Favourable demographics, rising income levels and a burgeoning affluent middle class have provided a strong customer base for the industry. We have seen investors moving towards evolved financial assets from passive ones. Over the last two years, the industry AUM (assets under management) has grown to 23% of bank deposits from 10%. The government’s push towards financialisation of savings through various initiatives as well as Mutual Fund Sahi Hai campaign by Amfi (Association of Mutual Funds of India) has led to this impressive growth. The growth can also be attributed to evolved products, digitalisation and ease of doing transactions.
However, there is a lot of untapped potential across the country as awareness about MF catering to different financial goals is still low.
How secular has this growth been in terms of investors subscribing to a variety of MF schemes? Equity schemes seem to be a favourite with retail investors.
MFs offer a variety of products across equity and debt asset classes for all types of investors. Generally, institutional and HNI (high net-worth) investors partake in a complete bouquet of products based on their needs. However, retail investors’ portfolios have been skewed towards equity-oriented funds. This can be because of lack of understanding of debt markets and slower push of debt products by distributors as well as AMCs (asset management companies).
In your experience, how diversified are investor portfolios in terms of scheme-wise exposure?
Investor concentration in one asset class and within one scheme is a major issue. Over 80% of our investors have their investments in one of the schemes and over 90% have investments in only one asset class. This would more or less be the industry trend. There is a dire need to offer investors multiple asset classes or products, and educate them to look at MFs as complete solutions to all their needs.
How can advisors and distributors address the issue of retail investor concentration in the equity asset class and within that in a handful of schemes?
Distributors need to look at increasing investors’ wallet share. In the current scenario, we see that distributors tend to focus on getting 15-20% of investors’ wallet share, but we believe there is a potential to increase it to 50-60%. This will also help them offset the impact of lower brokerage rates in line with the recent Sebi (Securities and Exchange Board of India) guidelines.
We now need to shift focus and highlight the benefits of other categories such as short-term debt for liquidity management and closed-end schemes such as fixed maturity plans (FMPs) for investors looking at avenues to avoid volatility and earn better tax-adjusted returns. These efforts will help us increase the participation of retail investors across asset classes and categories.
If MFs can cater to various financial needs of an individual, why does the focus remain on using them for long-term wealth creation? Does the marketing commentary need to change?
Yes, the communication needs to change as whatever the investment horizon, there is an MF scheme available for you. The long-term communication gets highlighted due to the focus on investing for needs such as retirement, and equity funds give the convenience to invest as per your need. Short- and medium-term needs are also well-served through funds and are the other side of the coin which need to be communicated more often.
What are the top three financial needs that can be catered to by different types of mutual funds?
For short-term requirements, such as saving for a rainy day, investors can look at liquid, ultra-short or money market funds. For medium-term goals, short/medium-term debt and debt hybrid funds can provide investors the opportunity to earn tax-efficient returns. For long-term goals, they can look at FMPs or long-term debt and equity-oriented funds, depending on their risk appetite.
With a wide range of product offerings and facilities such as SIP and SWP, mutual funds can serve as a go-to solution for all financial needs.
Though SWP and SIP have been talked about repeatedly, one still sees a marketing push for a single product. Why?
Yes, we need to change the approach to have wider participation and that can be possible when we shift from products to solutions. We need to educate investors about SIP and SWP as investment tools to meet their varied financial goals. However, more emphasis needs to be put on highlighting the benefits of SWP as it is still in a very nascent stage. SWP is a tax-efficient mode of getting regular cash flow along with capital appreciation on the balance investments. Product comes as a second layer wherein investors need to choose a suitable one based on their risk appetite and investment horizon for which they opt for SIP or SWP.
Why is the industry slow to talk about risk? We hear disproportionately about returns.
We have always highlighted the risk factors associated with investments in different asset classes and the factors leading to market volatility. While past performance is shown as a reference to investors, it is always accompanied with appropriate disclosures with respect to associated risk and market volatility. In all our communications, our endeavour is to highlight all possible risk associated with investment in the said asset class or scheme.
In his over two-decade stint at SBI Funds Management Pvt. Ltd, executive director and chief marketing officer D.P. Singh has seen the mutual fund industry evolve over the years.