By Suresh Soni, CEO, Baroda BNP Paribas AMC
When, in 1995, the Chief Executive Officers of a few public and private sector mutual funds (MFs) came together to form the Association of Mutual Funds of India, the industry had aspiration to attract attention of Indian citizens who had not looked beyond property, gold or bank deposits. For many decades thereafter, however, despite strong investment performance, Indian investors pretty much ignored Mutual funds, and by 2014, the Mutual Funds still represented less than 5% of households’ financial assets.
Fast forward to 2024, the situation has come a full circle. Many commentators including RBI Governor recently expressed concerns about Mutual funds and shares soaking up Indians savings leading to slower deposit growth for banks. Over the last decade, Mutual fund industry has grown 6x and now represents over 30% of Bank deposits from just around 10% of Bank deposits in 2014.
What has really led to this growth? While the previous generation of investors focused primarily on capital preservation and chose conservative investment options like PPF and bank deposits, today’s youth aspires for more. In an aspirational India, investors are now looking for ‘kuch zyada’ on their pot of savings to help finance their lifestyle and meet their life goals. Over time, the Mutual Fund industry has created a strong track record of investment performance, and the results were for everyone to see. Over the last two decades, most equity funds have grown investor wealth by 15-20 times, far higher than around 4-5 times that it would have achieved in a traditional option like bank deposit. This coupled with the investor awareness campaign:-“Mutual Fund Sahi Hai”, ensured that more and more investors became aware about this new asset class that they hitherto had ignored. Investment performance and rising investor awareness have been critical factors in the growth of the industry.
While the recent growth appears impressive, Mutual funds have so far been able to reach only 5 crore investors, i.e. just about 3% of population. So far not even one in ten bank account holders has invested in a mutual fund product. Though Mutual fund assets have grown to 30% of Bank deposit, in most developed countries the mutual fund assets are a multiple of bank deposits. Also 2/3rd of Mutual fund AUM comes from top 15 cities, indicating a strong metro bias and a very low penetration in Bharat. The industry has started well, but has a long way to go. As happens with any product, the early adopters are typically well-off and well-informed people in larger cities. While this section has benefited from wealth creation by Mutual funds, we need to create wealth for masses, in smaller towns and for people with small investible surpluses. Therefore, there is an urgent need to expand the reach of Mutual funds.
When Prime Minister Narendra Modi announced the Jan Dhan accounts initiative in his speech on Independence Day in 2014, the banking industry must have looked at this as a government imposed chore. Ten years on, the benefits to the banking system are undeniable. According to the government's figures, as of August 14, 2024 there were 53.12 crore account holders with an aggregate deposit of Rs. 2.31 trillion in these accounts. The Jan Dhan movement brought in a whole new mass of unbanked individuals into the system and with the growing income and savings, whole new breed of customers to upsell and cross sell loan and deposit products. The key filip to the Jan Dhan Accounts came from the simplification of KYC norms allowing tens of million of unbanked Indians to open bank accounts - most for the first time in their lives.
The JAM (Jan Dhan, Aadhaar and Mobile) trinity has completely revolutionized the payment ecosystem in the country and powered financial inclusion, like no other initiative. Similarly, what the MF industry needs is a similar Jan Nivesh movement to make the fruits of financialization and wealth creation reach the underserved masses. This requires continued active engagement between industry and the regulators. Sensing the potential, the AMC industry has lowered the minimum investment amounts and now most MF investments can potentially start at 500 rupees and some even lower. However, most of these ticket sizes will be loss making proposition for AMCs. To truly take the MF to masses, we need to think how do we bring down the client on-boarding costs like RTA, CKYC and other charges and make the small tickets viable for the AMCs. Is it possible to consider a 2 step KYC process. For investments up to a certain ticket size (maybe 25,000 per investor) can we rely on Bank KYC or carry out some form of very basic (Level 1) KYC? For higher ticket sizes, the full KYC (Level 2) may be completed. Financialization of cash flows are being taken care of by the Jan Dhan Accounts - we need to think out of the box to direct the balance in these accounts towards meaningful long-term investment.
While the mutual funds have performed well in past also, but the investor participation is a lot better this time around. What has changed this time around is the popularity of simple investing concepts like SIP- Systematic Investment Plan, that match the investing cycle with usual income cycle of most people. A simple one-time mandate and every month there is an auto deduction from your bank account. This simple initiative makes investing a regular habit, elongates holding periods and finally leads to better investor experience. The industry needs to continue working on popularizing SIP, easing investor on-boarding and lowering threshold for investment to help achieve wider participation.
Post-pandemic, the Indian stock markets have seen a sustained bull run attracting many retail investors to the equity MF fold. Today equity and hybrid funds represent over 2/3rd of industry AUM compared to just 1/3rd about a decade back. This is a welcome trend and helps in wealth creation journey. However, relying almost solely on a rising stock market to attract AUM is a huge risk. Markets, are and will remain cyclical. A prolonged downturn in equity markets can adversely affect MF AUM growth. Also, any investor’s portfolio requires a mix of different asset classes to deliver optimal risk adjusted returns and meet the equally important need of safety and liquidity too.
Individual investors account for 88% of equity fund AUM, but less than 12% of Debt fund AUM. It’s clear that in so far as debt funds are concerned, we as an industry have not been able to take this story to the average Indian saver. Relying almost solely on a rising stock market to attract AUM is a huge risk for the investors as well as AMC industry. Equity markets are and will remain cyclical. Investors require a mix of different asset classes to achieve optimal risk adjusted returns and meet the important need of safety and liquidity too. Mutual fund industry offers some very interesting liquidity products like liquid funds which not only offer high safety, high liquidity but also nearly double the saving bank returns of 3% pa. Sadly this segment of funds has almost exclusively remained dominated by corporate investors and retail investors have remained largely unaware about the benefit of these funds.
To crack this huge potential market, we as an industry, need to ensure that we make investors more aware about liquid and debt funds and create an awareness about this category. This requires more nuanced communication highlighting “Liquid/Debt Fund Sahi hai”
To sum up, a rising investor interest in capital markets and Mutual funds is a huge positive and helps in making both our investors and capital markets “Atmanirbhar”. While we have seen significant growth on a small base, we need to take Mutual funds to masses and beyond the larger cities. And to achieve this goal, the MF industry would need to innovate in its processes as it seeks to introduce the newly banked millions to mutal fund investments and create a Jan Nivesh moment for the vast majority of the newly banked Indians.
Source: RBI.org.in & AMFIIndia.com
Disclaimers:
The views and investment tips expressed by experts are their own and are meant for informational purposes only and should not be construed as investment advice. Investors should check with their financial advisors before taking any investment decisions.
The material contained herein has been obtained from publicly available information, internally developed data and other sources believed to be reliable, but Baroda BNP Paribas Asset Management India Private Limited (AMC) makes no representation that it is accurate or complete. The AMC has no obligation to tell the recipient when opinions or information given herein change. It has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. This information is meant for general reading purposes only and is not meant to serve as a professional guide for the readers. Except for the historical information contained herein, statements in this publication, which contain words or phrases such as 'will', 'would', etc., and similar expressions or variations of such expressions may constitute 'forward-looking statements'. These forward-looking statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially from those suggested by the forward-looking statements. The AMC undertakes no obligation to update forward-looking statements to reflect events or circumstances after the date thereof. Words like believe/belief are independent perception of the Fund Manager and do not construe as opinion or advise. This information is not intended to be an offer to sell or a solicitation for the purchase or sale of any financial product or instrument. The information should not be construed as investment advice and investors are requested to consult their investment advisor and arrive at an informed investment decision before making any investments. The Trustee, AMC, Mutual Fund, their directors, officers or their employees shall not be liable in any way for any direct, indirect, special, incidental, consequential, punitive or exemplary damages arising out of the information contained in this document.
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