Data analytics and AI will disrupt fund management

The mutual fund industry has grown rapidly in last few years. Its growth is almost like a bamboo tree. For years it was growing on a low base and suddenly it picked up super speed. The growth of mutual fund industry is due to many factors. Regulators helped create investor trust through transparent regulations, distributors provided low- cost access to investors and fund managers provided exceptional performance. There was also a common theme of disruptions which helped mutual fund industry.

In the crash of equity markets in 2000 TMT bubble, few fund houses were able to retain investor confidence. In 2003 and 2004 fixed income fund managers across industry informed clients to redeem from duration funds in rising intent rate environment. That was a disruptive way to keep client interest ahead probably helped build investor confidence. Many such disruptions were witnessed in fund industry which helped it grow. Going forward, following disruptions are likely to occur and help grow the industry.

Mutual funds offer long-only products. Their ability to add value to the client by outperforming index will come down in the days to come as their size increases. Fund managers will have to develop the ability to manage long short as well as leverage products in order to add value to clients.

Most fund houses today provide actively managed funds. Since the fund manager has added value to clients they are able to charge higher expenses. Globally, passive funds such as index and ETFs are taking away money from active funds, which operate at a low cost. Indian mutual funds will have to gear for the index and ETF funds at competitive cost at some point of time in future.

A few of the fund houses are offering multiple schemes. Within large-cap equity fund category, they offer open ended and close ended, value, growth and growth at reasonable price, concentrated and diversified, large-cap and large-cap biased funds. So many funds confuse investors. The maze of fund deters investors to enter mutual fund industry. Those who enter chase past performance to be disappointed in future. While the Securities and Exchange Board of India (Sebi) has been pushing rationalisation of the scheme for last few years, the mutual fund industry has not responded with as much speed as required. Scheme rationalisation will be the need of an hour for the industry.

Technology is disrupting many industries including finance. In the mutual fund industry technology will disrupt every facet. Fund management may be disrupted by data analytics and artificial intelligence. Distribution may be disrupted by data analytics, real-time information sharing and ease of execution. Operations will get disrupted by faster but cheaper processing, big data for customised service and solution. Marketing will get disrupted by real-time solutions through data analytics. The future success will hinge upon companies which will be able to leverage technology in multiple facets for reducing cost and providing efficient solutions and services.

Mutual funds today provide products in debt and equity markets. In future, the traditional products will be disturbed by commodities, structured and real estate products. Most mutual funds today provide India-specific products. In future, there will be products from global markets. The need of adding value to clients will push mutual funds to extend the horizon from the Indian debt and equity markets to global debt, equity, commodity and currency markets.

Disruption will be the way of life going forward. Fund houses which can ride the wave of disruption and adopt will have a better chance of survival as well as success.

The writer is managing director, Kotak Mutual Fund