The Securities and Exchange Board of India has put out a consultation paper on the total expense ratio (TER) charged by the asset management companies (AMCs) to you. Presently, AMCs managing your money through equity, debt and other mutual funds schemes charge you additional expenses over the TER. The Sebi paper seeks to bring all expenses under a uniform TER. It is essential that the TER lives up to the name, and you are not charged anything more than that. Anything that simplifies your life as a mutual fund investor should be welcomed. Mutual funds are supposed to help you achieve your financial goals. Despite covering considerable ground, the industry has a long way to go.
About 3.77 crore unique investors use mutual funds as a vehicle now. That is a significant jump from 1.28 crore unique investors in March 2017. However, considering the population of India, it is still barely a 3% penetration. It is much easier now to invest through mutual funds than before. Sebi’s moves are likely to ease the path further. It is unclear if unitholders bother about the expense ratio as long as the fund’s performance is better than the benchmark.
Even then, the low penetration means individual households have to see mutual funds as the vehicle for financial security to own a variety of asset classes. Investor awareness assumes significance. Sebi is allowing mutual funds to expense the cost of distribution commission for inflows from B-30 cities to the investor awareness budget. These are cities beyond the Top 30 cities in India. That allows the mutual fund industry to initiate new people in the mutual funds’ sector.
The regulators would do whatever it takes to create awareness and make mutual funds interesting. There is a problem with the upfront disclaimers that ‘mutual funds are subject to market risks’. While it is essential for everyone to understand the risk associated with investing, the disclaimer by the mutual fund industry effectively scares people. You need more people to come to the fold. The industry has requested toning down or removing it for a long time. Sebi and regulators want the disclaimer put upfront as a matter of caution. The disagreement over this matter needs a swift resolution.
There is also a significant misconception. Most people equate mutual funds to equity markets. You must understand that mutual funds are not an asset class in themselves. They are a vehicle that allows you to own a variety of asset classes. Those could be equity, debt or gold. You must work with your professional financial advisor to create an investment portfolio that suits your risk profile. An appropriate asset allocation plan matters to you more than anything else.
You need exposure to India’s equity or debt markets. There can be no better way to invest in these asset classes if you are new to the investing world. India’s economy is expected to grow steadily over the next several years. Besides Sebi’s initiatives, the digital revolution in India is also an enabler. In a recent speech, the Reserve Bank of India deputy governor Michael D Patra explained the ‘Dawn of India’s age’. He highlighted that India has emerged as the most significant player in real-time payment transactions globally, with a 50% share. He said that the Unified Payment Interface is at the heart of the ecosystem and has witnessed around 9 billion transactions in April 2023 alone. The India stack also brings mutual funds and the stock markets closer to you.
It is very common for Indian households to own real estate and gold. However, financial assets are only limited to bank deposits and life insurance. It is time for you to look at financial markets and make a beginning through mutual funds. If you think choosing a mutual fund scheme is a complex task, you can look at exchange-traded funds. They track popular benchmark indices and are supposed to track the performance of these indices. With all these developments, there is little excuse for not investing.
Rajas Kelkar
(The author is editor-in-chief at www.moneyminute.in)