Asset class diversification

In terms of asset class diversification, having experienced the recent bullish markets in commodities, gold and real estate, investors are likely to begin considering funds in these asset classes too.

Paradoxically, though, as the experience in developed markets has shown, the popularity of equity funds will not fade. Moreover, as market penetration grows and new investors enter the MF industry, the need for simple, easy-to-understand products will continue to strengthen. Investor education will remain a vital factor in bringing new investors into the MF fold.

In the US, the introduction of the 401k plan for retirement savings not only nudged investors towards equity funds to maximise returns, but also led them to take a more long term view of their investments.

Pension reforms in India will have a similar impact, which will prove beneficial for the growth of the MF industry. But beyond that, a crucial social reform is required, given that our social security benefits are not robust enough.

Not just new products, but addition of investor-friendly features to basic funds will go a long way too. For example, in equity and fixed income funds, the industry will get a tremendous fillip if regulation permits open architecture insurance wrappers, in place of the closed-architecture unit-linked insurance plans (ULIPs) we have today. Similarly, a check-writing facility for cash funds will boost their popularity among retail investors.

As the complexity of financial decisions grows, so will the need for advice. The guidance of financial advisors, coupled with the services they provide, will make them invaluable catalysts of growth.

Since the industry is constrained with a relatively smaller number of advisors, adding to these numbers by getting insurance advisors to sell MFs presents a tremendous opportunity.

The distribution network will be a key factor; not just a last-mile access for fund providers. The proliferation of distribution channels will go beyond the brick-and-mortar opportunities. Online investing appears poised to take off in a big way as internet penetration grows and connectivity becomes cheaper.

Self directed investors are likely to make online channels like their preferred route for investment, spurred by the convenience and the recent regulatory development of doing away with entry loads for direct customers.

The exhilaration of the growth we have seen over the past five years has become a bit muted due to the recent market downturn. But we’re standing on the threshold of an exciting time for the MF industry. Now is the time to ready ourselves for the growth that will come.

The domestic mutual fund (MF) industry has undergone significant transformation since it was opened up for private sector players in 1993. Transparency and service levels improved, as did product innovation and fund performance.

The industry also focused on investor education and expansion of distribution network, and leveraged technology to enhance the quality of service, while reducing costs.

The robust gross domestic product (GDP) growth, buoyant equity market and increased comfort with market linked products, especially in urban areas, helped the industry to grow at a strong pace in recent years. While this growth is encouraging, it is believed that to be successful in the long term, asset management companies (AMCs) need to continue to focus on the fundamentals of investing. Over the past five years, the domestic MF industry has grown at a rapid rate of 37.87%.

Despite this growth, MFs still constitute a small portion of the household savings pie in India (penetration levels are just 6%), reflecting the huge untapped opportunity for the industry.
Worldwide MF assets were estimated to be around $26 trillion at the end of ’07, whereas Indian assets stood at $150 bn. Domestic MF assets as a percentage of GDP stand at around 10%, while the figure is around 73% in the US. So, obviously, the industry has a long way to go, but the expectation is it will grow more rapidly and mature at a much faster rate than it has done in developed countries.