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Regulatory changes are reshaping Indian mutual fund industry

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The removal of the entry load, parity across fund schemes, and restrictions in launching schemes mean the Indian mutual fund landscape has radically changed for stakeholders, according to a report by Celent.

The report, titled The Evolution of the Indian Mutual Funds Landscape: Regulation and Technology, says the removal of entry load has an adverse impact on the distribution and sales of funds in the retail segment.

Many distributors are expected to abandon selling mutual funds and focus on distributing insurance products or other fixed deposit products. To keep the distributors in business, fund houses will have to offer compensation from their own pockets.

This increased expense, lack of organised distribution channels, and decline in profitability may force some smaller players to quit the business and could result in industry consolidation, says Celent.

As a result, direct sales will make significant headway, mostly in the urban areas. Although direct sales only account for ten per cent of mutual funds sold in the top eight cities, they are likely to grow significantly by 2012. Independent financial advisers in semi-urban areas will be affected the most by this change in regulation.

The report says the role of distributors is likely to evolve. Now that the upfront commission will be determined, to a great extent, by the investor through negotiation with the distributor, investors will pay according to the level of service from the distributor.

Celent says distributors must focus on providing value-added and customised advisory services to cater to individual needs as well as the risk appetite of each investor. This not only pertains to advisory service for selling of mutual funds, but can be enhanced if distributors take an umbrella approach of maintaining a number of financial products under their portfolios.

"A major issue in Indian regulation is that financial products are regulated by various agencies. The insurance segment is monitored by IRDA, while the capital markets are controlled by SEBI," says Arin Ray, an analyst at Celent and co-author of the report. "While entry loads for mutual funds have been removed, they persist for the insurance firms; this results in an asymmetrical compensation structure for distributors of two products, hindering growth of mutual funds."

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