Big Biz- Mutual Fund

THE BIG STORY
To grow big, mutual funds turn to small investors

Sandeep Singh
Posted online: Sunday, April 29, 2007

India’s top three funds lower investment limits to reach out to households in Tier 2,3 and 4 cities

When ICICI Prudential Mutual Fund lowered the minimum limit for its systematic investment plan (SIP) to Rs 50 per month last week, it raised the basic standard for other fund management companies to follow. And with this move, the best vehicle for wealth creation has finally reached the small investor. From now on, a huge chunk of Indians will get to invest regularly in mutual funds while asset management companies (AMCs) will be able to reach out to the “teeming millions”.

Explains ICICI Prudential Mutual Fund managing director Pankaj Razdan, “In the India growth story, only the rich have become richer and there is hardly anything done for the underprivileged retail investors. We want to create an investment avenue for them and, hence, this move.” This will also remove the block in investors’ minds about mutual funds says Razdan, “We want more and more people to taste it so that they feel confident about the market. It’s a slow process but will act as a wildfire in two to three years’ time.” ICICI Prudential is not the first to lower investment limits. In April 2006, UTI Mutual Fund initiated this trend by reducing its SIP to Rs 100 per month for its “pension scheme”; it does not offer this facility for other schemes. UTI Mutual Fund’s idea was to offer MFs to the “underprivileged”, who don’t even have a bank account.
Then last month Reliance Mutual Fund, with its focus on Tier 2, 3 and 4 cities, lowered its SIP limit to Rs 100. Says Reliance Mutual Fund CEO Vikrant Gugnani, “Investors in smaller towns have stayed away from the mutual fund industry because of the higher threshold. So lowering this will remove their apprehensions and act as an entry point to investors in smaller towns.” The impact so far has been what Gugnani describes as a “striking success” for Reliance. “After the launch of this product, we have received applications from 75 new towns.”
Beyond these Big 3, too, the industry is largely lauding the effort. “This product will be able to capture the really micro investors and from that perspective, it’s a really good idea,” says Sundaram BNP Paribas AMC managing director T P Raman. “We are evaluating the feasibility of the product and will accordingly decide.” For the industry as a whole, it is penetration rather than performance that has been the bigger challenge. The customer base has grown by almost 300 per cent over the past three years. But this growth has been on a very small base and penetration is still below 3 per cent. In three years, assets under management (AUM) in the MF industry have grown at a compounded annual growth rate (CAGR) of 37 per cent from Rs 1,39,616 crore in March 2004 to Rs 3,26,388 crore in March 2007.
In the same period, the AUM for equity schemes has grown from Rs 29,362 crore in March 2004 to Rs 132,707 crore in March 2007, a CAGR of 65 per cent. During this period, the Sensex has grown at a CAGR of 35 per cent. This shows that the mutual fund industry has grown faster — which is good for now. But there is still huge scope for growth, given the low penetration levels. Traditionally, most investments in mutual funds have come from the top 20-30 towns while Tier 2, 3 and 4 towns have not gained ground, points out Gugnani, “There is significant wealth lying in bank deposits in almost 600 towns due to lack of other investment avenues. No one has tried to venture out; so no one has gained ground. The industry should try and reach out to new investors and expand the market.” Adds Razdan, “I want to reach every single household as there is no security system in India. I want them to become a part of the economic growth story.”
Though it’s a good move, there are still bottlenecks to the long-term success of this product. Notes CAMS director V Shankar, “This is a good experiment, but it will take about two to three months before we can say that it’s a real success.” The distribution, collection and transaction costs are major hurdles that will have to be addressed. Says Raman, “The accounting and administrative issues need to be taken up properly.” On the small investors’ part, the greatest challenge according to Razdan is financial literacy: “Education is a big bottleneck and we have been teaching the microfinance institutions (our partners) over the past six months who, in turn, will educate the investors. Another bottleneck is costs but we are not creating a parallel infrastructure — we are using our existing microfinance infrastructure which is the most cost-effective way of going about it.”

REACHING OUT
• Prudential ICICI
Will use existing microfinance infrastructure and customer base of ICICI.
Will educate its microfinance partners who, in turn, will teach the investors.
• Reliance
Will create its own infrastructure or recruit people who will operate from Reliance Webworld outlets.
Already has a physical presence in 124 towns and expects to touch 200 by June-end.

http://www.indianexpress.com/story/29575.html