Mutual funds in India need a Jan Dhan moment
One factor that clearly tilts the scales in favour of the life insurance industry is its communication strategy and positioning of products
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Never before in economic history would 15 million bank accounts have been opened on a single day. Never before has the Government of India organised a programme of such scale," Prime Minister Narendra Modi said on 28 August 2014, when the Pradhan Mantri Jan Dhan Yojana was launched. Twenty-one months later, in January 2016, the scheme reached all Indian households, according to official data, bringing 220 million additional families into the banking system. Can this ever be replicated in the Indian mutual fund industry?
I was reading a report in a pink newspaper, which stated that life insurance industry’s assets under management (AUM) have crossed 25 trillion in financial year 2015-16 (https://mybs.in/2TDiWED). In comparison, the mutual fund industry is just above the half-way mark, at 13.53 trillion, according to the Association of Mutual Funds of India, even though it has double the number of companies. There are 44 asset management companies and only 24 life insurers. Interestingly, both the industries had their genesis around the same time. The government-run Life Insurance Corporation of India (LIC) was incorporated in 1956, and Unit Trust of India (UTI) in 1964. The way the insurance industry has been able to outdo its mutual fund counterpart presents an interesting case study given the basic premise that a mutual fund product is far easier to sell than an insurance policy.
One factor that clearly tilts the scales in favour of the life insurance industry is its communication strategy and positioning of products. Despite having a superior performance track record, mutual funds have always scored low on acceptance in any personal finance survey. The life insurance industry has thrived mainly on creating an emotional need for saving, while mutual funds have gone on the rational route. Be it saving for emergencies, wealth creation, a good future for children, or a comfortable retirement, one will find a product revolving around an emotional need.
You also have to give them credit for appropriate positioning of the product. Watch any television channel when a popular saas-bahu soap is on. One will find an emotionally appealing advertisement on child insurance plan. The idea is to convince the home maker, who will then pester her husband to buy an insurance product to secure the children’s future.
Insurance companies also have the liberty to bring in celebrities to endorse their products; as of today, mutual funds are not allowed to do this. Their advertisements tend to be dull, with the risk disclaimer eating away a good chunk of the time slot.
What can they do then? Well, rather than focussing on confusing scheme names like ABC Opportunities Fund or XYZ Focused Bluechip Fund, which don’t resonate with an investor’s emotional need, mutual funds can come out with plain vanilla funds like children education plan, retirement plan, wealth plan, or house purchase plan, which can connect well with an investor’s requirement.
Target date funds, with a set number of years and varying asset allocations that become conservative closer to the goal, can make goal-based planning simpler. Of course, a few mutual funds in the past have come out with such offerings but efforts to make them popular were half-hearted.
Goal-based products can also make investors stick for the long haul. An associate of mine invested 40,000 in a ‘child’ mutual fund in May 2004. It has grown to about 2.55 lakh in 12 years, generating an internal rate of return of 16.58%. But he doesn’t want to touch this money because it’s for his child’s higher education.
Following such a strategy will help mutual funds retain money for the long term, and investors, too, will avoid acting based on recent market movements.
The US market has already demonstrated how goal-linked mutual funds can become a major category. Retirement funds formed 43% of the total mutual fund industry in the US (according to the Investment Company Institute Fact Book 2014). Further, 23% of households that owned mutual funds in 2014, cited education as a financial goal for their fund investments. Of course, tax incentives play a major role in the success of these plans. The 401(k) plan (retirement schemes) could become successful only after tax breaks were given following the pension reforms in the 1980s.
In India, though the National Pension System (NPS) has been around for a while as a specific product for retirement planning, rigidity in the product structure and low distribution fees has ensured that its reach remains limited. Instead of coming out with another set of products, the government could notify retirement mutual funds as a way of saving for retirement.
Once basic and easy-to-understand goal-based products (with target date features) are introduced, along with tax breaks, the Securities and Exchange Board of India (Sebi) can also jump in and utilise a new cadre of distributors to sell such simple funds, which have low chances of being mis-sold. Banks, too, can sell these simplified products to regular as well as Jan Dhan account holders. Since these products will have built-in asset allocation, their volatility will be far more contained, which will automatically ensure no mis-selling.
But until this happens, the fund industry can at least come up with simple products on its own. The newest kid on the block, Mahindra Mutual Fund, has launched schemes that investors can easily connect with. Their schemes have names like Bachat Yojana, Bal Vikas Yojana, and Kar Bachat Yojana.
The step is in the right direction, but only time will tell whether this will be the “Jan Dhan" moment for the mutual fund industry.
Gajendra Kothari, managing director and chief executive officer, Ética Wealth Management.
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