Banks are using their distribution strengths to move aggressively into MF space.

The scrapping of entry load has forced independent distributors and brokerages to shun MF schemes as they are no more remunerative.The regulatory change has opened a new line of business for commercial banks while independent AMCs find it tougher to stay afloat

Bakul Chugan Tongia ET INTELLIGENCE GROUP 

    WHEN it comes to relying someone with one's hard-earned money, banks are the most entrusted of all institutions, especially in India. So much so, that even today, despite there being plenty of other investment avenues, an average Indian investor continues to trust banks with their savings. 
    According to data by the Reserve Bank of India (RBI), the share of banks in the total financial savings of the household sector has increased from about 48% in 2006-07 to nearly 55% by 2008-09. In contrast, the share of mutual funds has declined from about 5.3% to -1.4% in the same period. And as the MF industry continues to adapt to the regulatory changes that have been tightening the noose around manufacturers, it will be little surprise if the share of MFs in the total financial savings of the household sector declines further in the year 2009-10. 
    However, despite various challenges that the MF industry is currently facing, many new players, especially banks, have shown a great deal of interest in launching their own asset management companies. After the launch of Axis Asset Management last year, IDBI and Union Bank of India (UBI) are the latest banks to join the MF bandwagon. While IDBI has already launched its operations on its own accord, UBI has joined hands with the KBC group of Belgium and is likely to start business soon. With this, the total number of banks that are actively involved in the MF business stands at 10. And if Indian banks are yearning to be an active participant of the MF industry, it is not without reason. For, in the light of the current circumstances, banks are indeed better placed to run MF business in India than other institutions. 
STRONG DISTRIBUTION NETWORK 
Facilitated by a large distribution network through their extensive and continuously increasing branch network (see Distribution Strength), banks are indeed better positioned to tackle the main issue of distribution than independent asset management companies that are required to set up distribution networks right from scratch before starting their businesses. 
    The table clearly reveals the distribution strength that banks command through their pan-India presence and the pace with which they are expanding their network to further expand their reach. Moreover, given their large customer base and the brand equity that banks enjoy with the investors, it makes a tad easier for them to cross MF products to their existing customers. 
    The existence of a strong distribution network has in fact come to command a far greater importance following the Sebi diktat of introducing no-load regime for equity MFs last year. Not only has this new regulation compelled many in theindustry to alter their business models but has had far-reaching impacts even on the competitors of the MF industry. 
NO-LOAD REGIME 
Under the no-load regime, MF houses have been debarred from charging any commission or entry load from investors at the time of investment. If the investor is utilising the services of any distributor to invest in an MF product today, then the quantum of commission payable to the distributor now has to be mutually agreed upon between the distributor and the investor. This is in stark contrast to the earlier practice wherein investors were charged a flat fee of 2.5% of their investment amount as entry load by the fund houses, which was then used by the fund houses to pay the distributors for their services. 
    While the no-load regime can be construed as an extremely positive step for MF investors, who are now aware of the amount of commission they pay to the distributor, the distribution community has severely criticised this regulatory move, which has had a grave impact on their commission income. In a country like India, where financial literacy is still at an extremely nascent stage, it is indeed difficult for many distributors to convince their investors to pay for MF advisory and servicing, leading them to boycott the sale of MF products, and instead promote other high incentive earning financial products. 
    This, in turn, has greatly impacted sales of the equity MF products. Despite the markets making a dramatic recovery in 2009-10, the MF industry could add just about Rs 2,000 crore to its equity assets last year which is far lower than the equity inflows of about Rs 47,000 crore in 2007-08 or Rs 28,000 crore in 2006-07. Even the meltdown year of 2008-09 had witnessed equity inflows of more than Rs 4,000 crore. 
ADVANTAGE BANKS! 
With the MF industry's distribution network gone for a complete toss, bankbased fund houses are far better placed to reach out to investors. And this is not just plain thesis but a reality backed by factual data. 
    During the period from November 2009 to March 2010, total number of equity MF investors (folios) in the country has declined marginally by about 0.05% from 411.4 lakh folios to about 411.2 lakh folios. However, if one were to assess the growth of folios for bank-backed MFs, the same has gone up by about 1.5% from 137.5 lakh investor accounts to 139.4 lakh accounts during the same period. These include folios of Baroda Pioneer, Canara Robeco, HDFC, ICICI Prudential, Kotak Mahindra, Principal PNB and SBI Mutual Fund combined. As far as all other fund houses are concerned, combined together, their number of equity folios declined from 273.9 lakh accounts to 271.8 lakh accounts during the same period. 
    As far as the average assets under management (AAUM) of fund houses are concerned, while bank owned/backed fund houses reported an increase of about 45% in their AAUM during April 2009 - April 2010, the AAUM of all other fund houses combined has increased by just about 36% during the same period. Apart from convenience of distribution, it is also the popularity that these banks enjoy with the public at large that helps them gain the investor confidence.
    Axis Mutual Fund, for instance, managed to accumulate more than Rs 900 crore of assets under management (AUM) for its equity scheme that was launched in November last year even as the other newly-launched fund houses are struggling to reach out and convince the investors even today. Joining Hands With Bank 
The development has not gone unnoticed by international fund houses planning to launch MF business in India. Thus, instead of launching an MF business in India on their own accord, these international MF brands have preferred to join hands with an Indian bank. We thus have Societe Generale Asset Management of France, which has entered into a JV with SBI Asset Management, while Pioneer Investments of Italy has partnered with Bank of Baroda. More recently Robeco Group of the Netherlands has joined hands with Canara Asset Management while US's T Rowe has entered into collaboration with the country's oldest asset management, UTI, which is already quite strong on the distribution front. 
BANK OR NO-BANK – WHAT IT MEANS FOR INVESTOR? 
While bank-based fund houses are definitely at an advantage today in terms of reaching out to the investors, it will, however, be foolish for investors to get prejudiced for any fund house simply because it is backed by a strong bank. For when it comes to investing, performance is the key criteria to be looked out for, followed by the financial strength and soundness of the organisation. 
    Adjudging these fund houses solely on the basis of performance, Canara Robeco and HDFC Asset Management have topped the charts in this round of ET Quarterly MF Tracker with the highest and second highest fund house scores for the quarter ended March 2010. 
    While HDFC asset management, the second largest mutual fund house of the country today, has seen a healthy turnaround in the performance of its schemes since the market meltdown of 2008, for Canara Robeco, which despite being one of the oldest is a relatively smaller fund house; the turnaround has been visible since the time it has collaborated with the Robeco Group of the Netherlands. As far as the performances of other fund houses are concerned — banks and non-banks, log on to our website www.etintelligence.com to get the performance rating of MF schemes as well as the score card of the fund houses.
    bakul.chugan@timesgroup.com