The growth of mutual funds is one of the most significant developments in the Indian financial market. Over the past decade, mutual funds have become an important investment vehicle for investors, both individual and institutional like EPFO.
As financial savings in India grow, mutual funds seem to be a key beneficiary as well as a contributor to this phenomenon. As of March 2022, assets under management (AUM) of mutual funds stood at ₹37,56,682.56 crore.
From the era of Unit Trust of India to the current era of the dominance of bank-affiliated mutual funds, the structure of the mutual fund industry has evolved significantly. From 1964 until the late 1980s, UTI was the only player. From then on, banks, corporations, financial institutions, and insurance companies entered the mutual fund space.
Investing in mutual funds offers many benefits, the main one being diversification. Others include reducing transaction costs and sharing liquidity risk. At first glance, mutual funds appear to be a simple product. These financial intermediaries pool funds and invest them on behalf of investors in accordance with the objectives of the fund. Although simple in concept, the mutual fund value chain includes a set of services (see chart).
All of these activities are sources of value creation. Some of the activities are standardized and there is not much room for differentiation. The selection, marketing and distribution of titles are the areas where there is a large margin of differentiation. A surface survey of plan and AUM performance reveals that investors aren’t necessarily looking for top-performing funds.
Funds with larger assets under management are not the ones that beat benchmarks at different time horizons. Marketing and distribution appear as a key element of the value chain. A survey on how investors choose mutual funds shows that mutual funds in India still remain a push product.
The distribution network of mutual funds seems crucial and influences the AUM considerably. Many successful funds seem unable to garner significant AUM due to lack of distribution network. The distribution channel has a large fixed cost component, and bank-affiliated mutual funds appear to have a significant advantage over others.
Investors base their decisions on information from two sources – interpersonal and impersonal. Interpersonal information can further be categorized into informal sources such as family, friends, peers, colleagues, etc., and formal sources such as distributors and advisors.
Impersonal sources include advertising and direct contacts by fund management companies. The main distribution channels for mutual fund products in India are banks, local and national distributors and fund advisors.
In the case of formal interpersonal sources such as distributors, bank-affiliated mutual funds appear to have an advantage. These funds have access to banks’ extensive branch networks. Brand recall of bank-affiliated funds is stronger. These advantages are clearly visible in the growth of assets under management of bank-affiliated funds. Over the past two decades, there has been a clear shift towards the dominance of bank-affiliated mutual funds.
The table shows the top 10 distributors by commissions earned and the name of the mutual fund paying those commissions. AUM’s largest mutual fund, SBI Mutual Fund paid ₹1,371.83 crore as net commission to its distributors. The biggest beneficiary of the same is SBI. These inherent incentives may influence the manner and type of mutual fund products sold to investors.
It is entirely possible that if you buy funds from your bank, you will be sold products from the mutual fund with which your bank is affiliated.
The author is Professor and Dean (Academics), National Institute of Securities Markets
September 22, 2022