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How the Indian mutual fund money plant grew

Measures from no entry load to direct plans have grown the mutual fund industry to Rs 19 lakh crore now, says Kumar Shankar Roy

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For the Rs 19 lakh crore mutual fund industry that serves a record 5.82 crore folios, the past truly holds the candle to the future. Right from the early 1990s when private sector fund-houses entered this sector to today in 2017, key factors like competition, growth and opportunity have compelled the industry through go through ups and downs. Disruption has sometimes happened on its own, and sometimes painful changes have been brought in to steady things.

Exit for entry load

By January 2008, MF industry had reached an asset size of Rs 5.5 lakh crore --- almost five-fold growth in 5 years. However, the buoyant fund industry received its first big jolt when the Sebi, then led by chairman C B Bhave, banned entry load for open-ended MF schemes from August 1 of 2009. "The decision happened out of the blue. There was no consultation. It was a good decision but took the fund industry by surprise," recalls Debashis Basu, co-founder of Moneylife.

The banning of entry load was a big move because it fundamentally changed the way mutual funds were sold. Investors used to pay entry load of 0.5-2.25% on the amount they invested in mutual fund schemes. It was being speculated then that the MF industry would lose distributors because that incentive was banned. However, that wasn't the case. The MF industry did not die but simply evolved.

Dhirendra Kumar, founder and CEO, Value Research, said, "Entry load was a relic of the inglorious past. Entry load arose in the time of closed-end funds when there were no trail commissions. They should never have been allowed for open-ended funds. The regulator took a very long time to act upon this and when it was finally banned, it did cause discomfort to MF distributors and MF industry. However, the investor was a clear beneficiary since it enhanced returns."

When the distribution model of an industry is forced to change, it's never a happy place, at least in the short-term. The MF industry captains put on a brave face. Sundeep Sikka executive director & CEO, Reliance Nippon Life Asset Management, said, "Whenever something new comes, it looks like it’s a disruption, but the way to look at it is: a response to change. Whenever status quo is questioned there can be some pain but as long as changes are directionally right, it’s all okay."

The MF industry slowly took things in stride and adjusted a new paradigm as shifts started nudging mutual fund selling to a fee-based regime. From Rs 7.2 lakh crore assets in July 2009, the MF industry grew to Rs 10 lakh crore in next 5 years.

Directly yours

Another important change that came about was the introduction of direct plans. From January 1, 2013, mutual fund investors were given the option of investing in funds directly with the fund companies in special 'direct' plans of all funds. This was a big thing because while investors could have invested directly with an AMC earlier too, there was no advantage in doing so. Now, the commission -- that would otherwise have been paid to intermediaries -- went to the fund's NAV, and thus to the investors. Over 10 years, a difference of 0.50 per cent could add Rs 23,000 to a Rs 1 lakh investment.

“As soon as direct plans were available, within six months a lot of institutional money switched to these. This was definitely a disruption for distributors who were serving these customers. However, it probably points to the fact these distributors were not adding enough value,” notes Dhirendra Kumar.

In terms of category, debt (47%) and money market funds (37%) accounted for the bulk of the direct plan assets, but equity funds are not much behind because they account for 15% as of March 2017. Going direct is not a fashion anymore, it’s a revolution.

Direct plan assets stand at a new high of Rs 7.81 lakh crore, up 50% or by Rs 2.61 lakh crore in the last fiscal. Jiju Vidyadharan, Director, Funds & Fixed Income, CRISIL Research points out that direct plans’ share of the industry has now grown from 35% in March 2014 to 42% in March 2017.

“In terms of asset growth, direct plans recorded a robust growth of 36% CAGR in the past three years, compared with 23% CAGR growth in regular plan assets,” Vidyadharan said.

A long journey

Grom the early 1990s when private sector fund-houses entered to today in 2017, competition, growth and opportunity have compelled the industry to go through ups and downs. Disruption has sometimes happened on its own, and sometimes painful changes have been brought in to steady things

EVOLUTION OF MUTUAL FUNDS IN INDIA

  • 1963 Formation of the Unit Trust of India
     
  • 1987 Entry of public sector MFs
     
  • 1993 Entry of private sector MFs
     
  • 1993-2003 Entry of foreign MFs, M&As
     
  • 2009 Removal of entry load
     
  • 2012 Fungibility of total expense ratio (TER) allowed, portion of TER to be used for investor education
     
  • 2013 Reduction in STT for equity funds, introduction of direct plans
     
  • 2014 Definition of ‘long term’ for debt MFs to 12 months changed
     
  • 2015 EPFO starts investing in equties
     
  • 2016 SEBI tightens norms for MF investment in corporate bonds
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