A simpler and smoother on-boarding process can be a game changer. One of the key things in a growing economy like ours is to make optimum use of scarce capital, and improve investment efficiency. Mutual fund is one such investment option doing just that. Over the past couple of years, domestic institutional investors (DIIs), which include mutual funds, have emerged as a strong contender to foreign institutional investors (FIIs), which traditionally used to dictate the tone of our equity markets. DIIs have invested Rs70,400 crore in the past 2 years ended September 2016, compared with Rs82,700 crore by FIIs (according to data from National Securities Depository Ltd and the National Stock Exchange).
Over the years, the mutual fund industry has grown remarkably, balancing an asset base of Rs16 trillion due to its high disclosure standards, and a commendable track record. Investors also derive comfort from the fact that the industry is well-regulated and that their hard-earned money is well-invested by subject matter experts. Recently, U.K. Sinha, chairman, Securities and Exchange Board of India (Sebi), acknowledged that the industry has delivered good investor experience as 90% of the schemes outperformed their benchmark indices over various time periods.
The industry has been successful in improving the share of retail in total assets under management (AUM) from 43% in March 2009 to 51% in March 2016. Participation of retail investors in equities via mutual funds has risen, with 5.9 million folios added in financial year (FY) 2016, of which 5.45 million were retail folios (according to data from Association of Mutual Funds of India). Nearly Rs3,200 crore finds its way into the capital markets through systematic investment plans (SIPs).
One of the key impediments to the growth of the mutual fund industry, and which has been prominently spoken about, has been the low level of awareness among investors. However, over the past couple of years, the relentless effort and the significant time invested by Sebi, asset management companies, distributors and the media in spreading awareness, have helped retail investors become familiar with the benefits of investing through mutual funds. Increased financial awareness will, in turn, be further instrumental in driving higher retail demand for mutual fund products. But even today, the pace of new investors investing is extremely low, with more than 80% of fresh investments being made by existing investors.
While digitisation is transforming this sector by enhancing distribution and investor reach, the real experience for the customers will become smooth only if they are able to buy mutual funds in a few clicks. The ease of buying, and the entire experience associated with online shopping, has enticed the busy millennials to e-commerce portals. Now, let’s suppose that there was a complicated registration-cum-verification process, wherein one had to wait for a couple of days before placing an order. Do you think the e-commerce portals would be enticing enough? The answer would probably be ‘No’, especially for those buyers who do not intend to use it regularly. Likewise, in order to offer a smooth buying experience for mutual fund investors, one of the small things that will have a big impact is avoiding duplication of KYC (know your customer) and making it easier for investors to invest in mutual funds. KYC norms are a customer-identification process wherein information about the account-opening customer is obtained. The objective in collecting this information is to enable the financial institution like a bank or an asset management company or insurance company to have positive identification of its customers and prevent fraudulent activities like money laundering.
Investments into mutual funds are made via bank accounts of individuals. Hence, a bank-enabled system of KYC checks, which is also used by insurance companies, should suffice for mutual fund investments, apart from the basic check that asset management companies are conducting. In case of insurance, a customer can approach any intermediary registered with the Reserve Bank of India or Sebi and submit the application form, photo and banking confirmation certificate (in lieu of KYC) to buy an insurance policy. The process is simple and avoids duplication.
To summarise, a simplified and smooth on-boarding process for investors will be a key enabler for the growth of the mutual fund industry. This can act as a significant game changer for the industry and will result in in manifold increase in retail folios.
Nimesh Shah is the managing director and chief executive officer of ICICI Prudential Asset Management Co. Ltd.