Barely six months into the ‘no-entry load’ era for the mutual fund industry, the sector is witnessing a huge tectonic shift with distributors shying away from the industry and opting to sell more lucrative products under the insurance and post office fold. The trend could inflict serious damage to the long-term prospects of the mutual fund industry and reduce the participation of retail investors to whom the industry was intended to principally cater to, say industry participants.

Several mutual fund distributors, who spoke to Finance Chronicle, said they are finding it hard to deny themselves the lure of selling other products, mainly unit-linked insurance policies (Ulips), which have the potential to provide commission income of up to 40 per cent of the first year premium. All that is required is having a parallel licence to sell insurance products.

The ushering in of the era of no-entry load from August 1, 2009, meant that instead of taking a commission from the investors’ money, distributors would be required to move over to a fee-based structure negotiated with the investor.

While Devesh Bansal, president, Northern India Mutual Fund Advisors' Association, Pawan Gupta, president, National Savings Agents Welfare Association, V K Anand, agency manager for LIC Mutual Fund and Surinder Singh, an independent financial adviser, have already shifted focus, die-hard mutual fund seller Tamanna Varma, proprietor, Vinayaka Investments, is holding on, unable to decide whether to jump over to the other side.

“I have never sold insurance earlier and would personally like to avoid it. As of now, I am focused on mutual funds. But it is becoming difficult. If I am forced because of falling income from mutual fund sales, I will be open to the idea (of selling insurance),” says Varma.

Varma, who channelises money into mutual fund schemes only from high net worth individuals, is critical at the haste at which the Securities and Exchange Board of India brought about the no-load structure after a notice period of barely a couple of weeks. “If at all it (the moving over to the entry load ban) had to be brought about, it should have had a longer transition period. It is neither desirable, not feasible to have an effective advisory model overnight. The industry was not prepared for it,” she says.

The average ticket size of investments of the few select clients that Varma has is between Rs 5-10 lakh . “I deal with only few, select clients spread across places like Delhi, Mumbai and Moradabad. I have a select client base each with portfolio size of between Rs 50 lakh and Rs 1 crore. I am getting my clients to invest, but income obviously has come down,” she says.

“The retail investor is not willing to pay a fee. It is difficult to change their mindset. This will seriously hamper the industry,” says Devesh Bansal.

Bansal, who operates out of Chandigarh, said that barely a handful of active mutual fund distributors are left in his city and the contiguous area of Mohali, “Income has come down. So, retail mutual fund investors cannot be our focus. We had nearly 200 distributors of mutual funds in Chandigarh/Mohali region prior to August 1. Barely 25-30 left now. Most have gone on to selling insurance or post office deposits,” he said.

“There is definitely a slowdown in retail participation. I see it as a short-term disturbance. The industry is passing through a period of adjustment. It will take a little more time to settle down to the new realities,” A P Kurian, chairman, Amfi, says.

The mutual fund industry has been witnessing a steady fall in inflows for successive months since August last year, barring January 2010, when there was a slight increase in inflow in equity schemes.

Financial advisers, V K Anand and Surinder Singh, who together used to help bring in large sums into mutual fund schemes till recently, have seen a dramatic change in their portfolio mix.

“Before August 1, I used to get Rs 50-60 lakh new business every month into mutual funds on an average from retail individuals. It has now come down to Rs 5-6 lakh a month. What is the incentive for me to sell mutual funds if even my costs are not met? The 0.5 per cent commission paid by companies actually works out to 0.3 per cent after taking away service tax and income tax,” says Anand.

“Even the 10 per cent that I am selling in mutual funds is because I cannot say no to my earlier clients. I will not waste my time to scout for new clients. I am giving you time because you are a journalist. Maybe I wouldn’t have given you so much time if you had come to me as a first time mutual fund investor,” he said in a lighter vein.

Pawan Gupta, president, National Savings Agents Welfare Association, is also slowly giving up selling mutual funds. “Business is down 15 per cent compared with pre-August days. Distributors are not willing to put in the effort,” he said.

Surinder Singh, who has been selling mutual funds for the past 30 years, narrates a similar experience. “My son and I have almost stopped selling mutual funds. Between the two licences, we would generate new mutual fund business of Rs 4-5 crore a month earlier. It is now down by 90 per cent. This business is not worth it,” he says.