SEBI to eye e-commerce companies for selling mutual fund - way forward?

SEBI to eye e-commerce companies for selling mutual funds reminded me of what happened with Motorola.

The fortunes of Motorola revived due to e-commerce portal Flipkart when it started selling moto phone models in 2014. Always a user of motorola products in the previous decade, I was an early adopter of a Moto-G phone. So, when any one around me asked me about a phone for purchase, Moto E/G, due to the “value for money” proposition was the obvious suggestion. However, the biggest concern (with 100 percent strike rate) was “post purchase service”. Does Motorola have service centers around the city/country? was the popular enquiry. I had to literally coax them to buying Moto stating that the servicing may not be required at the first place and  even if it is required our “around-the-corner” mobile service centres will be equipped. Moto was a big success for both Motorola and for Flipkart.

I am glad that SEBI is thinking creatively to increase penetration and dismiss the theory that they are just following the herd mentatlity of every thing going digital. However, I am intrigued about the modus operandi.

Firstly, there is a talk of new plans for each online player. Like in other countries, there could be different share classes for each fund. Depending on the commission paid to e-commerce companies, there could be multiple plans – one for flipkart, one for snap deal, one for paytm etc. This will take mutual funds back to pre-2009 era where SEBI in all its wisdom (and rightfully so) thought that there should be only one saleable plan – the regular plan – no institutional, no super institutional, no retail et al. Again in 2012, came the advent of direct plans. That doubled the number of plans available to deal with. Now comes FK plans, SD plans, PTM plans among others and not to forget their daily/weekly/monthly/quarterly/yearly dividend options.

 

Alternatively, there could be only one plan for e-commerce players. Defining a seperate TER (Total Expense Ratio) may do the trick. The draw back in this is that this channel can mobilize larger assets but still get paid lower than the traditional channels. To ennumerate, a fund charging TER of 2.5% for regular plan may pay 1% to distributor. E-commerce plan may charge 2% and pay 0.8% to the ecommerce company. Why should the online company agree? I hope predatory pricing is not allowed in one form or the other. Else, it would tantamount to “paying back” the investor to acquire him.

One more element which needs to be focussed on is that investment unlike consumption does not involve instant gratification. In whatever way the information about a fund for purchase (after research and through use of analytics) is presented, there will be other funds which would better. There comes the element of dissappointment to the investor and I am not sure how ecommerce companies will be equipped to deal with this. The new model may remove any human interaction. The investors usually need human intervention during periods of market crashes – Yes! There will be bad times in markets as well.

Post the spending binge, the e-commerce companies will return to normal pricing. In this steady state, the gross margins on goods sold would be in double digits (20-50%). Compared to this, the best margin in a mutual fund is 1% and that too as trail (thanks to recent guidelines by AMFI). Will ecommerce companies be excited to participate in this opportunity? Or should SEBI focus on getting MF Utility equipped to deal with this opportunity. Sadly, in over two years of wait, all I have seen is an issuance of a number (yet another in ones life called CAN) and no online facility. Already exisisting  online portals need to be assisted – especially on the long winding-never ending KYC process.

While one may not turn a blind eye to the growing digitization era, the traditional channel should also be supported and expanded. There are harldy 20,000 active mutual fund distributors (and sadly most of them distribute insurance, amway products, tupperware etc as well) for a population of 1.25 crores people. They are hit by the constantly changing regulations and market dynamics. There are lakhs of insurance agents who work in a silo of their when the end customer needs are mostly the same – achieving the goals set out by him/her. My fear is that more country men than not may end up living poorer if these solders on the ground are not guided / taken care of. There is nothing like a perfect solution!. However, I feel that a combination and association of the online and offline models is the way forward.

Disclosure: Views are personal. Numbers quoted may have margin of error.  

Lessons to be learnt in the recent credit event in two JP Morgan debt funds

What happened?:

JP Morgan India Short Term Fund and Treasury Fund have fallen 3.38% and 1.73% respectively on  27 Aug 2015. Investors were set back by 3-6 months in their returns

Why this happened?:

The above two funds hold Amtek Auto security to the tune of 15.37% and 5.29% of the portfolio respectively as of end of previous month. The stocks of the group in the equity market have been under pressure the entire month -  some falling more than 85% in value. The rating agency, CARE has suspended rating on the company’s debt paper three weeks back. Another rating agency, Brickwork has downgraded to C rating from A+. This necessitated the fund house to take a hit on the Rs 200 crore exposure to the tune of 25% – a loss of Rs 50 crores to the investors. Incase of a default in the next coupon or principal payment, the hit taken by the funds could be more. This development could preempt the existing investors from redeeming and even if they redeem, it ensures that they will take the hit. 

Lessons to be learnt:

1.     There is no free lunch! The rationale for investing in a fixed income product is for its very definition – “I want fixed  income”. It is for the safety of the principal and consistent stream of cash flows through interest payments all through the time of investment.

2.     In the chase for returns, what might get forgotten is that there is trade off between risk and return. The reason why a company may pay a higher coupon / interest compared to the other is because of the additional risk it carries – There is no free lunch in markets.

3.     Liquid funds may give negative returns and so do debt funds, frequently! Through higher accrual (higher coupon payments), the credit funds / part credit funds attract huge investor participation. Due to higher payouts, the distributors also push them through. In 2008, a couple of liquid funds has given negative return for the first time in the history of Indian mutual fund industry. This was due to a liquidity event – the funds were unable to sell the paper as the market was frozen. Other funds managed dip into resources that bailed them out. The second instance was in 2013, on the fateful day when RBI increased the short term rates by 300 bps, due to the interest rate risk, the liquid funds across the industry gave negative returns. This was a rude wake up call again that fixed income funds including liquid funds can give negative returns. Infact for the next six months, funds across categories gave negative returns. This episode was another occasion where investors and distributors learnt the fixed income funds are also subject to volatility of returns.

4.     Is there enough lunch on table? In India, the exposure to credit funds does not offer the return which is commensurate with the risk investors are taking – not much lunch left on the table. For instance, 10 year Gsec yields 8% today compared to about 10.5-11% by AA security. Post the expense ratio, the realized yield is about 9-9.5% vs 7.5% in Gsec funds, extra return of 1.5-2% for significant additional risk(funds hold varies buckets of papers but just simplifying the explanation to make a point).

5.     The above does not indicate that one should not enter credit funds. Investors should hope to get a kicker in the portfolio. However, having a cap of 30-40% is a good idea. In a situation like today when a fund takes a hit, one should be able to sail through the period for 6 months to 1 year (and more probably) by tapping into other funds for liquidity and income. Also, one should be aware that negative returns to the quantum quoted above may be seen more frequently than in the past.

6.     Show what you are made of? It is very easy to be on television and print media when things are easy. It is very difficult when calls misfire. It is only during these times that the CEO and Fund Manager have to be everywhere stating what steps are being taken. Investing is all about predicting the future and taking calculated risks. In moments like these can stakeholders understand better and become more mature for future. The CEO and fund manager not being reachable to the people who recommended or invested in their funds is a shame. These are the moments when it shows what you are made of.

I am hoping that this is just a one off during these tough times for various sectors before economy picks up steam. Being discipline and diversified is the best formula to have sound sleep at night and make money work

   

Disclosure: Views are personal. No exposure to above mentioned funds.