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According to a survey of around 2,600 people in India by Nielsen, only nine per cent were found to have invested in mutual funds. I explored this topic in detail in my article Why Mutual Funds in India are not popular. I then thought let’s find out what other people who are in this field think about it. And I contacted some of whom I have interacted over on twitter or over mails and most of them agreed. We are thankful to them for taking out time from their busy schedule and penning their thoughts for. So read to find out why Monika Halan(editor of MintMoney of Livemint), Manoj Nagpal (Financial Services Professional), InvestMutual (Offer financial advisory services), FundsIndia (platform for investing in Mutual Funds in India) , M. Pattabiraman aka pattu (a professor at IIT-Madras who runs freefincal.com), Paresh from Saving-Ideas.com, BikramJit Singh (a Government doctor and from tradethetechnicals.com)

Monika Halan

Monika Halan (@monikahalan) Edits  Mint Money, the money&markets pages of Mint. Work on financial literacy and retail facing regulation

Mutual funds are very popular with the people who understand them. If you don’t educate the people on the benefit of a vaccination, who will line up to get a jab? It is not the job of the government to do this. Those running the business need to do the work to get people to correctly understand what mutual funds are and what works for each person. Having said that, the dice in India is loaded against the mutual fund industry since there are competing products offered by entities who function under very different regulatory regimes. Add to this the fact that investment rules mandate a purchase of government bonds by these competing products and the sort of tax breaks and looser regulatory environment seen in the life insurance and banking sectors is explained. But if funds are able to gather over Rs 22 trillion of equity funds, it proves that they can do business in very tough circumstances. Once the regulatory arbitrage is over, as it will be, we can expect funds to actually reach the people who need the product.

Manoj Nagpal

Manoj Nagpal (@NagpalManoj) is Financial Services Professional. He  is chief executive officer, Outlook Asia Capital, a consulting and wealth management firm.

Last year has been a year of introspection in the Indian MF industry. There are two reasons for this introspection. One the MF industry has always been seen as an industry of great potential given the long term performance track record, strong regulation, transparency and an ever burgeoning Indian middle class with a high savings rate. Secondly and most importantly, after a long time the MF industry saw a friendly regulator in SEBI who was willing to go the extra mile in removing the obstacles in the growth of the industry. The regulator prodded the industry into this self introspection almost forcing the industry to put their thinking caps on and come with the key challenges that the industry faces and the changes that the industry needs so as to become a preferred long term investment vehicle rather than its current form of being a short term investment vehicle that provides investment solutions primarily to institutions and HNIs based on tax arbitrage. It was high time that the MF industry finally realizes it potential, the regulator said.

This was an opportunity that the MF industry could not let go by and got to work on it seriously. The MF industry head honchos got into a room and brainstormed for hours on why Mutual Funds are not popular in India and came up with the below 5 point list:

(i) Government: Absence of level playing field/parity in terms of tax benefits, Direct Tax Code – Equitable Tax Treatment to Mutual Funds, Restrictive Investment Guidelines of major institutional investors, financial inclusion

(ii) Regulator: Reviewing structural issues like entry norms, obligations, protection of investors’ interest, etc.

(iii) Industry: Lack of appropriate products for attracting long term savings

(iv) Investor: Lack of awareness of the need to save for long term and tendency to procrastinate, insufficient incentives to save privately for the long term, limited stamina for long term savings, lack of education making them prone to mis-selling

(v) Distribution: Developing alternative distribution channels, distributors’ regulation, etc. SEBI has taken up this seriously and in a series of steps implemented regulations and proposals to solve the issues highlighted in this list by the mutual fund industry.

Now comes the key question – Will this change the investor investing preferences and make mutual fund the preferred vehicle. Is this the list that will be the panacea for the mutual fund industry.

The first time I had read this list what struck me was the effacing inconspicuous focus on the industry and the patronizing nature. To start with the assumption that the investor does not know what is good for him in the long term, clearly itself points to the fact that either this will be a long term process of changing investor habits and consequently the impact of the changes will be marginal or at best incremental in the short term. And the industry will need to invest in each of these steps with a five to ten year focus to see these steps translate into changes in investment habits of individuals.

There is another ludicrous thinking process that the basic assumption, of the investor not knowing what is good for him, being wrong. This camp thinks that the investor knows both his short and long term goals but he doesn’t find the mutual fund industry giving him solutions that have that certainty that will help him achieve his goals. I unfortunately fall into this second camp.

FundsIndia

FundsIndia.com is India’s first online platform created in 2008 specifically for mutual fund investing. 

The answer to the question of why mutual funds are not popular in India is often framed in the context of cultural attitudes – that Indians are risk averse, they don’t like non-guaranteed products, their love for gold, etc. I think the answer is simpler than that and less insurmountable. The reason I think this is because I believe that risk tolerance is a secular, non-culture-sensitive, fundamental personality trait. That is, if you take different sets of random samplings of people, you’ll find that the capacity and willingness to take risk (with investments) adhere to a normal (bell-curve) distribution. A few people willing to take extreme amounts of risk (gambling, for example), a few people willing to take no risk at all (savings account, deposits), and the majority in the middle willing to accept risk if there is a reasonable assurance of commensurate returns.

So, if I believe that to be the case, then how can I explain the lack of popularity of a risk-adjusted return vehicle like mutual funds in India? The answer to me is simple – it is simply a lack of awareness of mutual funds as a class of investment.

Over the past six years, I’ve spoken to hundreds, if not thousands, of investors across demographics (region, age, income, etc.). Every time I interact with a new set of people – be it at social gatherings or at corporate meetings or IT seminars – it is becoming increasingly clear to me. A vast segment of people who are prime candidates for investing in mutual funds are simply not aware of its existence and/or its role in their money management.

In high-school physics, when we learn Newtonian laws of motion, we are told to assume an imaginary world where friction does not exist. If, similarly, we can assume an imaginary India where everybody knows about mutual funds (or let’s just say mutual funds are as known to people as bank FDs), then the risk bell- curve will take over, and the bulging middle of people who want risk-adjusted returns will choose different classes of mutual funds naturally.

In the current situation, there is also a small segment of people who have been, at various times in the past, mis-sold NFOs and other inappropriate products by unscrupulous agents. This set of people, unfortunately, is misinformed about mutual funds, and are probably lost forever as customers of mutual funds. But thankfully, given that the overall investor base is currently a small percentage of the addressable audience (if you take the current FD investors in the country as the addressable audience for mutual funds, we are talking about 7 crore people, while retail investors in mutual funds are less than a crore), this ‘lost’ segment is not impactful to overall growth prospects for the industry.

So, we’re in a bad news/good news scenario – the bad news is that the industry is trying to sell a product that its target audience does not even know exists, and creating awareness is a hard problem to solve (especially with tightening margins). The good news, of course, is that there is a lot of room for growth, and this growth will happen almost automatically if people come to know about the benefits of this product. Yes, there is a problem, but at least it is not as insurmountable as reforming the cultural biases of an ancient people.

InvestMutual

invest-mutual.blogspot.in (@investmutual) Offer financial advisory services. Financial Planning / Investor awareness workshops and training modules for corporates. They are based Chennai 

  • Lack of awareness on how they really work
  • No education but awareness. And MF AMCs don’t make effort to really inform
  • I see efforts only to sell when the going is good
  • Though I see MFs actually becoming popular among informed investors
  • In my workshops on financial literacy the attendees eyes open up when I explain what funds r really meant for
  • So I would not say that they are not popular. I would put it as ” awareness” is less on how they work
  • If they are unpopular at all I feel that is due sub optimal return coxes by mis selling and earlier NFO s

M. Pattabiraman aka pattu of freefincal.com

M. Pattabiraman  is a physicist working at IIT, Madras and runs blog freefincal.com. He has a strong interest in personal finance calculations and provides excel based calculators he has created for financial planning

Mutual Funds in India are not popular because:

  • Investors do not understand the difference between risk and volatility.
  • Distributors are not competent enough to educate them and AMCs don’t car about investor education.

Paresh from Saving-Ideas.com

Paresh runs a blog saving-ideas.com  and he regulaly comments on our article. His comment on our article was

Mutual funds can not be popular in a country where people are mad about real estate and Gold.As well people are comfortable with products like FDs at 9-10%….more than 70% AUM in debt and liquid funds and its mostly in form of FMPs …situation is really full of worry especially after recent taxation changes in debt funds.

Bikramjit Singh from tradethetechnicals.com

Bikramjit Singh runs blog tradethetechnicals.com. He is a M.B.B.S. graduate working as Medical Officer with Government of Punjab. His comment on our article

There is too much of Financial Illiteracy in India due to low education level and socio economic setup.If we talk about Mutual Fund to anybody,they listen carefully and are enthusiast by the returns but the moment you talk about Stock Market,they are not just interested.They know only of risk in the markets and not the return potential.

Being more conservative and less risk averse are the reasons for low popularity of the mutual funds.

Bemoneyaware

While we agree with what has been said. As an investor investing in Mutual Funds we have to answer so many questions, while choosing , while being invested if you see performance/ratings of fund fluctuating. Remember the advertisement of person getting frustrated on buying coffee?

  • Too many choices With over 850 schemes , finding scheme to invest is an onerous task. mutual fund investors are spoilt for choice there are large cap, small cap, equity, debt, gold, ETF, sector based funds such as pharma, bank, retail or energy to commodities to foreign indexes.
  • Should I invest in lump sum or invest regularly through Systematic Investment Plan or Systematic Transfer Plan .
  • Should I invest through a broker, a broking platform or directly.
  • Should I trust the ratings of the Mutual Funds. Often a  5 star fund became a 4 star (experts said don’t worry hold on it’s a temporary blip) then a 3 star. Same with performance
  • Volatility :The term roller coaster ride has very often been used for schemes of equity mutual funds, but this has of late become a reality for debt funds as well.
  • Over period of time trying different strategies I wanted a fund which is of good pedigree, has given handsome returns, is consistent, Just like Draupadi who asked Shiva for a husband who was noble and strong and skilled with the bow and handsome and wise. One ends up having many funds in the portfolio.
  • Government/SEBI changing regulations entry load,exit load, change on tax strategy on debt fund.

Somehow My parents KISS(Keep it simple stupid) strategy in Fixed Deposit seemed so easy ,kam se kam returns to assured tha and easy to decide. Or as my friend,Kartik, comparing investing in mutual fund to choosing between Salman Khan’s Kick and Akshay Kumar’s Its Entertainment  “Salman ki movie hai I know what I will get. Unlike Akshay Kumar whose movie can range from Welcome to Special 26  you don’t know what to expect”

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So what do you think is the reason why Mutual Funds is not something that Indians considers investing in? Do you invest in Mutual Funds? Which is your preferred mode of investment and why?

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