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Low penetration hampering mutual fund growth

Posted on Dec 12, 05:59PM | IBNS

Low penetration resulting in an insignificant share in investor's portfolio owing to lack of financial awareness are certain key inter-related reasons hurting the growth of mutual fund industry in India, an ASSOCHAM-CRISIL study said on Wednesday. "Greater use of technology aligned with a well-planned strategy integrated into the business model together with channeling long-term investments into mutual funds, scientific financial planning to provide new products and services and utilizing the banking network to increase penetration through simpler products are certain significant steps," suggested the study titled 'Mutual Fund: Multiply Your Wealth with Investors' Protection'.

It was jointly released by apex industry body The Associated Chambers of Commerce and Industry of India (ASSOCHAM) and leading rating agency CRISIL (Credit Rating and Information Services of India Limited).

"There is a need to make mutual funds a good business proposition to expand their reach to smaller cities, towns and rural areas and solution to this lies in greater adoption of technology and innovative products," said C.S. Mohapatra, advisor, Financial Stability Development Council, Department of Economic Affairs in the Union Finance Ministry, while inaugurating the 13th Mutual Fund Summit organised by ASSOCHAM in New Delhi on Wednesday.

"Miss-selling and complexity makes people jittery to enter financial sector and there is a need to inform fund managers, distributors and people in the selling business to sell the right kind of product to right kind of information," said Mohapatra.

Mutual funds have a long way to go in terms of penetrating investors' savings pie evidently as there are just over 3,800 mutual fund folios per lakh of population in India as against over 50,000 savings bank accounts and over 26,500 life insurance policies, according to the ASSOCHAM-CRISIL study.

Most of the Indians park almost half of their total savings in bank deposits followed by insurance which commands over 20 per cent of the savings pie followed by various market-linked investment avenues like shares, debentures, mutual funds and others which have less than five per cent share, highlights the study.

Besides, only a handful of Indian households prepare and follow a financial budget, hardly discuss financial matters and have limited awareness about long term investment options and their benefits.

"Proper understanding of various kinds of financial products available is critical for prospective investors and they should have a long term financial plan for sustainable growth," said the study.

"Growing disposable incomes, persistently high inflation, improving lifestyles and growing aspirations amid people are certain factors which might lead to noticeable shift in preference of mutual funds as an investment avenue as we move ahead."

Challenging market scenario for last couple of years would provide valuable inputs for product innovation and improvements to help mutual fund industry to cater to retail investors.

Besides, there is a need to reposition ETFs (Exchange Traded Funds) and SIPs (Systematic Investment Plans) and create benefits of such investment vehicles to increase investment in market oriented products.

An appropriate proportion of long-term investible pension funds should be allowed to invest in mutual fund schemes to provide boost to the industry and earn better returns, said the ASSOCHAM-CRISIL study. Besides, there is also a need to consolidate schemes with similar objectives following a standard product labeling practice across the industry.

The fund names must also be made simpler to understand and give an idea of the risk return trade-off to be borne by investor and minimum investment horizon so that investor is able to make informed investment decisions.