There is a tendency in the mutual fund industry to measure performance based on assets under management. The AUM of the industry has grown to Rs 80 lakh crore in no time, gloat most mutual fund executives. It is not a small achievement. A year ago, it was just Rs 63 lakh crore, according to the industry data. It was merely Rs 30 lakh crore five years ago.
However, AUM growth does not give the whole picture. The number of unique investors in the mutual fund industry is less than six crore. It has grown by 10-11% year over year. However, it is still below potential for a fast-growing economy like India, where the population is nearing 150 crore. That means barely 4% of the country’s population is touched by the mutual fund industry. To add to that, 80% of investors are concentrated in the top 30 cities. In fact, Maharashtra alone accounts for 30-40% of the investors.
Mutual funds are a vehicle for ordinary people to organize their personal finances. They offer exposure to asset classes such as equities, debt, commodities, and real estate or infrastructure. There is a high-decibel campaign run by the Association of Mutual Funds in India, an industry body. Individual companies also run their own awareness campaigns and investor education programmes. Some large mutual fund asset management companies, such as HDFC Asset Management, Nippon Life India, and Aditya Birla Sun Life Asset Management, are also listed on stock exchanges. Last week, ICICI Prudential Asset Management, the largest by unique investors, listed at a premium to the IPO price. Investors are betting that mutual fund companies will continue to grow rapidly. However, the growth could face risks under an asset-under-management-oriented approach. At some stage, the mutual fund industry must put its heads together and focus on the way forward to expand its reach.
Gold and real estate obsession
When cola giant Coca-Cola returned to India in the 90s, rival Pepsi had already established itself as a soft drink leader. They called water, lemon water, and tea their top three competitors. The idea was to focus on category growth rather than replicate the global rivalry in India’s top cities. The beverage industry has undergone significant changes over the past two decades. There are new players too now, and the reach is probably in every district. In the world of investment, Indians consider real estate and physical gold possession as real wealth. The competition among mutual funds is not against other mutual funds. It is against a national mindset not to trust anything else as an investment. That poses a significant risk to the mutual fund industry.
The mutual fund industry is resting on its laurels, measured by assets under management. At the same time, the industry needs government and regulatory support to grow. Over the past few quarters, the government has managed to keep inflation in check. It has also lowered direct and indirect taxes to leave more money in households' hands. That should leave some surplus in the household budget. The Securities and Exchange Board of India last week revised the way mutual funds incentivize their distribution channels. A reduction in the expense ratio lowers the cost of owning a mutual fund for unitholders. The industry may not appreciate that the distributor network manages over three-quarters of mutual fund assets under management. The incentives for mutual fund distributions should also be linked to the growth in the number of unique investor accounts, rather than just to the value of investments. That requires more ambition than now.