The mutual fund industry’s Assets Under Management (AUM) soared to Rs. 8.2 lakh crore in 2012-13, an increase of 23% from Rs. 6,64,792 crore in the previous fiscal. This growth can be mainly accredited to steps taken by the market regulator to revitalize the equity culture and channelize household income into stocks and mutual funds.
Over the past one year, Securities and Exchange Board of India (SEBI) has taken several measures to improve the last-mile connectivity in mutual fund distribution. Some of the most important steps taken were; relaxing KYC norms for small investors, broadening the distributor network to include postal agents and retired officials, and proposing the inclusion of equity mutual fund schemes under RGESS. Simultaneously, the regulator has also been working on safeguarding the interests of investors. Mutual Fund product labelling and EUIN are two laudable steps in that direction.
Mutual Fund product labelling
SEBI has announced a product labelling mechanism with colour coding for mutual funds, in an effort to check mis-selling and help investors understand risk associated with schemes. The new guidelines will come into effect from July 1, 2013 for all new and existing schemes. The labelling will be based on two factors - nature and investment objective of a mutual fund scheme. Each scheme will have a specific colour depending on the risk associated with the scheme.
- Blue - low risk
- Yellow - medium risk
- Brown - high risk
With this kind of labelling an investor can in a single glance understand where the scheme is going to invest, risk profile and strategy of the scheme.
SEBI has mandated that every individual involved in selling mutual funds should be given a unique ID called Employee Unique Identification Numbers (EUIN) and this ID should be entered in each MF application form. This measure will help improve accountability and curb mis-selling as the person responsible for selling a scheme can now easily be identified.
The current scenario in the industry demands innovation and reinvention. We need more initiatives from AMCs in the areas of cost competence, product design and positioning, alternative distribution models, revenue diversification and capacity creation. Apart from this, AMCs will have to be agile to adapt to the evolving regulatory framework. SEBI has shown that it will keep AMCs and distributors on their toes.
Two key drivers for mutual fund industry’s growth will be financial inclusion and financial advisory. Deeper penetration in tier 1 and tier 2 cities and focussing on small and medium income investors would increase the investor base. Mutual fund advisors must do in-depth research of the market to explain the differentiator(s) which make the product being advised as better than the others in the fray. Remember, investors want facts, not fiction. Advisors should monitor clients’ portfolio performance, help change asset allocation strategies when appropriate, and stay alert for major changes in the markets. By going beyond just product selling, Advisors will be able to enhance customer loyalty and create real financial value for customers.
The regulator through its recent proposals and announcements has given a much needed boost to the mutual fund sector, but the industry is still waiting for an enduring initiative that will put this sector amongst the most favoured instruments of investment.
My message to investors is to retain the discipline of asset allocation irrespective of the market and the economic scenario and invest in mutual funds through systematic planning, as long term fundamentals remain intact.