Taking the spectacular recent growth in India’s mutual funds industry to the next level requires a clear understanding of the very different needs of customers, according to top product gatekeepers and asset management experts at a roundtable organised by Hubbis in Mumbai.
India’s mutual fund industry is developing at an impressive pace. But as it moves into its next stage of evolution, there is a pressing need to segment clients clearly and offer products that suit different needs.
This was among the views of senior product gatekeepers at leading wealth management firms as well as senior executives of fund houses – at a recent thought-leadership discussion by Hubbis in Mumbai.
The growth of India’s mutual fund industry has been remarkable over the past 10 years. It has gone from INR3.26 trillion (USD50 billion) in March 2007 to INR17.6 trillion (USD270 billion) as of March 2017 – representing more than a five-fold increase, according to the Association of Mutual Funds in India (AMFI).
There are a little over 40 fund houses operating in the country, selling more than 2,000 primary fund schemes. Individual investors hold about 46% of the overall assets.
Yet there is a dire lack of client segmentation, according to senior market practitioners. As a result, product manufacturers tend to look at what gatekeepers refer to as ‘the lowest common denominator’ when creating a product.
In many other developed markets, including Hong Kong and Singapore, investors are segregated as ‘accredited / qualified’ and retail, which applies to everyone else.
Qualified investors are typically HNIs who tend to be more financially savvy and experienced, so should understand better what they are investing in.
To segregate or not
In fact, in a Hubbis survey in early 2017 of more than 125 leading professionals in Indian wealth management, around 75% of respondents said they believe that the segregation of investors into retail and professional / accredited would be a good step in taking the market to the next level.
However, the views were split when considering whether to follow examples in more developed wealth hubs like Singapore and Hong Kong – in terms of offering a relatively more ‘relaxed’ rules framework for HNI clients, or professional investors.
Some of the respondents were also of the view that instead of segregating on the basis of ticket size, it would be better to segregate on the basis of financial literacy.
Even with a high level of investable assets, investors could show low levels of knowledge, according to many industry players.
Indeed, the vast majority of Indian households continue to shy away from mutual fund investing, primarily because they have little understanding of how such products work.
According to a recent survey by capital markets regulator SEBI (Securities and Exchange Board of India), more than 95% of households prefer to park their money in bank deposits.
Other preferred savings and investment vehicles include life insurance, gold, silver, post office savings and real estate. Less than 10% seem interested to invest in mutual funds or stocks.
Different needs, new products
Even those investors who do invest in mutual funds have vastly differing characteristics. As a result of this, wealth and asset management investment leaders say it is important to understand these better.
For example, many entrepreneurs tend to take enough risk in their businesses already, so might be looking for capital preservation when they invest in financial products such as mutual funds.
Another group of customers, meanwhile, might enjoy trading in the capital markets; they want to be active players and believe they understand markets better than their peers.
There are also those individuals who know very little about mutual funds, but want to experience the world of equity investments gradually. They might therefore try a monthly income fund scheme that has the option of investing just 15%, for example, in equity, to ensure volatility in returns remains low.
In such a case, distributors and advisers have the task of ensuring the client acquires some basic understanding of markets, risk and how a mutual fund actually works.
Inevitably, different types of investors have differing risk profiles, return expectations and investment time horizons – so require different products to ensure suitability.
To cater for all this, however, practitioners are calling for the Indian market to evolve accordingly and deliver an adequate breadth of products.
Client segmentation also has important implications for the budding market for advice, say investment leaders.
Wealth managers need to be aware of the key investor segments before offering suitable advice, they explain.
Further, clients seeking to build wealth for the long term, for instance, could be encouraged to make equity investments, while those who are more focused on capital preservation could opt for fixed income portfolios.
Encouraging behaviour visible
In a sign of positive things to come, some practitioners say that they also see both HNIs and affluent investors being increasingly willing to park their funds in investment vehicles for longer periods of time.
In line with this, many of them are now experiencing first-hand the kind of returns the market can offer over the longer term.
In turn, this breeds further confidence about investing in financial products such as mutual funds.
Indeed, the idea of ‘long term’ is itself changing among Indian investors; a decade ago, for example, the concept meant 12 months, whereas today, it’s considered to be more like five to 10 years.
More work to be done
Nevertheless, financial education of the average investor remains key to boosting mutual fund investing in a country that still banks heavily on deposits as a savings / investment vehicle.
Against this backdrop, the new and upcoming digital fund distribution platforms represent both an opportunity as well as a challenge for wealth and asset management players.
Digital channels can be effectively used to connect with and educate Millennials, who can, in turn, influence their peer networks. For example, digital marketing can be used to help them ‘unlearn’ what they might already perceive about investments from previous generations, such as getting involved in stock markets causes large losses.
On the flip side, practitioners warn that digital access increases the possibility of making mistakes, if investors are not fully aware of the risks involved.
After all, agree investment leaders, saving money in time or fixed deposits is one thing, but investing in mutual funds, which experience more variability in returns, is different and will take some getting used to for the majority of Indian investors.