Moneycontrol MF Summit: Rural markets, the new frontier for MFs

Moneycontrol MF Summit | Panel discussion from India to Bharat: Can mutual funds be successfully distributed in the hinterlands of the country?

Most Indians love to invest in physical assets, which includes, gold and real estate. People in rural India prefer investing in bank fixed deposits and chit funds.

At the Moneycontrol Mutual Fund Summit held on October 11, industry leaders dwelt on plans to scale the mutual fund industry to 20 crore unique investors from the current four crore. Experts from the mutual fund industry gathered on a panel to discuss what kind of inroads the mutual fund industry has made into the hinterlands of this country and how to go beyond.

Distributing mutual funds to Bharat 

Today 83 percent of the mutual funds AUM comes from the top 30 cities. So, it seems the wealth creation tool through mutual funds is limited to a few areas of this country.

Nilesh Shah, MD, Kotak Mahindra Asset Management Company said, "Mutual funds are open for all the investors who want to invest. We have no restriction, we don't differentiate between HNIs and a poor person. We are offering the same products, delivering the same returns and service to both segments of investors. But, the problem is whether people from B30 cities are interested in investing in mutual funds."

He added that the mutual fund industry is open for all to invest - when someone makes a mistake and realises it, and wants to return and make up, he must be forgiven and welcomed. For instance, we have seen 18 crore investors losing by investing in cryptos, 10 crore investors losing by investing in gaming, two crore investors losing in a particular ponzi scheme and seven crore investors who have traded in futures and options (F&O) and incurred losses. So, we are waiting for these investors to prefer investing in mutual funds and build wealth for the long term. We need a level playing field to show how mutual funds can outperform other risky investments.

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Is the entire country opting for mutual funds? 

As of today, B30 (Beyond 30) cities account for only 17 per cent of the total assets under management (AUM) of the mutual fund industry. This figure was 14 percent in 2018. So, just a three percent rise in this period. So, the hindrance to the mutual funds growth story is in the hinterland of this country. On this, D.P Singh, Deputy Managing Director and Chief Business Officer, SBI Funds Management said, "This three percent growth is a big number. The investment in the mutual fund journey has just started. People in B30 cities have started looking to invest in mutual funds."

He added organisations like SBI MF have reached 94 percent of the pincodes of the country with mutual funds distribution. At some of the places, it is just three to five applications and we have to grow it. We are the most democratised product because we don't differentiate between anybody, this is just a matter of time, it will grow. When the newer investors can be brought in with the right kind of intermediation and with the right kind of revenue, then it will grow much faster.

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Are mutual funds simple enough for Bharat?

Manish Kothari, Co-Founder, Z Funds said, "Mutual Funds are a simple product, made complex with disclaimers. Have disclaimers, but know that when you are investing you get what you are here for."

For instance, when you buy a large cap fund, you exactly know what you're getting into. How much is the cost? When do you want to take it out? How much will you get? No other product gives you that kind of simplicity, he said.

"If you go to rural India, a large part of rural savings is parked in five products, real estate, gold, bank deposits, insurance and chit funds," Kothari said. He added,  the commonality between all these products is not simplicity, but the physicality of these products - gold and real estate where the product is physical and in bank deposits, insurance or chit funds - where intermediaries are physical.

If we have to grow to 20 crore investors,  we need more physical presence of intermediaries across the length and breadth of this country, across the bottom 500 districts of the country.

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Role of investor education to take mutual funds to the hinterland 

"Investor education is important obviously because you're talking about a product which not many people still understand," said Hemant Rustagi, Wiseinvest Pvt. Ltd. He added, fresh SIPs are coming in from smaller towns and villages. When you come to a market linked product, you need to change the mindset and manage their expectations. Even though inflation is the biggest threat, for people, losing their capital is the biggest risk. He added that the only way you can tackle inflation is by investing in equity. The risk of volatility is what scares investors. So, we need to change their mindset. They need to invest with a long term view.

"Every time there was a rally, people would invest from every nook and corner. Investors are convinced with something exotic. But investors need to have patience while investing in mutual funds. We will see great results from here," Rustagi said.

Should rural investors invest in equity funds?

Risk profile of rural investors would be tilted towards debt funds because they're coming from the perspective of bank deposits. So, should AMCs pitch equity funds to investors to the hinterlands of the country. On this Rustagi said, "In equity mutual fund schemes, the risk is of volatility, that is what scares people. So, if you can minimise the impact of that volatility through a disciplined investment, there is nothing wrong in it." He added that investors in rural India would generally be looking at hybrid funds and equity funds to create wealth. They are already debt heavy with investments in bank deposits and other debt products.

"As long as we are selling with the right disclosures there is no problem. The question is not equity or debt, but does the customer understand any of these schemes? Simpler products are easier to sell," Kothari said.

Shah concluded with Bharat sone ka desh tab banega jab hum rural India mein equity bechenge.