WF: 2009 has been a year of tremendous recovery for market but its been a fairly difficult year for the distribution fraternity. Even as the mutual fund industry AUM scaled a new high of 8 lakh crores in November, that cheer unfortunately did not permeate to the distribution fraternity. How have you positioned your business since the entry load ban that happened in August 09?

Rajiv: Year 2009 was a year of recovery for the market as well as for the distribution industry. After the meltdown in 2008, we saw month on month recovery starting from Jan 2009 right upto July 2009. Starting August there was a hick up, in terms of adjusting to the new regime of entry load ban. This change brought in fresh opportunities in terms of abilities to charges to the clients - but to start something new like charging a fee it takes time to build up. Commissions on mutual funds sales became one third their original levels. The commission loss was much more than the fees that were generated. So from August to December on mutual fund side of the business, we had a short fall. We have tried to bridge this gap by increasing other products lines like fixed income and life insurance - which we have done successfully.

WF: If you were to look at say the last quarter the October - December quarter, what proportion of your revenues came out of mutual funds? Can you context that in terms of what was the peak contribution of mutual funds to your overall revenues before the market crash and the entry load ban? Today if you have to look at your business mix which are the top 2 or 3 products and how much do they constitute in terms of percentage of your revenues?

Rajiv: In a multi product distribution model like Bajaj Capital, ideal mix should be 40% mutual funds, 40% life insurance and 20% balance. That should be the ideal mix. In 2007 mutual funds peaked at 55 % and they were out performing all other product segments. In 2008 as the markets crashed, so did the sales in mutual funds, 2008 was a very difficult year so they came down to 15% of the total revenue at one point of time. But as I mentioned earlier that from Jan 2009 onwards there was recovery, upto July month on month mutual funds percentage of revenue was going up and it went up to 30% of the total revenue, in the month of July 09. But now, mutual funds have slipped back to 15% of total revenue. Life insurance is now close to 60% of the total revenue. Fixed income constitutes the balance 25% now.

WF: One of the issues on the mutual funds side is the net outflows over the last 5 months although the markets have been moving up very rapidly. What can be done to reverse this trend of net outflows and what in your opinion are the biggest challenges in getting the investors to buy into equity funds?

Rajiv: If I look at some of the recent NFOs like Fidelity and Sundaram - we have been very very active in these NFOs and the effort that have been put into selling these schemes are no less than what we did for the same fund houses in 2006 and 2007. But if you compare collections it is 15 % of what we did in 2006 and 2007. If we did say 10,000 applications in a 2007 NFO for the same fund house, this year, it is now 1500 only. So biggest challenge is the return on time for a financial planner at a ground level. He is not feeling motivated enough to sell a risk asset like equity fund, he finds it much easier to pitch FDs where his remuneration is equal or higher than an equity fund. Moreover, in equity funds, he has to put his neck out and make projections for the investor and commit to render servicing which is also very high because every quarter the portfolio has to be reviewed and your answerability to the investor is higher. The pricing for this effort was 2.5% to 3% while fixed income products gave him comparatively less - and demanded less effort too. That pricing paradigm has been disrupted - and the effort-reward correlation is just not there. So that is the biggest challenge and the financial planners are not finding it motivating enough to sell equity schemes anymore.

WF: Apart from the challenges at the distribution end, are investors also wary of a rising market - which could also account for the redemptions?

Rajiv: What is happening is that in general, the servicing of the equity funds investors has gone down on an industry wise basis. It is not remunerative enough. So whether it is bank or a national distributor or an IFA, this has happened across the board. Equity fund is a product were you need a continuous hand holding and advisory for a investor to invest and stay invested. And hence in the absence of the ongoing advise investors are taking there own call, and are deciding to get out at cost or a marginal profit.

WF: A number of IFAs are exiting MF distribution. If this trend continues, due you see this impacting the fund industry's retail penetration efforts or due you think that the stock exchange platforms which have now been set up, will compensate in terms of reach?

Rajiv: This is a question of short term vs long term. All these challenges which we are facing are a short term phenomenon. In medium term what you will find that the industry will find a balancing level, where volumes should slowly start picking up and people should have restructured and brought down there cost structures and have more variable cost related distribution modules and when that restructuring has taken place you will find distribution again participating in mutual funds. Mutual funds remains as the anchor product in every investor portfolio - that is something which cannot be disputed. So anything else whether it is fixed income or life insurance or general insurance form the satellite part of the portfolio and the core will remain as mutual funds.

It may take 2 years to really see the impact of the stock exchange platforms - but with a reach of 1500 towns versus just 200 that the MF industry has at present, there is no doubt that over time, stock exchange platforms will enhance retail reach for MFs.

When banks started selling mutual funds it was a new channel of distribution - and over time, they have carved out a sizeable slice of the pie - especially in the HNI segment. Similarly, stock brokers now represent a new distribution channel - and they too will participate and help grow the business and claim their share of the pie.

WF: Bajaj Capital has both an advisory / financial planning proposition as well as a stock broking service. Would you consider doing execution of mutual fund trades through your stock broking terminals because of the convenience or do you think that the two will run entirely independently?

Rajiv: We see clear benefits in executing trades through the platform because of the demat nature because of the holding and the operational convenience for the investor - but there is an additional cost.

We are right now in a pilot phase of using the exchange platforms, but do intend using them in a significant way in future.

WF: Moving on to different aspect : the NOC ban that SEBI has now enforced on change of broker codes. Do you think it's a positive or negative move from a distribution perspective.

Rajiv: I would like to see this from a consumers perspective : that if an investor is not happy with the services of an advisor, then why should he have to take an No objection , I mean it is the investor who has to take a decision, so from SEBI point of view the decision is absolutely in the right direction. For distributors, it obviously puts greater pressure, because now the activity of changing broker codes has increased. SEBI has also now clarified that trail should go prospectively to the new distributor. The SEBI clarification is welcome - although for distributors, there is more pressure to provide quality customer service to their clients so that they retain their assets with them.

WF: What are the key trends you see this year for the distribution business?

Rajiv: Well I see 2010 as the year of stabilization - after all the regulatory changes we've seen in mutual funds and insurance last year.

The other big trend I see is the first mover advantage. When so much has changed, firms that are able to absorb regulatory change quickly, turn over their business models to suit the new environment and take to the market their improved / altered customer propositions quickly - will be the winners of the future.

WF: What are your own plans for Bajaj Capital in 2010 - product portfolio, new services or any client segment that you are focusing on?

Rajiv: We have in the past used revenues as the primary measure to track our mutual fund performance - perhaps like all others did. We have now shifted to volume based tracking. This is a change we have already made and we should see the results. We are now concentrating on a wider basket of products within mutual funds like MIP's and FMP's in addition to Equity funds and ELSS. We are looking at a wider basket and we have targets for each of the segments, so our aim is to increase and bring back the volumes of mutual funds and our trail levels maybe by end of the year with the help of increased volumes.

WF: WF: From a industry perspective, which are the distribution channels you think will grow and which ones are likely to lose market share over the next 3 years?

Rajiv: Two new distribution channels have emerged - online and stock broking. Both of them will compete for a share in this pie. And you are already seeing the trend of online gaining and IFA's and regional distributors losing market share in the last six months. These trends will continue.

WF: When you say online you are talking about online direct.

Rajiv: Online through distributors, like ICICI Direct etc. I see the share of online going up and I see the banks and the national distributors having to fight harder to retain their share. So therefore overall I would see after three years from now, the mix between the HNI's and the retail investors would have changed towards the better in terms of more and more skew towards retail investors, right now this is a HNI dominated field. You will see bank share coming down and national distributor share going up as a consequence of this. And IFA's would struggle to retain their share.

WF: What are your key messages to your AMC partners at the beginning of this new year?

Rajiv: Well the message will be that the AMC's now have to make up their minds in terms of whether they want to pursue direct distribution or they want to go for a distributor oriented model. Earlier there was some kind of a blur and we saw some AMC's exponentially expanding their own distribution networks. In the new lost cost business models that will now emerge, AMC's have to maintain a lean and mean structure with a higher dependence on distributors. Here, we see a greater role for organized distribution. So we see lot of IFA's moving under the umbrella of organized distributors and AMC's have to deal with lesser no of players rather than opening their own offices to service distributors and IFA's directly.

WF: You see a bright future for the platforms business

Rajiv: Yes, definitely I see that there will be 4 or 5 major platforms which will emerge and they will act as the aggregators for the IFA business. AMC's would do well to support the emergence of these platforms rather than trying to compete with these platforms by creating their own platforms.