No Longer Mutual for the Middleman

From August 2009, the Indian mutual fund industry will change its distribution model under an order from the Securities and Exchange Board of India. The regulator has done away with entry load for schemes. This will cause a lot of turmoil for all three parties involved: Mutual fund companies, investors and the distributors who handle 90 percent of the transactions.

How will the industry change?
SEBI wants the industry to follow the model practiced by UK, US and other European countries. This means the investor can decide the amount of advisory fees that distributors receive. So, the distributors will not get the 2.25 percent on every transaction that they now put through. This means there is no incentive for distributors to sell mutual fund products, unless the investor agrees to pay them separately. Many distributors say that if the commission is removed, they will switch over to selling insurance products where the commission system is intact. In order to survive, they will have to scale up and become advisors. They will be in direct competition with banks to sell mutual funds. Banks hold an advantage since they know the financial status of customers. “This is a transformative change for the industry in India. Now distributors will have to become a complete finance advisor and help investors in giving financial solutions,” says Sourab Tripathi of the Boston Consulting Group.

Why are tier III towns so important?
Until now the top eight cities accounted for 80 percent of the mutual fund markets. Distributors never tapped tier III cities. But, as the market shifts from a fund-based module to a fee-based module, they will have to re-think their strategy.
Distributors will now offer annual plans and charge fees accordingly and to increase their business they will be forced to get more investors under their fold than concentrate on the funds of the same investors. In spite of all the initial problems that will be created by this move, over the longer term, it will only benefit the industry.

Image: Vidyanand Kamat

The regulator has done away with entry load of mutual funds causing a lot of turmoil for mutual fund companies, investors and distributors

What models will emerge in the future?
Mutual funds will be sold through four different channels. There will be a basic discount broker model or a courier boy model. Here, the distributor will simply act as the postman. People with knowledge of mutual funds will use them but pay only a very small fee. A further extension of this model will be a “Do it yourself” model through the Net which could charge around one percent on the total invested amount. The other two models will be slightly at the higher end, offering advisory services. These could be the next door independent financial advisor who could charge the investor around 1-1.5 percent while the top-end model will belong to banks which will charge closer to 2 percent. Even banks will not be able to charge high fees as the banking customer will become savvy.