RETAIL INVESTORS PARTICIPATION IN INDIAN MUTUAL FUND INDUSTRY- A

MATTER OF CONCERN

TARAK PAUL

Royal School of Business

Guwahati, India

Abstract

Indian mutual fund industry has grown during the last few decades. Since its inception in 1964,

the industry has introduced several products to cater the needs of investors. Various report

published by AMFI states that the retail investors share in the Asset Under Management is

significantly low as compared to the developed nations. During the last 49 years, Indian mutual

fund industry could not attract the retail segment in spite of having vast investment potential in

this segment. This paper highlights the present state of retail investors’ participation in the Indian

mutual fund industry and the key issues that need to be addressed by the fund houses.

Introduction

The process of economic liberalization, reformation of financial sector and globalization of

Indian capital market has increase the interest of the investors towards the capital market. The

entry of mutual funds has facilitated in garnering the investible funds in a significant way (Paul,

2012). As mutual funds are managed by professional experts, investment in mutual fund relieves

the stress of the investors’ involved in investment in securities. Technology is acting as a growth

booster for improved reach and efficient distribution (Bhowal & Paul, 2012). Despite of this

growth, investment in mutual funds is low as compared to other global economies. Assets under

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management in India as a percentage of GDP is less than 5% as compared to 70% in the US,

61% in France and 37% in Brazil.

Growth in AUM

Data published by AMFI reported that there is a significant growth in Asset under Management

of mutual fund industry in terms of investment. The increase in the number of fund houses in the

industry and number of schemes introduced is also encouraging. The total numbers of fund

houses were 44 as on 31st Dec, 2013 providing different types of products under eight categories

of schemes (Debt oriented, Equity schemes, Liquid/ Money market schemes, Balanced schemes,

Gold ETFs, Gilt schemes, Fund of funds (Overseas) and other ETFs. Average assets under

management (AUM) posted a growth of 23% for the year ended March, 2013 as compared to

March, 2012. The industry has grown at a compound annual growth rate (CAGR) of 18% from

2009 -20131.

Trend of Number of Folios

The retail investors in mutual fund industry have significant contribution in the volume of folios

held by the investors. A comparison of folios held by the investors showed a falling trend in the

number of folios since March, 2010. There is erosion in the overall investors’ base since last 5

years. This is evident from the fact that as per AMFI publication, there is a loss of 36, 24,184

folios during the year ended on March, 2013 as compared to March, 2012. A decreased by

44,70,335 folios was reported during the year ended March, 2013; 16,40, 578 folios during the

year ended March, 2012; 16,50, 363 folios during the year ended March, 2011; and 7,75,880

folios during the year ended March, 2010 as compared to their previous years. The situation of

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www.amfiindia.com

Electronic copy available at: http://ssrn.com/abstract=2395728

fall in the overall number of folios and declining rate in the holding of folios by retail investors is

indicative of the level of dissatisfaction of the investors from mutual fund investment. The low

share in the mutual fund market and the falling trend of the retail investors’ base is the result of

several factors. The following section explains the reasons for poor penetration of retail investors

in the AUM of the Indian Mutual Fund Industry.

Reason for Low Share of Retail Investors in AUM

In spite of having above 95% [as per AMFI data] share in the total numbers of folios, retail

investors share in the AUM is just above 20%. Both the number of folios held by retail investors

and their contribution in AUM has showed a declining trend. There are several issues and

challenges for which industry could not retain the existing retail investors and could not attract

sufficient number of retail investors towards the mutual fund market.

[a] Low level of awareness and financial literacy

Low levels of awareness and financial literacy among large section of investors (Bhowal & Paul,

2013). As a result in spite of having ability to invest, the savings are not properly channelized

into mutual fund market. The Indian retail investors have the savings preference in physical the

form like housing and gold and real estate (Paul & Garodia, 2012). The investments in MF are

low compared to these instruments. KPMG (2013) reported that mutual fund investments

constituted only 3% of total Indian financial assets as compared to real estate and gold which

constituted 46% of the total financial assets. Increasing financial knowledge and awareness to

stimulate retail investors in mutual fund investment is still a key issue that required to be

addressed.
[b] Limited focus on increasing retail penetration- The focus of the mutual fund industry in

India is limited on retail penetration. This can be seen from the amount of investment contributed

by the segment. Fund houses have historically gathered AUM by pointing the institutional and

corporate investors. The industry has focused on institutional investors due to their easy

accessibility, large ticket size and tax arbitrage on investment in money market schemes. On an

average above 97% of the folios are held by retail investors followed by individuals (investing

above five lakh rupees) who hold nearly 2% of the folios.

[c] Limited focus beyond major cities

Indian mutual fund industry has limited penetration beyond the 20 big cities. By the end of

December, 2013, the top 5 cities of India constituted 74.37% (Mumbai-41.92%, Delhi-16.4%,

Bangalore-5.92%, Kolkata-5.4% and Chennai-4.73%) of the total investment in the mutual fund

industry while the next 10 cities (Pune, Ahmedabad, Hyderabad, Jaipur, Vadodara, Panaji, Surat,

Kanpur, Gurgaon & Lucknow) constituted 11.92% of the total investment in the mutual fund

industry and next 20 cities constituted 5.52% of the total investment in the mutual fund industry

including Guwahati with a share of merely 0.31% contribution remaining. The rest 5.71% was

contributed by next 75cities and the rest of India contributed only 2.48%.

[d] Inadequate Innovation in Product Offerings

The mutual fund industry in Indian has largely been product-oriented and not sufficiently

customer focused (Bhowal & Paul, 2013). It has been observed that the industry has a limited

focus on innovation and new product development. Funds like multi-manager funds that are

globally popular hybrid funds have not launched in India. The Indian mutual fund market is yet
to launch funds like-green funds, fund of hedge funds, socially responsible investments,

renewable and energy/ climate change funds and enhanced money market funds.

[f] Limited Customer Engagement

It is observed that the mutual fund distributors’ lacks competence, their level of engagement with

customers and the value to be provided customers. In the absence of a proper framework to

regulate distributors, both the fund houses and the distributors have showed limited interest in

constantly engaging with customers after the sale of the products as mostly the commissions and

incentives are paid upfront fees from the sale of the products. This has resulted limited

engagement, mis-selling to customers.

In addition to the above, the public sector banks with a large customer base and significant reach

to the customers has played a limited role in attracting retail investors towards mutual fund

investment. Moreover, credibility of national banks, regional rural banks and cooperative banks

has not been fully leveraged for this purpose to target the retail segment. In addition to this, there

is a mismatch between the expectation and experience of the retail mutual fund investors

(Bhowal & Paul, 2013; Paul, 2012; Paul, 2014).

Conclusion

Indian mutual fund industry falls short of investors’ expectations in meeting retail investors’

needs. Expectations of the retail investors should be carefully studies before launching any

product. The industry need to develop customer oriented product for different categories of

investors (Paul & Bajaj, 2012). Building and penetrating into the retail segment require wide

distribution network. Thus, the distribution channels need to be more focused on retail segment.

As mutual fund investment is concentrated on big cities, there is a need to expand the marketing

channels to small cities. There is a need to increase the level of awareness among the retail
investors and provide satisfactory services by meeting the investors’ expectations. The Indian

mutual fund industry need to gain the retail investors’ confidence which will play a major role in

attracting more and more investors towards mutual fund products.

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