The Hindu Business Line : Widening investor base a litmus test

THE retail-vs-wholesale debate never seems to end in the realm of mutual funds. It keeps investors' emotions on a high, fund men on tenterhooks and the media on vigil.

The debate is based on the premise that a very small number of institutional investors accounts for the biggest chunk of the MF industry's total asset base. The multitude of retail investors does not add up to much in terms of their contribution on this front.

Winning over the retail participant, however, remains the litmus test for fund houses. Ordinary investors are probably the most sensitive of the lot, the first to run away from the market when trouble breaks out. Retail money can be quite `sticky' at times; the average investor may not always be inclined to follow a quick entry-and-exit strategy. After all, following such a strategy blindly will only add to his costs.

Are funds doing enough to retain such medium- and long-term money? That is a question each player must answer.

A reference to a couple of important issues may not be out of place here; in fact, these can help them form an opinion. One, the average investor seems to be rather underexposed to mutual funds. The bulk of his savings is still probably held in the form of bank or post office deposits as well as conventional fixed-income options such as Relief Bonds. Two, there will be enough scope for funds to widen their base only if they look beyond the urban centres. Rural India in itself may not seem to be a very tempting proposition. However, the potential is massive if one considers the nature and level of rural/semi-rural income.

Are funds capable of tapping this potential with the infrastructure on hand? The answer is not too far away. Remember, funds typically depend on distributors for mobilising money, and the large distributors are probably not prepared to look at the retail heartland. One does not think that large MNC banks, which are otherwise major distributors, will activate such investments.

The responsibility, therefore, is with the small intermediaries, possibly the ones who have signed up with the big boys in the business. Funds, however, are likely to suggest that their efforts to tap the really small accounts will not be cost effective. In an ideal situation, there is a need to direct a critical portion of these savings towards equity funds. It is often pointed out that equity funds are just the right vehicles for long-term savings, and systematic allocations to these could well bring in good returns over time.

A number of competing growth schemes is currently in the market and investors will have to choose the best of them on the basis of past performance and other parameters. Distributors will obviously have to guide them in this matter. Their clients need to work out an asset allocation strategy based on their risk profile.

Feedback may be sent to blcal@vsnl.net

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