Retail investor participation in smaller cities can be enhanced.

At a recent seminar on capital markets organised by the Federation of Indian Chambers of Commerce and Industry (FICCI) and the Securities and Exchange Board of India, Chairman U.K. Sinha said potential mutual funds markets lay in cities such as Patna and Guwahati and the MF industry should focus on these cities for growth.

All other speakers at the conference — be it senior bank executives, government officials or brokers — echoed what Sinha said -- that the time had come for retail investors to participate more actively in the capital markets, and that such potential buyers would only come from smaller cities and towns.

Despite a slowdown in the economy, India has the potential to hook more people to invest in mutual funds, given that current savings and investments rates are the highest in the world.

Awareness drive needed

To incentivise buyers of mutual funds from these smaller places, SEBI, through a circular dated September 13, announced sops for the mutual funds and asset management companies.

According to the circular, companies can charge an additional total expense ratio (TER) up to 30 basis points on daily net assets of any scheme, provided the new inflows from beyond the top 15 cities are at least 30 per cent of gross new inflows or 15 per cent of the average assets under management, whichever is higher.

To ensure that such investors are not short-term players and remain invested, SEBI has also specified that the additional TER so charged will be clawed back, if the scheme is redeemed within one year.

Currently, the top eight Indian cities dominate the penetration of mutual funds, accounting for almost three-fourth of the mutual fund ownership. This is when these cities contribute just one-third in the total of the country’s income pool.

So while SEBI has announced incentives for the companies, a large-scale education programme needs to be organised for the public in these smaller towns and cities. For this, the Association of Mutual Funds in India (AMFI) also needs to play a proactive role.

Developed nations have shown that such awareness programmes help.

In Germany, a massive education campaign by the German funds association, BVI, was launched in 2010 to bring household savings into the mutual funds network.

For this, an easy-to-understand Web site was created and linked to major social networks.

Similarly, after Korea declared 1977 as ‘insurance year’, it witnessed a 50 per cent jump in the growth of life insurance premium in a decade.

Selling Mutual funds

In India, investor education has intensified of late, with news channels running dedicated shows for mutual funds.

However, professional help is essential to ensure that investors are completely aware of their investment plans, because in India mutual funds are sold rather than bought. And this trend has been observed uniformly across all classes of investors and for all kinds of products.

There is also a need for many more professional financial planners, a trend in mature markets such as the US. The banking and insurance sectors could come in handy here.

With the right kind of assistance from these sectors, a more focused set of entrepreneurs can be created to do financial planning. Educated housewives and unemployed youth can be roped in with the right kind of training.

However, constant training, seminars, interactions of financial planners, etc, are an absolute must to make this exercise successful.

Relatively new methods to sell mutual funds — such as mobile alerts, SMSes, transacting through ATM cards, Internet banking, etc, — will be successful only if such trained manpower is able to communicate the details of these products.

Long-term investment

To attract people to invest in mutual funds, the nature of the funds also needs to be so devised that they act as long-term investment products which can compete with or complement the Public Provident Fund, which give assured returns and help tax planning by individuals.

International experience shows the mutual fund is largely a long-term investment instrument in the US, the UK, Australia and Canada. And it has been developed keeping such households in mind.

So, while the Canadian mutual fund industry is largely driven by registered retirement savings plan, in the US it is 401 K plans.

In Australia, again, the industry banks considerably on superannuation schemes.

According to 2012 Investment Company Factbook (Investment Company Institute is an association that advances the interests of mutual funds, their shareholders, directors, and advisers), in 2011, the total size of mutual fund assets worldwide was to the tune of $23.8 trillion.

Of this, 49 per cent ($11.6 trillion) came from the US alone, 30 per cent from Europe and 21 per cent from the rest of the world. US households use equity, bond and hybrid mutual funds for both long-term investments and cash management as these products offer both liquidity and are competitive.

Globalisation spur

The 1990s saw a tremendous growth in the mutual funds market across the world. This was particularly true for the US, where the total net assets of MFs grew at an annual average growth rate of 22.4 per cent between 1992 and 1998. EU nations also experienced double-digit growth in this period.

The growth was driven by increasing globalisation of finance, entry of large multinational financial groups in several countries and favourable demographic structures with growing middle-income class.

Further, the operational transparency that MFs offered relative to other financial institutions, such as banks, thrifts, insurance companies and pension funds, also led to their increased popularity amongst households.

Developed countries are also encouraging mutual funds to lessen their dependence on social security schemes.

In India too, with most jobs, including those with government, getting out of pension network (even now, some State governments don’t release pension in time), mutual funds can play an important role as long-term products, provided they are designed well.

(Sangeeta Singh is principal economist and Nandita Jain a senior economist at Nathan Economic Consulting India.)

(This article was published on November 16, 2012)
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