Mutual fund, though not completely insulated from market risks, is considered a relatively safe investment option available, after bank deposits. With the advantages of less volatility, diversification of risks, etc. mutual fund pools small savings and inculcates a healthy financial behaviour in people. It thus plays a vital role in accelerating financial inclusion, formalizes economies, and deepens financial markets. Yet, except for a relatively large base in India (Asset Under Management – AUM - at about 12 percent of GDP), and a tiny one in Pakistan (about 2 percent), the growth of the MF industry in the region has either remained largely stagnant or is still at a nascent stage.

Thanks to a combination of factors, the Mutual Fund (MF) industry in India has witnessed robust growth. Higher financial savings, growing investor awareness of MF products, ease of investing, digitalization, the regulator’s investor-friendly regulations, the MF Association’s efforts in framing broad guidelines/codes, have all helped the industry flourish and build a perception of mutual funds as long-term wealth creators. Alongside, the structural reforms such as tax incentives to corporates, formalization of the economy, growing financial inclusion have helped brighten up the overall scenario for the industry.

However, an analysis done by global brokerage firm Jefferies shows India’s MF AUM as a percentage of GDP of 12 percent, is among the lowest, and a fraction of the global average of 63 percent. Even smaller emerging market peers, such as Brazil (ratio of 68 percent) and South Africa (48 percent), boast of better penetration. Though the domestic MF industry has come a long way with a current AUM topping Rs 30 trillion, the Jefferies Report believes it still has tremendous growth potential, as it has barely scratched the surface when it comes to AUM growth.

Opportunity, potential

With this low base and penetration, the growth potential for the MF industry in the region is immense. But the corporate investors apart, to get people, particularly the young, hooked to and invested in a mutual fund is a key determinant for its robust growth trajectory. To register sizeable growth, the asset managers need to adapt their service offerings in tune with people’s preferences, leverage technology, be innovative, and pool shared experiences and, last but not the least, create awareness.

Among many commonalities, South Asian nations have large hi tech-savvy young population, and the asset management companies should tap this section to deepen mutual fund penetration significantly. Here, the convenience of buying a mutual fund through an app, for instance, can act as a strong pull factor.

In fact, tech-led MF start-ups, as a subset of Fintech, must take shape fast, with tie-ups between MF houses and tech start-ups. Built on an efficient digital platform and operating at an intersection of mutual funds and technology, Fundtech - to coin a new term - can be a game-changer. Tech-supported apps affording super convenience in seamless entry and exit, switching schemes, etc. can boost the acquisition of prospective customers to mutual funds significantly.

New portfolios with a focus on upmarket/ emerging sectors need to be explored more and should form part of new offerings. For instance, global funds (which predominantly invest in international markets), technology funds (which bet on new emerging technologies likely to disrupt the tech world with innovations) are attracting a lot of attention from new/young investors. In a well-developed region like India, asset managers may also seize the fastest-growing pockets of opportunities such as sovereign wealth funds (SWFs) and pension funds (PFs).

Innovation, shared experiences

Asset Management Companies (AMCs) may ideate and explore thematic funds in their bouquet of schemes. Environment social and governance funds, healthy lifestyle fund (focussing on businesses in food, nutrition, personal care sectors), learning and entertainment funds (riding on the success of companies in edtech and streaming platforms respectively) may be considered.

Further, liquidity being a major consideration, particularly in Tier-II cities and to the small investors, liquid funds need to be made more attractive. The growing retirement segment needs to be tapped by converting retirees into customers by providing solutions like online retirement calculators, facilitating access to advisory services, etc.

Instead of focusing solely on product innovation, asset managers should pay attention to service innovation as well, to build a comprehensive innovation portfolio. Digitally enabled value-added services can be a potent source of innovation and competitive advantage for them. Such services may include extensive use of web and mobile tools, as well as digitally-driven advisory, like Robo-services, to enhance the client experience. Depending on demands and preferences in many pockets, customized Sharia products can be offered.

Apart from India, there are countries in the extended neighborhood too, whose experiences and learning in the domain can prove to be valuable. Thanks to the investor protection policy and regulations, and IT prowess, Singapore is way ahead as a leading player in Southeast Asia, not only in terms of AUM but in leverage of technology and infusion of innovation. Experiences of asset managers in Thailand and Indonesia suggest how important it is to develop strategic partnerships to penetrate local markets. Partnerships with local champions have provided them a platform where asset managers can leverage the distribution networks of the former to expand in their region.

Creating awareness, addressing challenges

Financial saving skill is a life skill and must be learned and honed early. A sustained campaign to create awareness on the advantages of mutual funds among the students at colleges, universities, management institutes, skill centers, etc. can greatly help in promoting Systematic Investment plan (SIP) habits.

Conducting hackathons, quiz competitions, etc. can generate deeper knowledge and interest in mutual funds. A close interface with academia will also help encourage research and create intelligent data on the industry. Greater dissemination of scheme information through various media channels, preferably by roping in sports, music, tech icons, can spruce up the MF space.

Mutual Fund, to be popular, needs to be cost-effective first. However, high minimum investments and administrative fees, complicated procedures, are still some of the bottlenecks that make mutual fund investing inaccessible to less-affluent individuals. Fragile digital infrastructure/low internet penetration in some parts of the region also acts as a dampener.

Experience shows the absence of reliable, fast, affordable, and seamless digital connectivity impedes the online distribution of products and Fundtech uptake.

Clearly, strong policy and regulatory support are needed for the growth of MF in the region. At the same time, the growth also hinges on the ability of asset managers to unlock and capture opportunities. Using deep tech, innovation and customized/localized product and service solutions, they can not only build a strong base but also mitigate potential challenges that may emerge from shifting market dynamics.

Mutual Fund investing should not be seen just as another investment option. By pooling small savings and inculcating a healthy financial behaviour and investment habits of people, mutual funds play a vital role in accelerating financial inclusion, formalizing economies, and deepening financial markets.

(The writer, a former bank executive, is now a board member of a mutual fund company. The views expressed are personal. He can be contacted at rkrishnasinha@hotmail.com)