How to Increase Awareness Regarding Investment among People in Remote Areas

It is a well-known fact that mutual funds are the go-to investment as they offer several benefits over any other investment vehicle.

Given benefits like diversification over multiple funds, access to debt funds and equity markets for small investors at low risk, one would think that the Indian population with 28% of the GDP recorded as gross domestic savings, would jump and race to invest their money in mutual funds.

This however is far from the prevalent reality. The PWC- 2013 reported that the numbers related to assets under management are immensely tilted towards the top 15 cities of the country. Mumbai, Chennai, Kolkata, Delhi and Bangalore contributed 75% of the total assets under management in the nation. These numbers may have improved over the years but penetration into the remote communities of India still lag despite the efforts towards financial inclusion.

This challenge however does not only persist in the mutual funds sector but is also an indicator of a much deeper issue rife within the structure of the Indian financial sector.

More than half of the Indian population did not have access to any form of banking services till as late as 2013. In fact, according to the 2012 World Bank Global Financial Index, the quantity of accounts associated to banks and other financial institutes was restricted to a low percentage of 35.23% of the total population. Even a country like Bangladesh that is a laggard economically is better positioned in terms of financial inclusion.

There are many factors which could possibly explain this variation like laws, regulations, governance, technological issues, supply side and demand side factors.

India is a country which struggles with all these issues. Hence, it boils down to increasing awareness and motivate the public to invest.

According to the fund houses, this under penetration of financial inclusion stems because:

1) The typical investor is not adequately informed about mutual fund product.

2) Informed investors are significantly greater in number in metropolitan cities.

3) Investors in the top 15 cities are way more informed than those residing in other cities.

4) Lack of customer information is the biggest hurdle in selling mutual fund products.

5) Quality and well-trained distributors contribute to a major challenge in selling mutual funds.

6) Current permissible limit on incentives poses as a major hurdle in recruiting good distributors.

7) Penetration would increase if distribution were vastly done through banks and their branches.

8) Facility of investing in mutual funds through ATM machine would boost the investment.

9) Distribution through post office would increase investment in mutual funds.

10) Agents selling non-mutual fund products as well as mutual fund products often lead to mutual funds losing the attention of the potential investor.

11) Cost of entering new regions with no existing mutual funds can be an obstacle.

12) KYC / Paperwork / restrictions on cash transaction can be a huge hassle.

To add to these, the fluctuating inflation and the experienced slow-down in the economy have also contributed to the problem.

However, there remains a large untapped market waiting to be explored and serviced. Some areas like Himachal Pradesh, Haryana and Manipur are already experiencing high growth rates.

This growth can be catalysed significantly if the proper areas are targeted. While there is universal acknowledgement that good talent is hard to find and AMCs face difficulty in recruiting the right distributors and agents in small towns and villages, they should take note of the large pool of Business Correspondents which number more than 195,000 as of recently.

This could be an asset waiting to be commissioned to resolve the issue of shortage of mutual fund agents in the nation. Also, bank channels are currently being highly underutilized. With most districts adapted to high banking penetration as far as basic households are concerned, these should be focused on for further growth.

With new banking licenses rolled out by RBI in 2014, new possibilities for strengthening of banks’ distribution networks became a reality. AMCs should therefore start to focus on their bank distribution channels and build robust information systems to take advantage of these untapped opportunities.

The deduction of “trail commission” from investors makes mutual funds less attractive. A possibility may be explored about the sharing of the “trail commission” between fund houses and investors – this would increase the attractiveness of mutual funds vis-a-vis other products.

However, the exact mechanics of such a change should consider the changing attitude of investors with different mutual fund returns.

An area we have not looked into is the impact of advertisement and marketing costs on distribution. While fund houses did report these figures, with the 54 exceptions of a few fund houses, marketing and advertising costs were only available at the central level for the fund as a whole.

It is generally held that “You can’t manage what you don’t measure”. By not having these costs allocated or measured at a micro level, fund houses would not know which areas to increase their marketing and advertising efforts, which could lead to inefficient marketing.

It may be helpful to explore the challenges faced by India Post’s 2001 pilot programme for the sale of mutual funds through post offices in major cities. Such a study could investigate whether such a roll out across villages would be economically feasible and meaningful. Finally, analysis of sales data of agents would allow future research to be much more precise in determining the impact of agents on retail sales and how to improve it.

By joining hands together as investors, professionals, companies, regulators and lastly as Indians, we can overcome this dearth in awareness and together become a strong nation of informed investors.