‘Bigger advisors have grown after shift to no-load structure'

Much of the news around mutual fund inflows has been negative since SEBI imposed the entry load ban in 2009. However, gross inflows into funds do suggest a recovery in investor confidence in recent months. Was 2009 an aberration and has the industry recovered from it?

No, it was not an aberration. The shift to a no-entry load structure was critical, and the industry is still in transition mode after that move.

Gross inflows have essentially remained at the same level as in previous years and lower than pre-global crisis levels.

The participation of smaller investors has been affected because of the impact on smaller distributors.

I think it is going to take time for distributors, and the industry itself, to adjust, given that players rely on distributor partners to reach the investors, like it is done across the globe. It is extremely difficult for the mutual fund industry, with its cost structure, to establish a widespread retail presence.

The distribution industry is clearly witnessing a shake-up with those distributors focussed only on transactions moving out. Distributors who have the ability to graduate to the advisory model are making the shift and, eventually, may continue to grow their business.

At Franklin Templeton we rely on a fairly large force of Independent Financial Advisors (IFAs); interestingly, data has indicated that the larger and well-equipped advisors have become bigger post the regulatory change on no-load.

We need to keep in mind that equity funds are typically sold to retail investors and the market volatility of the past two years has led to retail investors turning quite cautious about putting in fresh equity money.

Also, I think that the message that has to go to investors is that mutual fund investing is not just about equity, and that debt funds are also good investment options for retail investors.

Franklin Templeton's debt funds have put up a good performance in the past year. Have they been successful in attracting retail money?

Our debt funds such as Templeton India Short Term Income Plan and Templeton India Income Opportunities Fund have added around Rs 10,000 crore in assets in the past year, helped by their focus on corporate bonds and accruals.

Debt funds are an attractive option for retail investors because of their tax efficiency and diversification.

When an investor buys a fixed deposit or bond, the exposure is to the credit profile of just one borrower. That could entail risks; in a debt fund, investors get to diversify across multiple corporate and government securities, reducing this risk.

Also, open-end debt funds offer liquidity, which should help investors who cannot predict their cash requirements.

Should mutual funds offer solutions to investors instead of products? Maybe they should bundle debt and equity products to offer a solution to meet financial goals such as education or retirement?

Yes, that is certainly the way forward for the industry.

I think that hybrid products which combine debt and equity particularly have a major role to play.

They offer a good risk-reward equation and may be suitable for those looking to meet long-term financial goals such as education or retirement.

Do you think the message that one should invest during stock market falls has been understood by investors? Have you seen heightened inflows during this stock market fall? Which funds have experienced such inflows?

Historically we have witnessed increased inflows when markets correct and data indicate that the pace of inflows into equity products has picked up.

We have also seen increased inflows into such equity funds as Bluechip Fund and TIGF.

We do need to increase awareness of the long-term benefits of investing in equity funds in a fast growing economy like India.

Equity funds have managed quite a good performance in the market rally. Are fund houses doing enough to communicate that good performance to retail investors?

In India, communication with investors has always been a function that distributors have taken on.

This is in line with the practices in the developed mutual fund markets, fund houses would never communicate their returns to investors directly.

That would always be done by third-party distributors or independent rating agencies. After all, how can a fund house objectively communicate its own performance?

However, as an industry we would need to change the focus on short-term performance and highlight the tremendous long-term track record of well-managed equity funds.

For example, our old equity funds such as Bluechip Fund have delivered over 25 per cent CAGR returns for 17 years across various market cycles.

Q. Data from fund registrars show that the inflows from Tier II cities are picking up and more inflows are happening through the Systematic Investment Plan route. What is Franklin Templeton doing to benefit from these trends?

The trend of Tier II cities contributing more to inflows is a developing phenomenon. I think banks have made a significant contribution there; taking mutual fund products into regions that were hitherto not reached by us. I think it is difficult for fund houses to go really retail on their own, given their expense constraints. The call that we have to take as a fund house is whether a smaller city/town offers enough opportunity for us to set up a branch office there. Or can it be serviced by our personnel stationed in a nearby centre? We remain focused on building out our retail business across the country.

On Systematic Investment Plans front, we are seeing a lot of traction. To my mind this is a good development. Once investors stop thinking about market volatility and decide to invest regularly in equity funds their experience with mutual funds as a class will improve. That can lead to stable inflows and I can see that change gradually setting in. In the recent market correction for instance, people are beginning to invest afresh in equity funds.

The participation of smaller investors has been affected by the impact on smaller distributors. It will take time for distributors, and the industry, to adjust, given that players rely on distributor partners to reach the investors.

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