Not by a fee alone

Market regulator SEBI is quite right to encourage retail investors to take the mutual fund route to the stock market. With wild market swings and the many external risks to corporate performance, stock selection today is a virtual minefield for investors who don't have professional help. However, whether retail investors can be wooed back to equity funds by the simple expedient of bringing back distributor incentives is open to question. The flat transaction fee of Rs 100-150 per subscription proposed by SEBI as an upfront commission on mutual funds may, in any case, do little to entice distributors back to the fold. Though well-intentioned, SEBI's August 2009 ban on entry loads for mutual fund investments caused quite an upheaval for investors. Larger distribution houses and wealth managers have moved affluent clients to a fee-based model since then. But small investors taking their first steps into equities through mutual funds have been left to deal with indifferent intermediaries and deteriorating service levels. This is because many smaller distributors stopped selling mutual funds and migrated to other financial products offering more lucrative commissions.

It appears highly unlikely that these agents will take up marketing of mutual funds just for an upfront transaction charge of Rs 100 or Rs 150 (proposed on all investments above Rs 10,000 for existing and new mutual fund investors respectively). After all, products such as unit-linked insurance plans (ULIPs), small savings schemes and even bonds still offer much higher incentives, ranging from 0.5 per cent to 2 per cent of the investment value. Selling more products to a few wealthy clients is a far easier proposition in today's uncertain market, than persuading new investors to try out equities. If SEBI is keen to ensure that distributors sell mutual funds on the product's merits, the only solution is to re-initiate the dialogue with other regulators to move other market-linked products such as ULIPs to a similar incentive structure.

However, lack of access is only part of the reason why retail investors have little appetite for equity mutual funds. A bigger problem relates to their unwillingness to take on risk after the gut-wrenching ride that stocks have been on over the past three years. Retail investors who poured big money into equity mutual funds at the end of 2007 are yet to reap significant returns from those levels. Despite this, though, there has been a gradual recovery in gross inflows into equity funds from their 2009 lows and an increasing proportion of systematic monthly investments (now about a fourth of inflows). These are positive signs. They show that if equity fund returns improve, retail investors may automatically increase their allocations to them, without much prodding from the regulator.

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