In 1995, the chief executive officers of some public sector and private sector mutual funds (MFs) came together to form the Association of Mutual Funds of India (AMF of India).
The purpose behind forming this association was to attract investors who could not think beyond property, gold or bank deposits or did not see anything beyond this. However, despite the strong performance of mutual funds for several decades thereafter, Indian investors largely ignored it. By the year 2014, mutual funds (MFs) represented less than 5 per cent of the financial assets of Indian households.
But fast forward to the year 2024, the situation has completely changed. Many, including the RBI governor, have recently raised concerns about mutual funds and the stock market, which are attracting a large number of Indian investors, leading to slowdown in bank deposit growth. The mutual fund industry has grown 6 times in the last decade and now accounts for 30% of bank deposits.
What has driven this growth? While the previous generation of investors focused primarily on keeping their savings completely safe and opted for conservative investment options like PPF and bank deposits, today’s youth wants higher returns on their investments. In India, investors are now looking for ‘something more’ in their savings to help them finance their lifestyle and achieve a range of life goals.
Over the last 2 decades, most equity funds have increased investor wealth by 15-20 times, which is about 4-5 times higher than the returns achieved by traditional investment options like bank deposits. This, coupled with the investor awareness campaign “Mutual Fund Sahi Hai”, ensured that more and more investors understood and became aware of this new asset class that they had ignored for so long.
However, mutual funds have so far reached only 5 crore investors, which is only about 3% of the population. Not even one in 10 bank account holders has invested in a mutual fund product so far. Moreover, two-thirds of the mutual fund assets under management (AUM) come from the top 15 cities, which indicates that mutual funds have a narrow reach and reach. The industry has got off to a strong start, but there is still a long way to go.
Jan Dhan Yojana benefited the banking system
When Prime Minister Narendra Modi announced the Jan Dhan account in his Independence Day speech in 2014, the banking industry must have seen it as a task imposed by the government. 10 years later, the banking system has benefited greatly from it. According to government data, there were 53.12 crore Jan Dhan account holders as of August 14, 2024, and a total of Rs 2.31 trillion (Rs 2.31 lakh crore) is deposited in these accounts.
The government’s Jan Dhan initiative worked to bring a new generation under the banking system, which was earlier away from the banking system. At the same time, with increasing income and savings, now a new generation of customers has been prepared, who are willing to spend more for advance loan and deposit products and they are showing their interest in buying more such products. A big boost to Jan Dhan accounts has come from the simplification of KYC norms, allowing millions of unbanked Indians to open a bank account for the first time in their lives.
JAM (Jan Dhan, Aadhaar and Mobile) has completely revolutionised the payment ecosystem in the country and has empowered financial inclusion like no other initiative. Similarly, the mutual fund industry needs a similar mass investment movement to reach the people who have been left out of the benefits of financialisation and wealth creation. This also requires constant and active engagement between the industry and the regulators.
To truly take mutual funds to every household, we need to reduce customer on-boarding costs such as RTA, CKYC and other charges and enable smaller ticket size investments for asset management company services. 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 follow some very basic (level 1) KYC? For higher ticket sizes, full KYC (level 2) can be completed.
Suresh Soni, CEO, Baroda BNP Paribas Asset Management Company
He further added that to grow stronger in this huge potential market, as an industry we need to ensure that we make investors more aware about liquid and debt funds and give them the right information about this category. So is it now the time for “liquid/debt fund sahi hai”?
Post the COVID-19 pandemic, Indian stock markets have seen a steady rise, attracting a large number of retail investors to equity mutual funds. Today equity and hybrid funds represent more than 2/3 of the industry AUM, while about a decade ago it was just 1/3. This is a welcome trend and it helps in wealth creation. However, depending completely on the ever-rising stock market to attract AUM is a huge risk.
A prolonged downturn in equity markets can have an adverse impact on mutual fund AUM growth. Hence, any investor’s portfolio requires a mix of different asset classes to deliver good risk adjusted returns and meet the equally important requirement of safety and liquidity.
Individual investors hold 88% of equity fund AUM but less than 12% of debt fund AUM. This shows that as far as debt funds are concerned, the MF industry offers some very interesting products like liquid funds which not only offer high safety, high liquidity but are also offering double the returns of bank deposits of 3% per annum. Sadly, this category of mutual funds continues to be dominated almost exclusively by corporate investors and retail investors are largely unaware of its benefits.
