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Ready for disruption

At the twenty-five year mark, India's mutual fund industry is ripe for something new

Ready for disruption

Over the last few days, I was surprised to get some phone calls from mediapersons who were in the process of reporting on the 25th anniversary of the mutual fund industry in India. I guess, birthdays are always nice but I'm a little ambiguous about this one. First of all, this 25-year anniversary is that of the first formal mutual fund regulations and the resulting launch of private-sector mutual funds in 1993. Even before that, public sector banks had launched mutual fund schemes in 1980s. And, of course, the long-gone Unit Trust of India had launched the Unit Scheme 64, which was certainly a sort of a mutual fund, as far back as 1964.

However, those were all previews of a sort and it's definitely true that 1993 was when Indian mutual funds really took off. The interesting thing is that so much has changed since then that a seasoned investor of today would hardly recognise mutual funds from that era as being mutual funds at all. First of all, those funds used to be closed-end ones. That means that they had initial offerings when you could buy them, and then you were locked in for the lifetime of the fund, which could be anything from three to ten years. Today, open-end funds are the norm and investors are used to being able to invest and redeem rapidly, in a few hours to three days, depending on the type of fund. Of course, there are closed-end funds today too, but those were the only option back in those days.

One of the biggest differences is in the level of transparency. In those days, funds declared their NAVs once every three months. Actually, that's not quite right--they calculated their NAVs only once in a while, which was in theory once a quarter. So, most of the time, not only did the investors not know what the investments were worth, the mutual fund itself didn't know either. I personally got a taste of this when, as a young mutual fund researcher (possibly, the country's only one), I landed at a mutual fund's head office to find out their schemes' NAVs. This was pretty much the only way of finding out NAVs in those days. In the context of the time, I probably should not have been surprised when I was handed a 'Register of Investments' and asked to calculate the NAV myself! Of course, today, all NAVs are available every day, and the exact investments a fund has made are available monthly, which easily make these standards the best in the world.

Operationally, for investors, the biggest change has been in the mechanics of investing. Obviously, back in 1993, everything was manual and paper-based. You filled in a form, wrote a cheque and deposited it. At some point of time, you got a certificate, hopefully. Compared to today, the process had a relatively high error rate and resolving errors was a painful process. Redemption was an even shakier process. Today, funds are transferred over the network, there is a perfect digital trail of all actions and investors get an account statement that's proof of ownership. Valuations can be tracked daily on Value Research Online and other websites and the chances of getting surprised or stuck are miniscule. The depth of performance and portfolio data also means that investors are much more likely to be able to choose good funds. And if they do end up choosing a fund that does badly, then one can get out of open-ended and correct the problem whenever one wants.

So, all things considered, it does look like mutual funds in India have come a long way since then, but that's just a cliche. Obviously, they've come a long way--everything in India has come a long way in the last quarter of a century. When I look at the most substantive changes that have happened, I see almost nothing that can be pointed out as an achievement of the mutual fund industry. The list entirely consists of things that the regulator forced mutual funds to do, and those that resulted from a changed environment like networked banking and the rise of the consumer internet. Mutual funds have done far too little and moved far too slowly to enable consumers to become savers and investors. For most of the past decade, they have also dragged their feet over moving to innovative modes of bringing access to new savers. I know for a fact that this is mostly due to a comfort with the old way of doing things.

In 1993, if you'd told me that in 2018 it would be easy to summon an auto-rickshaw using a pocket-size, handheld computer that is wirelessly connected to a global data network, but it would be difficult to invest in a mutual fund using the same, I would have found it hard to believe. But that's the truth. As someone who's observed things for literally every single day for a quarter of a century, I can see that the mutual fund industry is comfortable with the ways of the past, and doesn't really like the future.

India's savers and investors need some disruption here. Who's going to provide it?