Image: Shailesh Andrade/ Reuters
To give a boost to the mutual fund industry, the market regulator Securities and Exchange Board of India (Sebi), has now allowed celebrities to endorse mutual funds. But it has made it clear that the celebrity will not endorse a particular scheme nor will they be used for the branding exercise of a mutual fund house. This is a big step because, with this move, it brings the industry at par with the insurance sector which allows celebrity endorsement.
The industry as a whole can use a celebrity to talk about mutual funds. This will help the Association of Mutual Funds of India (AMFI) which has good budgets to promote mutual funds.
Rajesh Krishnamoorthy, managing director, iFAST Financials, says: “Given that over 90 percent of the population is yet to make any investment into mutual funds, this is certainly a welcome move. Getting celebrities to endorse their products was available to other financial institutions like banks and insurance companies. This decision will certainly aid in catching the attention of the mass market”.
In a separate development, there was a paper submitted by the International Advisory Board (IAB) to the regulator which stated that there should be a gradual transition for the industry from the distributor model into an advisory model. Sebi has said that mutual fund distributors cannot give investment advice to buyers. It has also made it compulsory for mutual fund distributors and agents -- who give advice -- to register as investment advisers.
This has once again raised the debate of which model, distributors or advisors, works for the industry. “The perspective from the distribution committee is that there will always be an embedded advice in product sales of mutual funds in suggesting the right product fit for any customer”, Krishnamoorthy says.
There are many who feel that it makes sense to separate distributors from advisors as the general feeling is that distributors are only interested in earning commissions and not really in the betterment of the investor. “While this has been a view for many years where distributors earned a bad reputation by churning investor portfolios to get higher commission, the bulk of the distributors are not that bad. They are long term players and want to own the client for years”, says the CEO of a large mutual fund.
He points out that distributors got a bad name especially after 2014 when large fund houses came out with close ended funds and started giving commissions up-front to the distributors. This was done to raise money in the shortest possible time. Some mutual funds who were not interested to launch these close ended schemes complained that distributors were mis-selling the products to investors without really explaining how close ended products were different from open ended products. “The regulator now has taken serious note of this and now wants to segregate these two functions. But without the distributor this industry will be crippled,” he says. He has a point.
Over the last few years the mutual fund industry has seen increasing sales especially in the systematic investment plans (SIPs) which have become very popular amongst middle class Indians who have now realised that there is not much return to be gained from investing into real estate as well as gold.
They have opted for SIP where the mutual fund distributor has played the most important role. Today the industry gets Rs 4,000 crore worth of SIP every month and this number is expected to grow to Rs 12,000 crore in the next two years. The mutual fund industry is aware that this is possible only because of the distributor. Now the mutual fund industry is scared that this move of moving towards advisory from distributorship will only upset the applecart.
The mutual fund industry is very small and has only penetrated the major cities. If the industry has to grow in terms of investor folios then distributors become an important part of the eco-system. The best example is how Life Insurance Corporation (LIC) managed to reach every nook and corner of the country on the power of distribution. The same is the case with FMCG or Coke and Pepsi which have managed to reach places with low density of population in extreme geographical areas.
“We are a long way from clients paying for distributions on its own. The whole eco-system needs to be developed. You have to enable the distributor or advisor to generate returns out of their own skills and not dependent on the commissions that they get from the mutual fund industry. We are reaching there but the regulator should give us some time”, says a fund distributor from Mumbai.
Sebi has also allowed mutual funds to invest into real estate investment trusts (REITs) and infrastructure investment trusts (InvITs) to the extent of five percent of the NAVs.