The Finance Ministry is holding a meeting today with representatives from the mutual fund industry and SEBI on measures to revitalise the MF sector. A key issue that will be debated is how to incentivise MF distributors.

With entry load making a comeback being virtually ruled out, a possible move could be to enhance the expense ratio. The MF sector has been complaining that with the entry load gone, distributors are not enthusiastic about pushing mutual fund products.

Not just about entry load

Explaining the issues confronting the sector, Dr S. Karthikeyan, Director, Coimbatore Capital Ltd , said entry load has been allowed throughout the history of mutual funds.  If incentives alone can assure inflows, why in the insurance sector where the incentives are continuous some companies “struggle to survive”, asks Dr Karthikeyan.

Stating that entry load abolition “is not the prime reason” for the declining MF inflows, he said even in FY 2008-09, the assets under management fell 17 per cent — from Rs 5.05 lakh crore to Rs 4.17 lakh crore.

According to him, it is not the AUM of MF but gross and net mobilisation that should be considered.

In 2009-10, the gross mobilisation doubled but net mobilisation went up four-fold compared to the previous year. During 2010-11, while gross mobilisation fell 12 per cent, the net mobilisation crashed nearly 60 per cent. The wild swing could be due to the investment behaviour of corporates at times when economy ran into “rough patches”.

Expense ratio

Dr Karthikeyan, who is also Professor-Finance, Jansons School of Business, Coimbatore, feels that the 0.25 per cent increase in expense ratio, if approved, cannot do much to improve collections.

He argues “market trend/expectations and mutual fund AUM is positively co-related” and this could be worse in countries like ours where corporate investments remain high. When the economy was doing well, the surplus cash available with corporates flowed into MFs and in a dire economic situation, the reverse occurred. 

He says the MF sector should reach out to retail investors with a proper strategy and not merely through intermediaries.

Feedback mechanism, needed

Dr Karthikeyan said mutual fund distributors were intended to deliver a structured product, looking at the investors’ age, risk profile, risk tolerance, availability of deployable fund, its duration etc. While this may not be a big job for them, the bugbear is the commission.

The Association of Mutual Fund in India must find ways to improve best practices and the process of “closing the loop through feedback” – asking feedback from investors about their investment advisors “is not even there in MF industry”. He said this was the scenario in the financial services sector as a whole in the country and much was needed in monitoring the quality of practice by these advisors.

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