WF: Industry AuM reached a new high of Rs. 8 lakh crores in Nov 09 - which few people would have predicted in Jan 09. Do you see the industry AuM crossing the magic 10 lakh crores figure in 2010?

Globally 2009 was a year where all markets were driven by ample liquidity (and not because of fundamentals) and the same phenomena occurred in India, where over Rs. 1.75 lac crores were invested by Banks in MFs, sprucing up the AUM numbers. I do not see the industry AUM crossing the Rs. 10 lakh crore mark in 2010 simply because over Rs. 1 lac crores of the bank AUM could be withdrawn in the first 6-9 months.

Also from an equity market perspective, after a terrific 2009, where indices gained 75-80%, 2010 should remain muted at best growing 20% in line with Corporate earnings growth. On a combined basis based on the above 2 factors and add to that new AUM being sourced, I will be happy if the industry AUM remains at Rs. 8 - 9 lacs crores range. If the industry can replace the Bank money with Retail investor money, it will be a far better outcome than crossing the Rs. 10 lac crore mark.

WF: One of the biggest challenges that the industry is facing is that despite a sharp recovery in equity markets, net inflows are not coming into equity funds over the last few months. Why is this happening and what can be done to remedy this situation?

The industry is facing outflows month-on-month for the past 5-6 months now. The outflows are a combination of the following factors -

   a) Spate of NFOs 2-3 years back at similar market levels - these investors are booking profits now, once the NAV they had entered in has been reached

   b) Distributors advising HNI / retail clients to book profits due to the sharp market run-up, which has defied fundamentals

   c) Impact of no-entry load which has forced a number of IFAs / distributors to change their business models. This could be a long drawn out process at the        ground level and the distributor is fine if the investor comes to him in other products like Insurance, Company FDs where they are being paid more        handsomely for client acquisition as compared to MFs

This is a very challenging period currently and the industry is suffering heavily because of the current regulatory arbitrage which exists between MFs and Insurance / other financial products.

Remedy for this situation will have to be a combination of the below mentioned situations -

   1) Regulatory arbitrage disappears slowly. Insurance regulator and Banking regulators are looking into this but the process could be more gradual

   2) Market correction by 10-20% could provide investors with a good entry point and justify investments from a fundamental perspective as well

   3) Runaway bull market will force investors to re-invest in frustration of losing out on returns - this though is the least favourable situation as invariably we        have seen Retail Investors entering at higher levels and burning their hands

WF: 2009 saw two big developments for the industry : the ban on AMCs charging entry loads and the emergence of stock exchange platforms for mutual funds. How do you see these developments from an industry perspective?

   1) Ban on entry loads - An excellent measure from the customer's perspective but maybe implemented too quickly and has left the other stake holders viz. the        distributor and the AMC, too stretched on an immediate basis. The outflow impact post the ban is being felt by MFs, who are now paying from their own equity        capital to acquire new clients and as the days go by, the AMCs will realize the pain especially if the assets get churned after 13 months (which is the current        holding period for the industry).

       This initiative needs to be heavily advertised by AMFI and SEBI to mutual fund investors and only a surge in volumes can compensate the distributor for his        efforts in selling the fund. The surge will eventually happen when the investor realizes that MF is by far the cheapest and most transparent product available        in the market but when will this happen - 6 months, 1 year, 3 years will all be a function of how quickly the investor awareness is created.

   2) Stock Exchange platforms - While volumes look muted currently, this undeniably will help the MF industry increase its reach to tier 2, 3 and the next rung of        cities and towns. Again if adequate investor awareness is created, it could turn out to be a very big inflexion point for the MF investor

WF: What do you see as the big trends for 2010 - from an AMC industry perspective and from a distribution perspective?

AMC Industry perspective - Industry consolidation will be a big trend. Consolidation could be internal, within the company by re-looking at various distributions channels / products or external where M&A activity will pick up. Existing AMCs could sell their businesses or get into JVs with partners providing distributor access.

Distributor perspective - They will need to choose between 2 options. The first - simpler option, being taken currently - is slowdown on MF distribution and sell the other financial products offering higher commission. The tougher second option is to switch to an advisory model for all financial products including MFs (and which will be the future across products). People opting for the second model faster will reap more longer term benefits and create more sustainability for their businesses. They will also eventually gain more market share (with benefits from economies of scale) at the cost of others exiting the business

WF:What are your plans for 2010 - products, investment management, distribution, communication? What are your key focus areas going to be this year?

All of them.

Religare AMC has had a rocking 2009 on all parameters. AUM growth (4 fold), profitability, client acquisition and recall value with distributors.

Products - We intend launching new products - Gold ETFs, MIPs, international funds to complete our product suite.

Investment Management - Investment management will come into focus as our products start completing 1 to 3 years of fund performance and therefore start coming into the distributor circulation lists

Distribution - We currently have 12,000 empanelled distributors. We intend to grow this 3 fold to at least 40,000 distributors by end of 2010. Also large banks are yet waiting for 1 year to be completed to initiate due-diligence on Religare Mutual Fund and hopefully, we will have a few of them selling us by next year-end.

Communication - Religare Mutual Fund will undertake its advertising brand campaign starting Mar 2010. Last year we silently went about integrating our business post Lotus buyout and reaching critical size. We have that now and we will focus extensively on brand building and communication in 2010.

WF: A number of distributors have shifted focus to alternative products like company FDs and insurance. What can be done to get them to re-focus on mutual funds?

This is currently a function of regulatory arbitrage. Once the regulatory arbitrage disappears, MFs will be back on an even keel.

It is so surprising that retail investors are lapping up company FDs. When MFs invested last year in secured papers of the same companies, the fund managers were crucified by the investors when interest payments were not on time. It is indeed an irony and beats all logic.

I am surprised at distributors hawking company FDs so aggressively. They need to do their due-diligence - 1 default will lead them losing their client trust and this has happened 8-10 years back.

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 have market penetration initiatives been impacted over 2009 and what can be done to enhance penetration into smaller towns in 2010?

Religare AMC situation has been slightly different in 2009 as compared to the average industry data. We have expanded our branch network to 60 cities and seen good flows from tier 2 and tier 3 cities. We intend to remain focused on these cities and increase our market share further.

WF: Platforms have been one of the big buzz words in 2009. We have seen the emergence of stock exchange platforms, the joint CAMS-Karvy advisor platform FINNET and we have an AMFI platform in the pipeline. In parallel, we have a number of super-distributor platforms meant for IFAs. In 3 years time, what role would platforms have carved out for themselves? Do you see a trend of IFAs gravitating towards platforms?

IFAs will gravitate towards platforms if it reduces their back-office work burden, provides technology support to his business and increases his visibility. I see this happening over the next 2-3 years. Platforms could command a 15-20% market share, 2-3 years down the line.

WF: What are your key messages for your distribution partners as we begin a new year?

Remain focused and understand the headwinds would be my message to the distributor community.

In India, as compared to other global economies, all our regulators are set-up to protect the interests of the small investors. Fees to be paid on advise, from clients and not manufacturer will be a reality across all financial products sooner than later. Therefore the faster the distributor goes through the painful period of changing his business model, the better will it be for them to gain more market share and make their business more sustainable over a longer period of time.

Think about this - Banks have now made it mandatory for all commission disclosures, so has SEBI for MFs. The Swarup Committee did the smartest thing of putting Insurance Commissions issues in the public forum for debate. While IRDA may resist, it is only a matter of time. I am sure at the ground level every retail investor is now asking his agent that are you being paid - 20-40% commission of my premium. The headwinds are clear.

We at Religare Mutual Fund remain committed to this business and the distributor community and would be more than happy helping them migrating to the new model.