service to its investors and make mutual funds accessible to a bigger share of the population. Adopting a technology driven model helps to reduce costs and improve control.
Despite the advantages of a direct model of distribution, many AMCs are not enthusiastic about adopting it. The main reasons could be the risk of harm to existing channel partners and the lack of regulatory support. Regulatory support across the Financial Services universe, and not only in Mutual Funds universe, is crucial in creating a favourable environment for firms to innovate. This could come in terms of acceptance of new payment modes, the much awaited e-KYC, moving away from wet signatures, sharing of data to avoid duplication, just to name some.
2. Allow individuals to start an AMC
By allowing eligible individuals/professionals to start Asset Management Companies or AMCs, we will encourage good and honest players, which will benefit both individuals and investors. In the US there are some large fund houses which were initially started by an individual. Vanguard and Templeton, both mammoth fund houses today were started by John Bogle and Rupert H. Johnson, Sr respectively.
Even in India there were fund houses in the past that were founded by individuals. Dr A.C Muthiah was the erstwhile sponsor of First India Mutual Fund, until the AMC was taken over by Sahara group, late in 2003. We could return to the former good practice. The RBI has taken already this step for Payment Banks and Small Finance Banks. Of the 11 licensees for Payment Banks, 2 are individuals!
Some of the features/criteria that AMCs by individuals should be required to have are: a professional who should be fit & proper, having 10 years of sound track record of professional experience in the Asset/Funds Management business/industry, networth of only Rs. 1 crore, criteria of promoter holding at minimum 40% of voting capital (anybody holding non-voting capital not to classify as a promoter), majority of independent directors, limitation in number of products, robust risk management system, a responsive customer grievance mechanism , liquid funds being exclusively for retail investors or investors investing upto Rs. 5 lacs, valuation of portfolio to be completely mark-to-market, capturing all risks thus reflecting the realizable value of the security, and optimal use of technology for product distribution, which may be fully internet driven..
To conclude, would like to rewind a bit to the definition of Monopoly, which is "a situation in which a single company or group owns all or nearly all of the market for a given type of product or service. By definition, monopoly is characterized by an absence of competition, which often results in high prices and inferior products." The last thing we want is this kind of scenario in the Mutual Funds industry where a cabal of large fund houses offers a limited choice to the investor.
The following numbers highlight my perspective. In 2014, there were 867 investment firms in the US that provided investment services and products to its population of 318.9 million. An estimated 43.3% of households in the US owned mutual fund products. The corresponding number in India: 44 mutual fund houses for 1.25 billion, and 9% urban households investing in any mutual fund product (mutual funds are still less popular in the rural areas).
Hence, more the fund houses there are, the merrier the investor will be.
