Investor awareness is the key factor for expected returns

In order to sustain the current growth and increase penetration, the key challenges are as follows:

Investor awareness:

The industry has to ensure that investors are armed with the knowledge they require to make informed investment decisions, with the right expectations.

Lack of distribution infrastructure beyond urban/semi-urban areas:

This is a key constraint in expanding the investor base.

Paper-intensive nature of industry:

There is an urgent need to set up an industry-owned web-based servicing and transaction platform, that will provide independent financial advisors with the IT infrastructure and tools they require to expand their client base, while reducing operational costs for both advisors and AMCs.

Parity in terms of regulations or policy:

The industry needs a level-playing ground with other financial service providers in terms of ‘know your customer’ (KYC) documentation requirements and expense ratio flexibility.

Going forward, we see exciting times for the industry as the Indian economy grows and penetration of MFs increases. We believe that with a favorable policy framework and robust economic growth, the industry can be expected to expand at a sustained pace of 20-25% over the next few years, even though sharp changes in market conditions, as seen in H1 ’08, can impact flows over the short term.

The product range in the industry has already undergone significant transformation in the past 10 years. At the same time, we have witnessed a change in the risk profiles of investors and increased comfort with market-linked products, due to rising income levels and a younger workforce.

We anticipate that there may be appetite for sophisticated investment products such as absolute return funds, alpha strategies (including portable alpha), structured products, long short funds, active exchange-traded funds (ETFs), private equity funds and other innovative products, going ahead.

There can also be investment options in new asset classes like real estate and dedicated infrastructure funds, as well as in overseas markets.

The usage of technology will be critical in a country like India, wherein one needs to cope with high volumes at fixed costs. Leveraging technology infrastructure will become critical for the industry, as this will improve efficiencies, ease access and provide higher service levels to investors.

For this, the establishment of an industry owned servicing and transaction platform, and a transition to paperless transactions, is essential.

Another aspect that needs to be adhered to is the lack of distribution network beyond big cities and towns, apart from awareness about MFs. The geographical expansion of banks and national distributors and new distributors like India Post will help us in addressing this issue and expanding the investor base.

There has already been substantial regulatory emphasis on risk management and we expect the practice to improve further in the coming years. Global fund houses will have an established risk management policy/process, which can be customised as per domestic requirements.

Others will have to develop a risk function to monitor and evaluate fund performance — a rigorous risk management process helps investment teams to review the portfolios from a different and critical perspective.

As far as competition between MFs and insurance products is concerned, we believe that the two cater to entirely distinct needs of investors and there is no overlap between the two.

However, the following regulatory changes are required to bring about a level-playing field: MFs should be allowed to manage insurance assets, like in developed markets. AMCs should be allowed to wrap insurance around their products and must be given some leeway to pass on this cost to investors outside the current regulatory expense caps.

KYC documentation requirements should be the same for MF investments and insurance.