VR Logo

UTI chief on the road ahead for the industry

Distributors are not finding it remunerative to sell mutual funds and have stopped approaching investors. They prefer pushing alternate products like Insurance

UK Sinha shares his view on the industry and what drives his personal investment

Albert Einstein once said; You have to learn the rules of the game. And then you have to play better than anyone else. UTI is following his words diligently. “Distributors will remain an important part of the mutual fund industry. We need to work out ways that will help distributors and small IFAs,” says UK Sinha, chairman and managing director, UTI AMC. .

It is now a universal perception that AUM growth has been disappointing because the distribution business is under heavy stress. Do you agree? What is the way forward?

I will disaggregate the mutual fund industry and the AUM into two categories-equity, balanced and the monthly income plans (MIP) funds where mostly the retail investors invest and the liquid and debt funds where the corporates invest. The two segments have different contours as the retail investors come into mutual funds due to the push from the distributors and the corporate investors who mostly come directly into mutual funds.

As the Distributors are not finding it remunerative to sell mutual funds they have stopped approaching investors for mutual funds and prefer pushing alternate products like Insurance ULIPs and corporate bond papers where the remuneration is superior. If one looks at the net inflows into the Equity and ELSS schemes of mutual funds, where the retail investors invest, there has been outflows of more than Rs. 8000 crores from April 2010 to August 2010. This kind of redemption pressure has put a severe stress on the mutual fund industry.

The possible direction to proceed may therefore be to create awareness about mutual funds. Not many investors know that mutual fund is the best way of wealth creation and that the level of transparency in terms of disclosure of investments made, fees charged etc. is the best. The industry needs to pitch together the fact that mutual funds are a very low cost investment vehicle and offers a number of investment avenues for achieving an individual's investment objectives.

In the long run, seen holistically, do you think these changes will be good for the investors or bad?

We must appreciate that the mutual fund industry has been a very well regulated industry over the years. The regulator has set caps on the expenses charged. Therefore even before the Entry load ban, the mutual fund industry was a very low cost investment vehicle as compared to ULIPs or other investment avenues. Now after the ban on MF charging entry load, the onus on paying upfront commission has moved from the AMC to the investor. Therefore, the cost may not necessarily further come down as some of the distributors are still charging commissions for the transactions.

What has happened is that the small IFA who was serving small ticket investors in Tier II, Tier III towns is now finding it un-remunerative to go to the investor for Systematic Investment Plans (SIP) investments wherein the investment is say Rs. 2,000 as he may get only 1% upfront commission from the investor which works out to Rs. 20. And the IFA has to spend on the travel to reach to the investor. Therefore the small IFAs have stopped selling mutual funds. Recent reports by reputed consultants have also corroborated the fact that IFAs esp. the small IFAs are going out of business. The implication will be that investors will have to reach out to mutual funds as mutual funds were dependent on the IFAs to reach the investor. However, even today, very few investors are aware about investment in mutual funds or about Systematic Investment Plans as there is a serious lack of investor education and awareness in the country.

Markets are back to the high levels of the past; what do you make of it?

While we are close to earlier peak, we should also not forget that almost 3 years have passed since that level was achieved in early 2008. Indian economy has grown at about 8% on an average every year since then. Even the corporate earnings have significantly increased during that period. The stock market was trading at about 21-22 times on 1 year forward basis at the earlier peak. Although, we are at about same levels on the index again, the valuations are not that rich. Today we are trading at about 17 times on 1 year forward basis. As always, there will be pockets of over and under valuation in the market. The key is to be able to find undervalued stocks to create wealth for investors on a sustained basis.

What's the road ahead for your AMC?

UTI has taken up the challenge of investor education in a big way and we have launched 'Swatantra' which arguably is the biggest of its kind investor education campaign in the country and perhaps the world. In the campaign, we have three UTI Knowledge Caravans moving from Porbander in the West, Jammu in the North and Guwahati in the East covering different towns and villages and culminating into Kanyakumari in the South after covering more than 400 locations in 100 days (300 van days). We hope that the 'Swatantra' will create awareness amongst the investors on the benefit of investing in mutual funds and will help bring more investors into the mutual funds.

Despite the lukewarm response from distributors in the last one year, we feel that Distributors will remain an important part of the mutual fund industry. We therefore need to work out ways that will help Distributors and the small IFAs to at least make a decent earning.

How do you describe your personal investment style?

Personal investing must begin with financial planning and clarity about financial goals at different life cycles stages, time periods or events. This also helps in deciding the level of risk that one is prepared to take.

I believe that the mutual funds are the best way of investments. I invest in mutual funds with allocation to Equity and Balanced for the long term and to Debt and Liquid for short term requirements. I tend to invest in funds which have given long term consistent returns and do not show short term spikes in performance, as then, I am comfortable that the fund manager has not take undue risks to push up the performance.

At the same time, certain amount of life cover and medical insurance should also form part of the portfolio.

On the whole, as an individual I am happy if my portfolio is able to beat inflation and there is reasonable liquidity to deal with unforeseen events. A house of my own was one of my plans and I acquired one early in life. It provides a huge sense of security. I am also a supporter of the concept of reverse mortgage of property as a means of regular income in old age. However, the industry has yet to develop in India and certain tax related issues are still to be sorted out.