What can bring new investors into mutual funds? This is the problem that has been exercising the Securities Exchange Board of India (SEBI) in recent months.
There is really no reason why the fortunes of the mutual fund industry must be pegged directly to the ups and downs of the Sensex. While a booming stock market can certainly help inflows into equity funds, there are quite a few other ways to rekindle investor interest in the category. Here are four suggestions.
To most investors the word mutual fund conjures up the image of the stock market. But mutual funds don't just manage equity products. They also manage liquid funds, short-term debt funds, fixed-maturity plans, gold exchange-traded funds and balanced funds. These are eminently suitable for retail investors but are currently favoured mainly by companies, banks and high net-worth investors.
Short-term debt funds are in fact the ideal entry point for a first-time investor into mutual funds. To an investor who is used to the safety of a bank deposit, the concept of an unpredictable market-linked return is hard to digest.
An awareness campaign on categories such as gold exchange-traded funds or liquid funds can help draw investors into mutual funds. Once used to them, investors may be willing to experiment with equity.
Advertise performance
Despite moribund equity markets and so on, equity funds with a 10-year track record have delivered 15 to 25 per cent returns over the period.
That's not bad. Considering that funds carry low traction costs and provide liquidity, there is no reason why retail investors should shy away from the category.
The problem seems to be one of awareness. The ban on entry loads, the annual cap on expenses and the SEBI's curbs on advertising have made sure that fund houses have made only minimal efforts at advertising and promoting their products.
Ads which highlight fund performance over long periods may work wonders in creating awareness. The SEBI must do its bit by allowing funds to advertise their returns over periods and formats of their choice. Only the accuracy of these claims needs to be regulated.
Tied to the above point is the fact that the industry needs to make its products more convenient to investors.
Many investors in mutual funds complain about the lack of regular updates on the status of their investments and lack of notifications on key events, such as dividend payments. They also cavil at the industry's practice of skimping on regular account statements. Even if this increases costs, funds may need to cater to these basic requirements to retain investors.
Investing in equities today is easy. Sign up for a trading portal and you can buy and sell stocks electronically through just one gateway, with payments being seamlessly debited from your bank account.
Investing in funds is tricky. You need to deal with multiple fund houses, registrars, application forms and account statements. Online transaction portals such as Fundsindia.com and Fundsupermart.com have simplified matters. A common electronic platform from the Association of Mutual Funds in India or the depositories where all the mutual fund units could be held and monitored would be welcome too.
Feet on the street
If it is keen on penetration, the industry needs to pay greater attention to investors who don't have internet access too. Recent Census data showed that only 3 per cent of households have an internet connection
Any marketer looking to expand penetration therefore needs to look beyond the Internet to market his products. While setting up their own branch offices across the country may not be viable (given expense limits), fund houses do need to get more feet on the street. Traditional avenues such as public sector banks, post offices and small savings agents may need to be explored more.
Getting agents interested in selling mutual funds will require a relook at incentives. The SEBI may consider tweaking the agent incentive structure — a higher trail commission and flexibility to fund houses to pay distributors out of their own pocket are both possibilities.
akrishnan@thehindu.co.in