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The Mutual Fund Industry – Challenges And Opportunities Ahead

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The Mutual Fund Industry – Challenges And Opportunities Ahead
Sanjay Sapre - 30 January 2020

India’s mutual fund (MF) industry is currently experiencing a state of flux; while ample opportunities are knocking at the door, its equally concerned with the numerous challenges. However, as Albert Einstein states, ‘in the middle of difficulty lies opportunity’, the dictum is equally applicable to India’s mutual fund industry.

In 2018, the industry achieved an asset under management (AUM) of Rs. 25 trillion, which was within four years’ of hitting an AUM of Rs. 10 trillion.

However, this momentum jolted due to an array of events such as changing regulations, credit events and market volatility.

Nonetheless, as the market is moving towards correction (though at a slow pace), it’s important that the mutual fund industry focuses on the opportunities to ensure growth.

Here’s a look at the opportunities:

  1. Low mutual fund penetration

Source: AMFI, Financial websites

The above image indicates that despite the mutual fund industry registering a growth by over 20 per cent, it has only 2 crore investors. The numbers indicate the huge opportunity lying ahead. Industry leaders should focus on the B30 category cities (Tier 2 and 3), where nearly 90 per cent of India’s population resides and accounts for nearly 16 per cent. It’s time that smaller cities are brought under the wings of the industry.

  1. Rising middle class incomes

Middle class population in India has increased manifold. While 2005, one in 15 households were considered upper middle class, by 2018 it moved to one in five households. Today, India has 6.1 crore upper middle class households with disposable income. However, only 2 core choose to invest in mutual funds. How to tap in the remaining four crore? Probably, a new kind of marketing strategy can be the answer.

  1. Move to market-linked products

The chart below shows that there is movement from physical (gold, real estate) to financial assets. There is also a shift from traditional products to market-linked ones. Today, people realise that with rising expenses and declining interest rates, some level of market risk is a must, and this is best taken via products like mutual funds.

Source: RBI, NSE

  1. Millennials and retirees, two ends of the age spectrum

Millennials form a third of our population. According to a Deloitte report they contribute 70 per cent of total household income and account for 46 per cent of the workforce. There is no doubt that this segment provides a significant growth opportunity.

However, with the proportion of senior citizens increasing, India will have ~3.5 crore such individuals by 2030. With increasing life expectancy, lack of social security, rising medical expenses, senior citizens need solutions that not only beat inflation, but also support their golden years. The opportunity lies in offering accumulation solutions to millennials and decumulation solutions to seniors, both of, which mutual funds are well suited to do.

6. Fixed income products –

Mutual funds have played a key role in developing India’s debt market and have emerged as a key source of funding. However, despite the variety of fixed income products, investors have shown preference for equity funds vis-à-vis debt funds.

Keep Challenging Your Limits

While the financial industry is full of opportunities, we tend to limit our growth pointing to the challenges. However, it is all about the lens you wear.

We often say that regulations are ever changing, and hence is one of the biggest challenges for investors. A case in point is the recent reduction of Total Expense Ratio (TER), which has led to many concerns about the ongoing viability of certain business models.

However, to me, the biggest challenges are really three-fold. Here’s a look:

1. Shifting from awareness to education:

The industry spends two basis points or about Rs.500 crore per annum on investors’ education. 50 per cent of which was via AMFI’s pretty successful Mutual Funds Sahi Hai campaign. However, need of the hour is to transform mutual funds from a push to a pull product. For example, adding financial investment (mutual funds) in high-school or college curriculum. Such efforts will help in instilling the habit of early savings.

2. Need for more distributors:

There is a need for far more distributors and advisors to spread the message of investing in mutual funds far and wide. Indians are usually risk averse and lacks sound financial literacy, thus refrain from investing in market-linked products owing to a lack of understanding.

To address this, we need an army of well-trained financial advisors who can help educate investors about modern investment tools such as mutual funds.

3. Simplified operational processes

While the mutual fund industry has made significant strides in standardising processes, but few challenges still remain: such as a simplified KYC to make onboarding hassle-free; making Aadhar inter-changeable with PAN; and allowing investments on the basis of ‘Bank KYC’.

Key Enablers to Succeed

These challenges can be addressed given certain key enablers are in place.

  1. Products to solutions:

In most instances, we invest in mutual funds to meet a specific goal. To enable investors remain invested over the long-term, it is important to shift focus to goal tracking.

In the next few years, we hope to see emergence of investment solutions through bundled products or asset allocation strategies that will make investing within the mutual funds industry easier and enable investors achieve their goals.

  1. Leveraging Technology

Technology will be the biggest enabler for growth as mutual funds is already noticing increasing traction from online channels like fintech platforms, mobile apps and websites. Needless to say that it makes mutual fund investing, geography and time agnostic.

While recent growth may be challenged by a few factors, growth opportunities are abound. Winding up with the quote, “It’s not the load that breaks you, it’s the way you carry it.”

The author is the President, Franklin Templeton

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