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Mutual Funds: Systematic investment plans(SIPs)

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Systematic investment plans are giving a new lease of life for the mutual fund industry as several fund houses are increasing their equity asset base by selling these products aggressively. But the difficult part is the time taken for such a model to generate profits

 


   Monday, May 18, 1992: Riot breaks out in front of the Unit Trust of India office in New Delhi's Bahadur Shah Zafar Marg, when the asset manager launched its third mutual fund (MF) scheme, UTI Mastergain. Hundreds of investors are lathicharged to bring back order.


Nearly two decades later, the industry that was to spread the culture of equity investing, is faltering. On the contrary, equity assets have shrunk to just about a quarter in 2010, from 35% in 2007. Industry is blaming the regulator and the regulator the industry. Much water has flown in the Ganges, but little to celebrate for investors.


The 'Mastergain' euphoria lived on for the next two weeks. Policemen guarded the front doors of UTI offices in Mumbai and Delhi. UTI Mastergain, the third major fund offering by UTI after 'Mastershare' in 1986, and US-64, had scripted a history of sorts. About 65 lakh investors — that is one in every 140 Indians — had invested in the issue to raise . 4,600 crore.


People invested in the "1992 blockbuster" to make a quick buck. They were aware that 'Mastergain' will list on the exchanges at a premium, but few knew why. When it listed at a premium a few weeks later, intelligent investors sold units for a profit. They earned their proverbial 'quick buck' on MFs, but the reputation of UTI, the previous avtar of UTI Asset Management, was in tatters a couple of years due to problems of bad delivery, losses and more.


Ever since it was a kind of love-hate between investors and equity MFs — expectations of quick buck and disappointment. It may probably be changing. Systematic investment plan (SIP) mode of investing is gaining popularity among investors. "It took 25 years for investors to understand that MFs are long-term investment products. We've now begun seeing increased inflows through SIPs. This will be the game-changer for the industry in the years to come," said Dhirendra Kumar, managing director of fund research firm Value Research.

SIP: THE GAME CHANGER

A look at data sourced from asset management companies reveal that SIP numbers have grown over 45% over the past 15 months. 'New SIP additions' among funds serviced by fund registrar CAMS have gone up from 5.2 lakh folios in 2009-10 to 17.7 lakh in 2010-11. The industry added 2.2 lakh folios in the April-June quarter, 4.2 lakh folios during July-September, 5.8 lakh folios during October-December and 4.8 lakh during January-March quarter.
SIPs will be game-changer for MFs in the coming years. Fund houses will have to get their basics right to survive. They will have to promote SIPs, increase distribution reach and bring in more retail investors to debt funds.


If one takes a long-term view, SIPs have gradually gained popularity among retail investors. The number of live SIPs has gone up from 18.1 lakh accounts in March 2009 to 41.1 lakhs in February 2011. Weighted average investment in one SIP account is about 2,300 a month. The duration of investment on an average has gone up to about 36 months from 12-14 months. With about 93% of SIP transactions happening over electronic, or automatic clearing, fund houses do not fear about missed payments.


The sad part, however, is that distributors are not willing to sell SIPs. They are not incentivised enough to sell them. Distributors will not approach smaller investors as the brokerage they receive from smaller investors will not be worth the effort.

DISTRIBUTION HURDLES

Lower commissions are prompting wealth advisors to stop selling mutual funds to investors. According to industry watchers, MF was not a profitable business even when asset managers were charging 2.25% as entry fees — eventually stopped by Sebi.


Fund commissions have fallen significantly post the entry load ban in August 2009. Distributors are paid 0.75 to 1% as commission while selling equity and balanced funds. Low fund commission rates are prompting large distributors to focus more on selling insurance-based tax saver unit-linked insurance plans (Ulips), retail bonds and other exotic investment products. Even after rate rationalisation, Ulips are being sold at commissions as high as 8-15%.

 

Distributors also have the option to offer to distribute fixed deposit schemes that yield 1.7% to 2.5% and RBI Tax Relief Bonds which give 1% as commission charges. Something has to be done to strengthen the distribution system. In the interest of the industry, investors will have to leave a small sum of money to distributors; this has to be built in to investments made by the investor. Distributors will have to rein in their costs to be profitable. "


All said, wealth advisors continue to contribute in a big way to MF sales. As per data from CAMS and Karvy, 45% of equity fund sales were done through independent financial advisors as compared to 29% by banks in 2010-11.

 

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