WF: 2009 has been a difficult year for the distribution fraternity even as market posted a sharp recovery and mutual fund industry AUMs scaled a new high of Rs. 8 lakh crores. How have you positioned your business since the entry load ban in Aug 09?

Rajiv: 2009 was difficult year for all distributors of equity products. It was a reasonably good year for selling fixed income or hybrid instruments viz. NCDs, FDs, MIPs, Debt funds etc. Approximately Rs. 20,000 Cr. was raised from fixed deposits and Rs. 2 Lakh Crore. mobilized in Debt funds, the AUM of which now stands at around Rs. 5 Lakh Crore.

Major challenges were in selling equity mutual fund as many investors lost their confidence in equities after the market fell due to financial crisis. Further, waiver of entry load and new SEBI regulations reduced the incentive for Independent Financial Advisors to promote the equity mutual funds. After ban in entry load from Aug 09 it has been observed that in equity funds there has been a net outflow. The rise in Equity AUM is mostly due to increase in price of equities.

We were focusing on direct equities as well so we used this as an opportunity to increase our franchisee network. Besides this we focused on corporate fixed deposits where we have a 40% market share, debt funds again where we are one of the largest distributors and other hybrid fixed income products.

WF: What proportion of your revenues in the last quarter (Oct-Dec 09) came from mutual funds? What was the peak contribution of mutual funds to your overall revenues? Which are the products that today contribute the highest towards your overall revenues?

Rajiv: During last quarter (Oct-Dec 09) we had around 20 % of our revenues from mutual funds, which is significantly lower from the peak.

WF: What are the biggest challenges in getting investors to buy equity funds? What can be done to reverse the net outflows trend that equity funds have been witnessing in the past few months?

Rajiv: As we all know, penetration of mutual funds in retail segment remains very low. Attracting longer-term money and allowing fund managers to invest with a longer-term horizon is an important step. There is too much focus on regular NAVs.

Schemes should be set up based on the horizon of the investor. We need to have separate classes of the same fund based on time horizon. Making investor aware that Equity is a long-term asset class is an important step. This will allow an Independent Financial Advisors to do real asset allocation and think long term, which in turn will justify a service fee.

As far as net outflows in equity funds are concerned, it is due to a combination of two factors - Genuine profit booking by investors who saw large erosion in their portfolios earlier and low levels of gross mobilization. We feel it is a short-term phenomenon and we are already seeing improvement in gross mobilization figures. Fact remains that mutual funds are ideal vehicle for investors to enter equities.

WF: Why are NFOs not attracting large retail participation - are investors wary of markets or are distributors focussing on alternative products?

Rajiv: An NFO should normally be planned around a new investment idea. In the past 20 months, the appetite for new ideas and themes has been low. Secondly pricing advantage due to amortization of expenses in NFOs is no longer available to AMCs. Hence, compensation to intermediaries for selling ongoing schemes and NFOs is almost same. Intermediaries, therefore, prefer to sell schemes having a proven track record rather than new schemes with no track record. Secondly certain percentage of Independent Financial Advisors are moving towards selling alternative product.

The recent few NFOs have managed to gather good traction with retail investors and as markets improve, the scope for innovation and its demand will increase.

WF: There are reports of a number of small distributors and Independent Financial Advisors getting out of mutual fund distribution due to the new pricing environment. Do you see this impacting retail penetration of mutual fund? Do you think the stock exchange platforms can now substitute small Independent Financial Advisors and ensure similar or even better reach?

Rajiv: There is a fall in number of active Independent Financial Advisors post new pricing norms. We feel apart from revenue issues, Independent Financial Advisors have also been disoriented due to the underperformance of many funds and the uncertainty around the regulatory environment in future.

Several developments e.g. Stock exchange platforms, broker change NOCs etc have forced them to rethink their business strategies.

We firmly believe that an Independent Financial Advisors are an integral part of the mutual fund stock exchange platform. There is no substitute to the human touch that an Independent Financial Advisors brings in India. The levels of consistent service that an Independent Financial Advisors offers are amongst the highest in the world. What we need to do is to equip these Independent Financial Advisors with good and valuable advice and align a compensation structure which is aligned to their client. They should be registered and regulated like in the USA, UK and Australia. These are the biggest Independent Financial Advisors markets in the world.

We should not forget that retail equity broking penetration has been led by franchisees associated with large broking houses.

WF: Some observers believe that flows from Tier II and Tier III cities have more or less vanished and that business is getting concentrated back into larger cities. Is that a trend you see in your business? How adversely has market penetration initiatives been impacted over 2009 and what can be done to enhance penetration into smaller towns in 2010?

Rajiv: Above observation may be true in short run but in a longer run if mutual fund industry needs to grow like direct equity broking business then mutual fund trading will have to go in Tier II and Tier III cities to have sustainable growth over a long period of time. We don't see our business vanishing from Tier II & Tier III cities as we are selling diversified products and we also a major player in IPO & Fixed Deposit distribution. Hence, we will continue to have our existence in all cities we access today and will try to leverage this advantage even for mutual fund business by providing mutual fund trading facility through our branch and franchisee network.

WF: Will you be using the stock exchange platforms for your mutual fund business?

Rajiv: Yes we are one of the major players in mutual fund distribution and will use stock exchange platform to gain market share.

WF: Do you see the move to ban distributor NOCs as a positive or a negative development?

Rajiv: It is positive development as now investors who are not happy with the services of their advisors can easily move investments under another advisor and new advisor will get advantage of trail brokerage for services provided to client. So it is not just to mobilise but also to provide continuous services to client, which is more important to retain clients.

WF:What do you see as the key trends in 2010 for the distribution business?

Rajiv: We expect distribution business to go through an evolutionary phase in the coming times. There are clear signs of the regulation tightening around the primary market intermediaries. This will lead to consolidation and benefit distributors who remain committed to building a business around the long-term investment planning of their client's assets.

WF: What are your plans for 2010 in terms of product portfolio, new services, client segments etc?

Rajiv: We are very focused on our existing business. We have 4 sales verticals catering to Ultra High Networth Individuals, Corporate Clients, Independent Financial Advisors and Brokerage Clients. We will continue to service these clients with our existing products, however we will increase our focus on fixed income products.

WF: In terms of equity AUM, at present, roughly 40% is contributed by banks, 20% by national distributors and 40% by Independent Financial Advisors and regional distributors. In 3 years time, how do you see this pie changing and what can drive this change?

Rajiv: We believe that expected consolidation would lead national distributors to improve their contribution in equity AUM. Regulatory changes in competing product segments viz. Insurance, pension etc. will also play a major role in deciding the focus areas of various distribution segments.

WF: What would be your key messages to your AMC partners as you begin a new year?

Rajiv: We expect to work together with AMCs in building a very efficient and value driven industry with lot more retail base and penetration. We also expect AMCs to continue the development work, which seems to be taking a hit in the current turmoil.