Indian mutual fund industry has grown more than four fold in a span of 10 years. From Rs.5.41 lakh crore as on July 31, 2008, the industry has grown to 23.06 lakh crore as on July 31, 2018. Distributors have played a major role is proliferating mutual fund schemes as an optimum investment avenue amongst the masses. In this article, we will understand their role.
Before we look at the role of distributors, let us look at the different ways of selling a product.
Direct from manufacturer to customer:
One way of selling a product is directly from the manufacturer to the customer, also referred to as B2C. Products sold via this route are: (a) banking products as customers directly buy products through branch or online (b) services with one to one correspondence e.g. doctors-patient.
Through an intermediary
The other, more prevalent method of reaching out to the customer is through the intermediary route. FMCGs and consumer durables are sold mostly through this route as customers need to touch and feel the product before buying it. Moreover, in case of consumer durables (such as TV, fridge) the staff’s sales pitch plays an important part in the product buying decision. Apart from consumer goods, other products sold through this route are financial products. Financial products are generally ‘sold’ by the intermediary because the distributors or advisors need to explain all features of the products to investors so that they can make an informed investment decision.
Most of the times, investors are not equipped with requisite knowledge to be able to take prudent investment decisions independently. This is where the distributor comes in. Moreover, he helps prospective investors understand how these investments fit in their overall financial plan.
The contribution of distributors in spreading awareness about investments is evident in case of mutual fund industry. Distributors have lion’s share in increasing mutual fund penetration in the non-corporate investor segment. By marketing the product and handholding the customer in market downturns and periods of underperformance, they have helped investors transition from guaranteed return products to market-linked products. The distributor community is the sales force of the industry driving it forward.
To look at the numbers, AMFI data shows that 40% of the assets of the mutual fund industry come through the direct channel. However, a huge chunk of the 40% is corporate money coming in debt or liquid funds. Only 10% of the retail investors have invested through direct plans, while 19% of HNI assets are direct. 70% of liquid/money market scheme assets where institutional investors dominate are direct, whereas 49% of debt oriented scheme assets and 16% of equity scheme assets are direct. This clearly shows that retail investors prefer investing under the guidance of distributors.
What is the way forward for the distributor community? We all know that technology is disruptive. While technology has introduced new channels of communication like video calls and chats, it has made execution or transaction instantaneous. Many distributors are embracing these changes and using them to grow business. Another, upcoming change is the emergence of robo-advisory globally. Even in India, this is an alternate channel catering to tech-savvy individuals. However, it lacks human interaction and does not handhold customers in times of market downturn. SEBI recognizes distinction between advice and distribution, since robo websites give ‘advice’, they make the direct plan available to their customers. However, in true sense investments in direct plans through this route requires an intermediary. Taking advisers and distributors as part of the same community i.e. intermediaries for mutual funds, the community is working for advancement of the industry. For guidance and handholding of investors, the mutual fund intermediation community has a tremendous role to play in developing the investment culture in India.
Intermediation of financial products requires working knowledge of markets and products, maintaining persistency with clients and patience in volatile market phases. MF distributors have stood by it across cycles and seasons, even in the face of diminishing commission rates, by expanding the business reach. Today, MFs are 21% of bank deposits, and are set to grow further. In times to come, the personal human touch of the intermediary will play a pivotal role in on-boarding more people and inculcate discipline of investments through mutual funds.