In India, over the last few years, the Mutual fund industry has grown at a very impressive rate. However, it is not without its fair share of challenges. Let’s take a look at some of these key challenges.
The Rs 37-trillion domestic mutual fund (MF) industry has seen a sharp surge in assets under management (AUM) over the past few years.
The growth of the industry seems to be restricted to Metros. The Mutual fund industry continues to focus on the top 20 cities and cities beyond the Top 20 only comprise approximately 10% of the industry AUM as per the industry practitioners. The costs of reaching out to smaller towns are higher compared to the expected returns
As per an industry estimate only 60-70% of the 1 lakh registered mutual fund distributors are active. This is compared to the estimated 20 lakh agents selling insurance. Banks which also provide access to financial products also focus more on traditional deposit products and insurance. There has been a spurt in the online platforms giving options of investing in mutual funds, however the reach to the Tier 2 and Tier 3 cities is very small.
Customer awareness is also a major challenge the distributors face while selling mutual funds. AMCs are of the opinion that the investors in metros are significantly better informed as compared to non-metro cities. AMFI’s Mutual Fund Sahi Hai campaign has helped in increasing the customer awareness, however the focus needs to be shifted to customer education. Adding financial planning and investments in the school curriculum , will help in instilling early habits of saving and open up the minds to more investment products.
The mutual fund industry has been more product centered and not customer focused. This has led to duplication of products and lack of innovation or lack of product differentiation. There has been a shortage in the types of funds available and the current products don’t meet all the customer requirements. Sectoral funds, thematic funds, exchange traded funds don’t have a lot of options and the customers' awareness of these products are very less.
Although in the recent past, we see a few AMCs launched specifically to focus on ‘Passive Funds’ and also existing AMCs putting more focus on this category of funds. Passive Funds carry a very low expense ratio (as they follow a predefined index/investment criterion, thereby not requiring active management of the portfolio), thereby offering a better risk-adjusted return to the investor. Also need to work on getting more customer buy-ins by creating more products with capital protection.
As the industry grows in size, it is expected to see increased attention from regulatory bodies, working towards protecting the interest of the customers. SEBI has recently introduced several measures like disallowing investments from pool accounts, double factor authentication (2FA) using a one-time password (OTP) and more.
SEBI has also proposed a separate framework for platforms providing execution only services in the direct plans offered by mutual funds.
SEBI has proposed this to promote the penetration of the mutual funds and to ensure that ease of investment comes with adequate investor protection and grievance redressal mechanism, a framework for working of these platforms may be the stepping stone towards strengthening the investors with the power of technology along with the ability to invest directly in MF schemes.
It is high time that SEBI comes up with long-term strategies in terms of regulating the mutual fund industry and with the intensity of SEBI keeping an hawk eye on the industry, mutual fund companies cannot risk non-compliance.