15 July, 2009

King Louis & the MF Industry

I suddenly remembered the amazing work of Disney in their immortal classic “Jungle Book”, penned by Rudyard Kipling. The immediate stimulus for this sudden recollection was, the abolition of loads in Mutual Funds. In Jungle Book, in one of the scenes, King Louis – a Chimpanzee had kidnapped Mowgli to learn, among other things, “How to make fire”. In the meantime, Bageera the Panther & Baloo the Bear come there, looking for Mowgli. In the melee which ensues, at one point accidentally the temple pillar breaks and the entire superstructure starts shaking. Seeing this, King Louis, goes and stands in place of the pillar. Baloo sees an opportunity here. He goes and tickles King Louis. King Louis is not able to stand steady now and the superstructure comes crashing down. After this, King Louis is shown, still holding, just a small stump. This image of King Louis standing in place of the pillar, flashed in my mind as the Mutual Fund industry is already in that situation. With entry loads abolished, the situation can look like the other image. King Louis standing with the stub. I do not want that to happen to MFs, a promising sector in the investment firmament.
On the face of it, the abolition of entry loads looks like a great idea… Jai Ho Investors and all that. One of the arguments is that in the developed markets ( read US ), entry loads are very low or not there at all. It is true that in US there are lots of funds where entry loads are nil. However, there are 1971 funds charging 4-6% entry load and another 143 funds charging 2-4% entry loads. I also found a fund that charges 8.5% entry load! So, that justification is not tenable. Also, entry loads for direct investments are already nil for all funds here and in that sense we are ahead of the US! Even in the US, funds pay distributor charges, in all these cases where entry loads are present. So what is the provocation here? Is simply justifying this move as an investor friendly step logical? Will investors actually be served better this way?
Clearly not. Mutual Funds are a great way for lay investors to participate in the Stock market. As it is, the penetration of Equity among Retail investors is in single digits. Now, with no entry loads, more investors are expected to participate, right?
Maybe not. Lot of handholding, counseling & advice is required, which the distributor traditionally gives. Now, as per the new scheme, he is to seek a fee from each client investing with him. Think of a distributor servicing a hundred clients. For each and every investment, he has to ask for another cheque, as a fee. Possible, yes. Practical, No. Also, the investor psyche has been to get advice for free. It has to change at some point. But suddenly changing over to an entirely new system could have the effect of wiping out a large chunk of the distributors. I’m again reminded of King Louis.
But Investors stand to benefit as they can ensure good service, right? Probably yes. But that depends on whether they find someone to give them the service. Let’s face it. If distributors are reduced to pan handling, will they stay in this industry? Probably not. They would start selling Insurance, FD, NSC etc., as that allows them to earn with dignity and not be reduced to the state of virtually begging for twenty & forty rupees from investors. So, investors will be forced to go direct to MFs. Investors will be left to their own devices to find out which type of funds to invest in, scheme to invest in, which companies etc. If they approach companies directly for advice, they will try to sell their funds. So, where does the investor get advice from? They need to start reading up on the economy, about performance of the stock markets and stocks, happenings abroad etc., to be on top of things. In other words, by saving the entry load, the investor is back to square one – fending for himself & taking on a whole lot of work on himself.
This proposal seems to be on the verge of implementation, in spite of all the problems that it can potentially unleash. So what is that the investor can do for a win-win relationship.
It may still be workable if the investor understands & follows certain basic rules-
1. First, find a good distributor who can give proper advice & is dependable. If the current distributor is good, stay with him/her. See their past track record, if you have dealt with them; if they are coming from a reference, find out about this aspect.
2. Ensure & understand why a distributor is recommending a particular scheme or sector and get proper explanations. This way, you’ll protect your investments and ensure that the distributor recommends only the correct schemes to you.
3. Find out if they have the software support ( preferably web enabled, so that you could check your portfolio anytime ) to provide you with reports, when you need. Will they advice you & assist you with back-office support while redemption, switching, STP, changes in address/ bank etc.
4. Look at creating a win-win relationship with the distributor. Do not try to squeeze him to forfeit the commissions, just because you now have the liberty to do that. The distributor may not offer good services or may not service you at all in future, if you do.
This way, everyone can enjoy Jungle Book … King Louis tracks will become enjoyable then… instead of looking like the pathetic reflection of the mayhem that could have been.

published in Moneycontrol.com on 13/7/09

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