Imagining mutual fund industry five years from now

Every industry changes at the different moment of its existence. Sometimes the changes are fast, sometimes they are painfully slow. The Indian mutual fund industry too has gone through its share of transformations. Since the launch of the first mutual fund in India in the year 1964, it took 23 years for more companies to come out with mutual fund product. Nevertheless, in the last one decade, we are witnessing a stupendous change in the mutual fund industry.
 
The pro-active market regulator, SEBI has remained at the forefront of these changes. The recent implementation of rationalisation and categorisation by the mutual fund industry is one such change and is a major milestone for the industry, which will help investors select the right fund that suits their needs and risk appetite. It will also bring the much-required transparency in the fund’s investments.   
 
Going ahead, however, the pace of change will accelerate further. Few of them are already being in process of being implemented.
 
Disintermediation: As the technology gets more advanced and more and more data becomes available easily, the middle layers of distribution and service may become obsolete. Currently, direct investment do not form a major chunk of investment in the mutual fund, however, it is increasing. A few platforms that will use technology and charge less will exist that can be used by many investors to invest. Investors may hire advisors or use robo-advisors to get their asset allocation and investments right.
 
Fee Compression: Largescale disintermediation will lead to steep fall in the fee charged by mutual funds. We have already seen that fees charged by fund houses represented by expense ratio to a direct customer have come down drastically. The difference in the expense ratio between the direct and regular option of the fund is sometimes more than one per cent. Even SEBI is acting in the same direction and we may see a meaningful reduction in the expense ratio, going forward.
 
Artificial Intelligence: Wide application of machine learning, natural language processing, and advanced analytics will change the entire landscape of investing. It will prompt technology to replicate human function to a large extent, starting with mundane jobs to portfolio construction.