• AUGUST 29, 2016

Here's How Transacting In Mutual Funds Will Change Going Forward

The mutual fund industry exists in India for about 3 decades now. Before 1987, UTI enjoyed monopoly in asset management. However, soon after the SBI mutual fund was founded in 1987, competition intensified and many more mutual fund houses were set up. Having said that, the journey of mutual funds over the last 30 years hasn't been encouraging. The Assets Under Management (AUM) of the industry have grown substantially as compared to what they were 3 decades ago, but the concern is, still, under 5% of Indians invest in mutual funds. Indians are great savers, but when it comes to investing in mutual funds, they shy away. As a result, they still rely on conventional investment avenues such as bank fixed deposits which attract nearly 70% of India's savings.

Digital wallets are gaining more acceptance

On the other hand, digital wallets which proliferated in the last 5 years have approximately 13.5 crore users in India, as revealed by the research done by 6Wresearch. Further, it expects India to register 68% compounded annualised growth as far as the market for digital wallet goes. By 2022, the digital wallet industry in India is likely to touch the mark of US$ 11.5 billion. About 5 years ago, nobody could have imagined that paying taxi bills using e-wallets would be possible, but today it has become a common practice to do so. The same is true for grocery bills.

SEBI aims to capitalise on these trends...

Looking at these evolving trends, the Securities and Exchange Board of India (SEBI) has planned to capitalise on the changing traits in payment preferences. SEBI is pondering on the idea of allowing investors to invest in mutual funds via e-wallets. The capital market regulator has been holding discussions with the RBI to figure out the way to execute this plan. SEBI feels that allowing the use of digital wallets to buy units of mutual fund schemes would attract younger investors who prefer to transact online and using their mobiles.

Huge response to direct plans from tech savvy investors...

The industry has already seen the higher participation in direct plans from the tech-savvy investors. In the recent past, the capital market regulator decided to allow the buying and selling of mutual fund schemes on e-commerce websites. In the coming months, you might see mutual fund houses actively selling their products on frequently visited e-commerce websites such as Amazon, Flipkart and Paytm to name a few.

Costs in the e-commerce route would be higher than those involved in direct route, but would be lower than those charged in regular plans. As a result, besides offering two options viz. direct plan and the regular plan, mutual funds may offer another plan under each scheme. In other words, due to the difference in the expense structure, the third option of "e-commerce" would be provided.

At the time when mutual fund houses are looking up to exploiting the technological advancements and innovations to spread their reach, advisors and distributors are not behind. With changing times, even the advisory platforms are evolving. The trend of robo-advisory is picking up fast. Robo-advisors are digital advisors that provide portfolio management and financial planning services online, without any human intervention. The absence of any emotional bias and affordability are the key features robo-advisory. The positive aspect of these advisors is there's no bias in processing the information. However, the lack of human intervention can be a hurdle too, particularly when active intervention is needed.

If the popularity of these online marketplaces and advisory platforms draws more people to mutual funds, then it's only logical to allow them to use e-wallets to perform transactions. Young gadget-savvy generation needs to connect with products they are buying online. And unless they see the convenience and merit in investing in mutual funds, they may not get attracted to mutual funds even if they are sold online.

The task for mutual fund houses is not as easy as it looks. Merely selling mutual fund schemes online and allowing the use of digital wallets won't readily provide any new investor base to the mutual fund industry. As mentioned earlier, showing potential investors the merit of investing in mutual funds and then facilitating the transactions by providing maximum possible convenience is the way to go. Therefore, it remains a challenge. PersonalFN is of the view that, the SEBI has been efficiently addressing the "convenience" part of the challenge, but educating investors on mutual fund investing still remains an unresolved problem.

Investor education is a must...

PersonalFN also believes, the mutual fund industry will have to make sincere efforts to educate investors. Time and again, it has been observed that mutual fund houses either fail to spend money earmarked for investor education or they reduce the effort to marketing their products in the name of investor education. As a remedial measure, SEBI directed them recently to transfer half the amount they need to spend on investor education to the industry body, Association of Mutual Funds in India (AMFI). Until lately, even AMFI failed to utilise available funds.

While riding the wave of popularity of new technological platforms, mutual fund houses shouldn't forget that the business of asset management works on trust. Unless the industry does away with the commission-driven growth model, it would be difficult to win over the confidence of investors. This is primary because many mutual fund distributors and agents recommend schemes which pay them hefty commissions. They advocate frequent churning to earn an even higher commission. On the other hand, mutual fund houses frequently launch New Fund Offers (NFOs) to garner more AUM. In this entire process, hardly anybody genuinely cares for the investor. False promises made by the distributors at the time of soliciting investments often dampen the morale of investors as a result.

When using new technological platforms, you as a smart investor, keep in mind the basics of investing. You should focus on your financial goals and consider your risk appetite before purchasing units of any mutual fund on e-commerce platforms using your e-wallets. Ensure you are investing in the right scheme and not compromising on any safety measures while making a payment through your digital wallet.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.


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