The increasing financialization of investment assets of the average household, since demonetization, is being widely discussed in social and media circles, and mutual funds have been a significant vehicle in this phenomenon.
A thrust from the Securities and Exchange Board of India (Sebi) is also there, in the form of bifurcation of T15 (top 15) and B15 (beyond the top 15) and some nominal incentives for B15 business. However, of late, the debate on mutual funds has been centred around the adviser versus distributor or fee versus commission model. While there is merit and propriety in saying that an entity or individual should follow only one model, let’s focus on the bigger picture. It is about the spread of awareness about market-driven investments, vis-à-vis physical or contractual return avenues, through the vehicle of mutual funds. This is challenging, given the high levels of financial illiteracy even in urban areas.
Having said that, if it has to be done, it has to be done through mutual funds because direct exposure to equity or bonds can be an even bigger challenge for the un-initiated investor.
The numbers on asset growth are there: as per the Association of Mutual Funds of India (Amfi), assets under management (AUM) from B15, as of end-December 2017, were Rs4.2 trillion, up from Rs2.86 trillion as of end-December 2016. The report further says, B15 locations have a better balance of equity and non-equity assets—60% of the assets from B15 locations are in equity schemes. Equity-oriented schemes accounted for 36% of the T15 assets. Another driver for the increase in B15 AUM, apart from what is mentioned earlier, has been the easing of returns from traditional contractual-return products and the booming equity market.
On a different note, a paper by the Reserve Bank of India (RBI) says: “The significant increase in inflows into mutual funds and their subsequent deployment is altering the scope of disintermediation in India”, which is an objective of the RBI. The paper further says, “...plenty of scope for potential movement of borrowers away from banks to mutual funds.” So the move is welcome.
Let’s move from ‘India’ to ‘Bharat’, that is, from urban or semi-urban to rural areas. From the top 15 cities, to not just the leading B15 cities, but beyond. This is where the crux of the matter is, as well as the challenge.
The first brush of financialization of investments of the average middle class or lower middle class first-time investors, moving from physical to the financial, is with the post office or a public sector bank (they have branches at remote locations) or the Life Insurance Corporation of India (LIC, which is distinct from the private sector insurers, and enjoys an implied government patronage).
The first step is moving the savings from town or villages, in the form of investment in physical assets like land or gold, to the formal system through bank deposits or an insurance policy. The next step is moving from contractual-return investments like bank deposits to market-driven investments like equity or debt.
The stepping stone to market-driven investments in beyond B15 (BB15) locations has to be mutual funds, as these are managed by professionals and they offer small ticket sizes for investments. But what is the incentive for mutual funds to spread business in remote locations? The current incentive for promoting business in B15 areas is being allowed to charge a little higher expense, provided they do the stipulated minimum volume of business from B15. However, given that the expenses are anyway within the stipulated limits in most cases, it does not mean much in practical terms.
The advertisement campaign of ‘Mutual Funds Sahi Hai’, initiated subsequent to bifurcation of the corpus generated from charging 2 basis points to fund expenses, between Amfi and asset management companies (AMCs), has helped. The ‘language’ of the campaign, being simple and on the ground, has been digested well by the target audience. (One basis point is one-hundredth of a percentage point).
More is required. There is need for touchpoints for the masses, where someone will explain and sensitize people on what are market-related investments. There are investor awareness programmes organized by mutual funds, but there is need for something more institutionalized, more regular and more visible—like a bank branch or an LIC office, with dedicated resources. It has to be done with a non-commercial approach, that is, not for immediate conversion of the query to investment but with a long-term view of spreading awareness. If it has to be institutionalized in terms of the content and communication, Amfi has to take the lead. With the corpus generated from bifurcation of the 2 basis points of expenses charged, Amfi has the leeway to at least start a pilot project in certain remote locations.
Mutual funds on their part, as an allocation of the marketing budget, can distribute one free unit of a fund of their choice. They can also take up a few pilot locations for distribution of one free unit to bank account holders, to give a flavour of how market-driven investments work, preferably at a location where Amfi is setting up a representative office.
The long-term benefit of the concerted effort should be cost-effective.
Joydeep Sen is founder, wiseinvestor.in