Indian mutual funds have been working against the clock to push new products on to the market before a ban on entry fees that asset managers charge investors becomes effective on August 1.
Since the investor-friendly move was announced on June 18 by the Securities and Exchange Board of India, the country’s market regulator, nine new funds have been put on offer by asset management companies.
The mutual funds that have rushed to launch products in the past five weeks include big enterprises such as JPMorgan, Franklin Templeton, DSP BlackRock, Religare Asset Management as well as other, smaller operators.
The ban on entry loads – the 2.25-2.5 per cent fee mutual funds charge investors on schemes, which is used by money managers to pay distribution commissions – is seen by insiders as being a paradigm-shifting reform for the Indian market.
“This is one of the most significant changes that the mutual funds industry has seen in recent times,” says Sanjoy Banerjee, executive vice-president of ICRA-MutualFundsIndia.com, a local rating agency.
“It is a positive move for the benefit of the investor community, for the benefit of regulation and for the transparency of the mutual funds industry.”
However, the ban is also likely to have a negative impact on India’s $137bn (€96.4bn, £86.2bn) mutual fund market, because distributors will have less of an incentive to promote new products offered by mutual funds.
“In the short term there will be disruption to business, as distributors will try to find other products that reward them better,” says Naval Bir Kumar, chief executive of IDFC Asset Management, which has about $5bn under management.
“Clearly there will be a reduction in business and activity will slow down. The ban will change the intermediation that currently exists, because the revenue pool that fund managers and distributors today work on and which they share between themselves will be reduced from August 1 onwards.”
Fund managers also fear that, in the short term, they may face growing competition from insurance and pension funds, since distributors are likely to market more products similar to mutual funds that have not been hit by the entry load ban.
Mr Kumar says: “In the future you could see a shift away of sales to other investment products . . . you could have insurance companies trying to create products that look very similar to mutual funds products but without the pricing restrictions which are being imposed on us.”
However, over the medium to long term, fund houses and distributors are expected to revamp their business models and will look for new pay-out structures, according to Sukumar Rajah, chief information officer at Franklin Templeton India.
“Distributors will evolve an advisory fee model and will also get remuneration from fund houses for distributing products either in terms of upfront or increased trail,” he says.
The ban is expected to have a big impact on the way distributors take care of their clients, according to market analysts.
“Distributors have not evolved in India. They don’t give specific services to investors,” says Mr Banarjee of ICRA-MutualFunds .
“What has been happening until now is that once a distributor sold a fund he forgot about the investor. Now he will have to continue to be in touch with the investor, providing real services, so that the investor feels obliged to pay the distributor.”
The consensus among fund managers and analysts is that investors will benefit substantially from the new market changes, as products will become cheaper to buy.
This, coupled with the return of strong market sentiment – the Bombay Stock Exchange’s benchmark Sensex index has risen 32 per cent so far this year and has almost doubled since March – is likely to spur a new wave of investments in mutual funds.
“We have witnessed a sharp increase in foreign institutional investors’ interest in the local markets – $6.6bn in the quarter ending June 2009,” says Mr Rajah of Templeton. “Hence, [in spite of the ban] the medium- to long-term prospects continue to be positive for the industry.”
Mr Kumar of IDFC also believes that the short-term fall in product launches from August 1 onwards could be compensated for by a strong market performance and more active mutual fund investors. “Most investors believe the rule change is a good move; it will make investors a bit more proactive. So when I talk to my team I tell them that if the end consumer is happy, then this can’t be really that bad for us,” says Mr Kumar.
Since the investor-friendly move was announced on June 18 by the Securities and Exchange Board of India, the country’s market regulator, nine new funds have been put on offer by asset management companies.
The mutual funds that have rushed to launch products in the past five weeks include big enterprises such as JPMorgan, Franklin Templeton, DSP BlackRock, Religare Asset Management as well as other, smaller operators.
The ban on entry loads – the 2.25-2.5 per cent fee mutual funds charge investors on schemes, which is used by money managers to pay distribution commissions – is seen by insiders as being a paradigm-shifting reform for the Indian market.
“This is one of the most significant changes that the mutual funds industry has seen in recent times,” says Sanjoy Banerjee, executive vice-president of ICRA-MutualFundsIndia.com, a local rating agency.
“It is a positive move for the benefit of the investor community, for the benefit of regulation and for the transparency of the mutual funds industry.”
However, the ban is also likely to have a negative impact on India’s $137bn (€96.4bn, £86.2bn) mutual fund market, because distributors will have less of an incentive to promote new products offered by mutual funds.
“In the short term there will be disruption to business, as distributors will try to find other products that reward them better,” says Naval Bir Kumar, chief executive of IDFC Asset Management, which has about $5bn under management.
“Clearly there will be a reduction in business and activity will slow down. The ban will change the intermediation that currently exists, because the revenue pool that fund managers and distributors today work on and which they share between themselves will be reduced from August 1 onwards.”
Fund managers also fear that, in the short term, they may face growing competition from insurance and pension funds, since distributors are likely to market more products similar to mutual funds that have not been hit by the entry load ban.
Mr Kumar says: “In the future you could see a shift away of sales to other investment products . . . you could have insurance companies trying to create products that look very similar to mutual funds products but without the pricing restrictions which are being imposed on us.”
However, over the medium to long term, fund houses and distributors are expected to revamp their business models and will look for new pay-out structures, according to Sukumar Rajah, chief information officer at Franklin Templeton India.
“Distributors will evolve an advisory fee model and will also get remuneration from fund houses for distributing products either in terms of upfront or increased trail,” he says.
The ban is expected to have a big impact on the way distributors take care of their clients, according to market analysts.
“Distributors have not evolved in India. They don’t give specific services to investors,” says Mr Banarjee of ICRA-MutualFunds .
“What has been happening until now is that once a distributor sold a fund he forgot about the investor. Now he will have to continue to be in touch with the investor, providing real services, so that the investor feels obliged to pay the distributor.”
The consensus among fund managers and analysts is that investors will benefit substantially from the new market changes, as products will become cheaper to buy.
This, coupled with the return of strong market sentiment – the Bombay Stock Exchange’s benchmark Sensex index has risen 32 per cent so far this year and has almost doubled since March – is likely to spur a new wave of investments in mutual funds.
“We have witnessed a sharp increase in foreign institutional investors’ interest in the local markets – $6.6bn in the quarter ending June 2009,” says Mr Rajah of Templeton. “Hence, [in spite of the ban] the medium- to long-term prospects continue to be positive for the industry.”
Mr Kumar of IDFC also believes that the short-term fall in product launches from August 1 onwards could be compensated for by a strong market performance and more active mutual fund investors. “Most investors believe the rule change is a good move; it will make investors a bit more proactive. So when I talk to my team I tell them that if the end consumer is happy, then this can’t be really that bad for us,” says Mr Kumar.
Source: http://www.ft.com/cms/s/0/aeefc570-787d-11de-bb06-00144feabdc0.html
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