MFs need to diversify revenue stream, says PwC
Even as the Securities and Exchange Board of India (Sebi) hinted it would not re-introduce entry load — the amount charged by mutual funds on subscribers to cover marketing expenses — global consultancy agency PricewaterhouseCoopers (PwC) has said one of the fallouts of such re-introduction could be an increased churn to some extent.
Abolition of the entry load and the revision of trail commission guidelines have taken care of some key issues, but in turn have given rise to other aspects that need to be tackled and resolved, said PwC in a report on the Indian mutual fund industry. Considering the higher costs of acquisition of a retail investor, one could consider evaluating differential expenses being charged to retail and institutional investors, the report said.
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Despite the higher upfront cost of acquiring a retail investor, the sticky nature of such investors indicate that retail consumers break even and are actually more profitable than corporate clients in the long run, elaborated the report.
Currently, an investor is required to draw two cheques; one to the AMC (asset management company) for the investment amount and the other to the distributor for the commission. Distributors on the field have observed investors may be hesitant to go through this process. The depositing and subsequent collection of the distribution commissions by the distributor also involves a cost.
"A system whereby investors are given the option to draw a single cheque to the AMC, which clearly indicates the distribution commission to be paid by the AMC to the distributor, may help in simplifying this process," said the report. Sebi, too, is considering this suggestion.
AMCs, currently, do not foresee a significant change in their current cost structure, and, thereby, continue to have a limited margin to pass on to the distributors as commission. Any increase or decrease in AUM (assets under management) directly affects the revenues (management fees) and profitability of an AMC.
In such a scenario, according to the report, AMCs having access to their ‘own’ distribution channel to sell mutual fund products have a relative advantage. The report also pointed some other alternative avenues for the fund houses.
One of these is to diversify their distribution so that it includes an examination of distribution channels prevalent in other industries, said the report. Another area available is the offering of advisory services to offshore funds. There is a large amount of capital invested in India from overseas. Indian asset managers with a proven track record and necessary infrastructure and network could do well to tap into this segment.
An additional line of business available to AMCs is the management of funds registered under the alternative investment funds (AIFs) regime. These new areas should be explored and business models will need to evolve accordingly, noted the report.