Not So Mutual

The average mutual fund investor in India must be celebrating since the Securities and Exchange Board of India (SEBI, it’s like the SEC) is doing everything in its power to bring down the costs of mutual funds.  The speed in which SEBI is mandating these changes is fast and furious…nice to see for a change.  On the flip side, many of the asset management companies (AMC’s) and banks that offered mutual funds are taking a hard look at their business model.

During the past 4 years what drove the mutual fund industry was the “entry load” that was paid to distributors.   The fee was as high as 2.25% paid by the consumer and then sometimes the AMC would throw in some additional coin to generate more sales.  The biggest distributors were banks and independent financial advisors (IFA).

The writing is on the wall, most of these AMC’s will have to steamline their operations and look at technology to enable their sales growth. I see two options:

1. Go directly to an AMC’s website and get their products, such as Fidelity.co.in

2. A low cost mutual fund online aggregator, which makes money directly from the AMC or supported via advertising

Both have potential but India has a small number of internet users, the reason the mutual fund industry grew was because of the IFA’s in the Tier 2/3 cities and villages.

To be honest 2.25% upfront was a complete joke and really lined the pockets of everybody but the consumer.  And when the markets were going up, many financial advisors were telling customers to switch to Product X because it was better.  In reality, the advisor wanted to get the 2.25% entry load on Product X – not much of a financial advisor.

The real winner in all of this could be brokerage firms. SEBI recently issued guidelines which allow mutual fund products to be bought and sold through brokers. The real losers will be the independent financial advisors who in a span of 9 months have gone from gravy train to derailed train.

NOTE: The above image is the SEBI logo, which could possibly be the worst logo ever designed.