Will reviving entry load draw investors back to MFs

As the Finance Ministry mandarins come to grips with what ails the MF sector in India on Monday at a meeting with industry and SEBI representatives, a key issue that is set to figure is a way to incentivise the MF distributors.

The MF sector has been grappling with flight of investment and closure of a significant number of folios, which has gathered momentum because of prolonged market turmoil causing value erosion.

Ever since the then SEBI chairman Mr C.B. Bhave abolished the entry load for investment in MFs in 2009, there has been a clamour for its reintroduction in some form to draw investors back to MFs. The argument was that with no incentives, the distributors were loath to push MF products.

But what many proponents of this argument ignore is that investors in MFs are different from those looking for regular, safer returns through products such as fixed deposits and would patronise MFs that offered them better returns than FDs, even with some risks.

The economic turmoil after the collapse of Lehman Brothers in the US and the prolonged Euro Zone crisis had created so much volatility in the markets that many investors are yet to recoup the loss suffered from their capital market investments.

That the professional expertise of fund managers was not enough to protect the investments of investors was made public by the SEBI Chairman, Mr U.K. Sinha, while speaking at the CII Mutual Fund summit held on June 21 at Mumbai. He pointed out that in the case of nine fund houses, over a three-year period most of their schemes underperformed the benchmarks. In respect of nine other AMCs, nearly half of their schemes were underperforming the benchmarks. He said SEBI would soon discuss the issue with the fund houses concerned.

Investment in any fund is made with an intention to make some profit and when the funds underperform for a prolonged period, the investors tend to become restive. In such a scenario, blaming entry load abolition is just too simplistic an argument to explain why investors pull out money from MFs.

However, Mr Anil Chopra, Group CEO, Bajaj Capital Ltd, New Delhi, said abolition of entry load was “one of the significant factors” responsible for drastic fall in MF collections. But he conceded that there were other factors such as lacklustre markets and the slowdown of Indian economy leading to “lower confidence” among investors.

He argued that mutual fund distributors “have been the key drivers of growth” of the industry as they used revenue from entry load in “increasing awareness amongst uninitiated investors” in tier II and tier III towns, thereby increasing presence across India.

On whether distributors had the capability to identify market outperformers for investment, he said leading distributors had in-house research capabilities to choose the “most suitable option” for their clients “with reasonable success.”

Explaining the correlation between entry load and collection, he said “our mobilisation for various MF schemes declined by 25 per cent but our revenues fell by more than 50 per cent.”

Mr Chopra added: Inflow of funds and fund performance have little correlation but definitely, higher inflow of funds will give bigger elbow room to the fund manager to allocate funds to a larger number of sectors and companies, and thereby reap the benefits of diversification.”

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