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Gains after pains

SEBI reforms seem to be having the desired effect on the mutual fund industry

Have the abolition of commissions and the tightening of new fund issues started showing a shift towards long-term and more stable investments? In other words, have mutual funds reforms that the Securities and Exchange Board of India (SEBI) unleashed last year actually started giving the desired result? There is probably not enough hard data yet, but if one looks at the way funds are being sold and the changed approach of many fund distributors and fund companies, then that may well be the case.

The biggest indicator of the shift is the renewed emphasis on systematic investment plans (SIPs). A number of fund companies have observed that investors are starting SIPs in larger numbers, and for greater amounts. The rate at which SIPs lapse is also now lower than it has historically been in similar phases of the stock markets. SIPs are a critical indicator of how investors will invest for the long term, whether they will continue investing when the markets are weak and most importantly, whether they will get converted to long-term believers by making money through good times and bad.

The emphasis on SIPs can be seen clearly in the advertising and marketing campaigns that many fund companies are running. Most people in the fund industry can see that in terms of bang for their marketing buck (that is AUM for effort), SIPs are the best options. Unlike earlier, when fund sales were focused only on new funds, many fund companies are running ad campaigns that are solely meant to convince investors about the idea of SIPs.

The other big factor that is aiding this shift is the changed attitude of fund distributors. High commissions of the old days are gone, but it is clear that convincing an investor to start an SIP is much better than convincing him to invest a lump sum. Systematic investments eventually lead to larger investments and thus higher commissions. More importantly, it also leads to higher returns and thus, a happier investor who is likely to invest more.

All in all, after a period of turmoil when fund companies and distributors were reconfiguring their businesses, mutual fund investing is emerging into a post-reforms phase, and the long-hoped shift to stable, long-term investing may actually be working out.