Mutual Fund AUM – Good numbers, but the bigger challenges lie ahead…

It is, definitely, a commendable fact that Indian mutual funds have managed to touch an AUM of 12,00,000 crore ($200 billion) in February 2015. Equity still accounts for about 30% of this AUM at around $60 billion. The spread is still skewed. The Top 5 fund houses viz. HDFC, ICICI-Pru, Reliance, Birla and UTI; account for 50% of the industry AUM. But that is less of a worry and more of an indication that the mutual fund industry is ripe for consolidation. The real question is; what are the challenges ahead for mutual funds?

Distribution holds the key…

How to distribute effectively at minimal cost continues to be the million dollar question facing mutual funds. To begin with KYC norms can be simplified for small investors so that they can participate in equities without too many hassles. The industry and AMFI need to focus intensely on selling through the online channels. The exchange pipeline as well as the online broking pipeline is open for mutual funds but are still not being effectively leveraged. This can effectively help them reach out to a larger audience at lower costs. Also mutual funds need to look seriously at electronic marketing in a more focused manner to minimize cost of reach.

Level playing field with insurance…

That is something many mutual funds have been demanding. Their standard refrain is; while insurance companies are able to sell quasi-investment products, the reverse does not hold true for mutual funds. With the recent cap of 1% on distributor commissions, mutual funds will be at an additional disadvantage. This creates a problem at the distribution end. Since the same brokers distribute mutual funds and insurance products, an attractive commission structure forces them to cannibalize mutual fund sales. This is a major challenge for mutual funds and the AMFI and SEBI need to look into it.

Sync it with financial planning…

That is probably the way ahead. Currently, mutual funds are being sold as stand-alone investment products. Hence the interaction of investors with mutual funds also tends to become one-off. One way to overcome this is to focus on mutual funds as a means of long term wealth creation and liquidity management. Systematic Investment Plans (SIP) can be an excellent way to do this; and some are doing it already.

Mutual funds complain that low commissions leave brokers with little incentive to invest in educating investors. And funds are anyways operating on wafer-thin margins. The current government has made financial inclusion as its primary economic agenda. What better way than to help retail investors create wealth through mutual funds? Sounds salivating! ©

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