Mumbai: Heavy dependence on third-party distributors is hurdling the growth of India’s mutual fund industry, which needs to reach out directly to potential investors such as the fast-expanding middle-income group, says a study by research firm IIMS Dataworks.
Investors need to be educated about the benefits of investing in mutual funds for the sector to match the growth of the life insurance industry, the study says.
India has only about 5.3 million investors in mutual funds, a fraction of the 190 million wage earners who have some form of savings such as post office and bank deposits and life insurance policies, IIMS Dataworks says.
These mutual-fund investors are serviced by 60,000-odd independent financial advisers, or IFAs, who function as agents. Life insurance firms have about two million agents.
“What’s missing is an active industry-level effort to invest in market growth strategies,” said Christopher Butel, chairman of Dataworks. “For the moment, the task of doing so has, by default, been outsourced to IFAs who have only weak incentives to proactively grow the market.”
The report says that about 80% of the independent distributors also sell other financial products such as life insurance and postal savings and broking and portfolio management services.
Some 34 fund houses in India had Rs5.44 trillion of assets under management in August. The figure declined from Rs5.48 trillion in January.
A downturn in the stock markets has caused inflows into new fund offers to shrink. After offering more than 45% returns for two consecutive years, the bellwether Sensex index has lost 26.5% since the beginning of this year.
Some mutual fund industry trackers challenge the premise that dependence on third-party distributors is crimping the industry’s growth.
“A shared distribution network is always more cost-effective,” says Dhirendra Kumar, chief executive of Value Research, an independent mutual funds research firm based in New Delhi, who adds that any exclusive distribution network restricts customer choice.
“What needs to be done is to make (buying) funds cheaper, make it profitable for people to invest in funds and greater financial awareness and education.” Kumar added.
Money managers such as ICICI-Prudential Asset Management Co. Ltd, the country’s third largest fund house in terms of assets under management, say they are focusing more on customer education even as they try to increase sales by tapping distribution networks such as banks.
ICICI-Prudential Asset chief executive Nimesh Shah says that a lot of handholding is required if a fund house wants to start selling through a new third-party distributor. “We need to educate and support them, sometimes with a person,” he said.
Shah’s company has nearly tripled its exclusive distribution outlets to 235 in the past couple of years even as it uses 30,000-odd independent agents.