Challenging times for MFs to continue: Dhirendra Kumar

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The mutual fund industry has seen its fifth consecutive month of net outflows. In December 2009, the sector saw net outflows to the tune of Rs 2,185 crore while net outflows in the last five months stand at Rs 7,315 crore.

In a discussion on what ails the beleaguered mutual fund industry, Milind Bharve, of HDFC Mutual Fund and Dhirendra Kumar, CEO, Value Research Online, analysed the reasons.

Bharve said the outflow seen in MFs were due to profit booking and regulatory changes. "The MF industry is still adjusting to the regulatory changes," he said, pointing to SEBI ban on entry load in equity schemes.

"The challenging times for MFs will stay," Kumar said, adding that MFs had not created enough pull for customers.

Bharve added that cost of acquiring customers for MFs has to go down.

Here is a verbatim transcript of the exclusive interview with Milind Bharve and Dhirendra Kumar on CNBC-TV18. Also watch the accompanying video.

Q: For the fifth month running, you have seen a net outflow, what you would put it down to because since August-September, we have only seen net outflows from the sector?

Bharve: At higher levels of the indices investors have been relatively tentative in putting in new money. You got to recall that when the markets were between 17,000 and 18,000 and above, a fair bit of money did come into the industry. So at this time when the index levels are above 17,000, there are people who would like to be a bit more cautious, a bit in the wait and watch mode and that's probably unabating them from putting serious amounts of new money into the market through mutual funds.

Having said that, there is also the fact that the rules of the game in terms of how funds are distributed and sold has seen a radical change. The first thing is of course that while everybody knows the entry loads are no more there, the fund product has become cheaper by 2.25% at least and that's something that the whole industry is now bending backwards and trying to communicate to investors through distributors. So when you have a change, which is as radical as what has been made, it would take some time for the players in the industry and I would say more distributors than asset managers to adjust to this new regime.

In some sense the industry is in transit; it is transiting from what it did for decades and to a new regime where cost to investors are being brought down and more like advisory fees have to be now charged to investors, which is at the discretion of the investor to pay. All of us, particularly the distribution community is adjusting to it and to be fair when you do something like this you have to give the industry and all the players, all the constituents in this industry a little more time to adjust. So I do not read a lot into these negative figures. The figures are indeed negative; they are not as stronger. For example, we see a significant amount of new registrations for systematic investment plan (SIP) transactions in the industry as much as for us and that's a very good sign. I think that's the best way, which investors can start beginning their participation in the market.

So we will see good increase in the book on SIPs and systematic transfer plans (STP), which is a best way for retail participation. So those numbers are looking good, they are not looking the overall numbers in the industry of being RS 2,000 crore minus is probably giving an impression that nobody is interested or nobody is buying.

But this is a period of position; it's a big change. I think we need reasonably stable market with a steady growth; people will come back to the mutual fund products.