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The recently concluded FIFA annual conference featured an insightful presentation on how investors see mutual funds and why some of them have an apathy towards MFs (Click Here). This presentation was followed by an engaging panel discussion which principally focused on how to get retail penetration up for mutual funds, especially in light of some of the findings of FinalMile on why young investors don't want to engage with MFs.
Nikhil Naik steered the debate and sought panellists views on what can and should be done to move the needle on retail penetration. Here are edited excerpts of three different opinions from three experts on an issue that has and will remain the number 1 priority for the MF industry.
Nimesh Shah, ICICI Prudential MF
On the issue of investor apathy towards mutual funds, lets understand that MF will always remain a push product - nobody wakes up in the morning thinking of which fund to buy to become wealthy. Understanding financial products is stressful for most people and you naturally avoid that which is stressful. There was a study in the US which reveals that people spend more time in selecting vegetables than they do in managing their money. Its about what you relate to and understand better.
If we accept this premise, the only solution is to expand distribution. We need many more distributors engaging with investors, getting them comfortable with MFs and guiding them towards appropriate investment choices. If I look at the IFA fraternity, the number of people whose households run primarily on MF commissions (annual commission > Rs. 5 lakhs) is only 7,000. That's simply not enough to reach out to investors and get them comfortable with what will always remain a push product.
Creating new distributors is not so simple. At ICICI, we have a foundation which spends a huge amount of time and money in skilling youth to make them ready for diverse vocations. We decided to include financial advisory as one such vocation that we will enable upskilling, through a 6 month program for graduates. The challenge is not upskilling - it is about the revenue model that you showcase to them to excite them about this career choice. With limited upfront commissions, the revenue model starts looking exciting only from the third year, when trail begins to make a difference. Established distributors understand the value of trail in the long term - but it is very difficult to explain to a young person why he should be patient through the first three years of his career, when other career alternatives start giving you rewards almost immediately.
It is in this context that I have been often telling all successful IFAs and I am saying this again - this is a huge opportunity for every established distributor to expand, grow your team and make the most of this situation where entry barriers have been erected due to commission regulations. You have a large and growing trail income, you can hire teams on a salary and incentive basis, you can bridge the huge gap between demand and supply for MF distribution, and in this process, grow your business much faster than industry.
The second challenge that we face is the existing KYC process. When I look at our own data, I can conclude that while the industry sees sizeable investor traffic coming to AMC websites, our ability to convert them into investors is seriously challenged due to the cumbersome KYC process. I understand that simplifying KYC is a work-in-progress initiative, but my fundamental question remains - why KYC? If the money that comes into MFs is only through banks, if all redemptions get paid out only to bank accounts and banks conduct KYC and are willing to share this information when required, why should we do another KYC?
The third challenge is to ensure that we minimize negative investment experiences for investors. Trust in the brand is built on positive experiences over a reasonable time horizon of 3-5 years. And trust is what this business is all about - be it in the advisory space or in the fund management space. This is why we at ICICI Prudential are very focused on promoting the dynamic asset allocation category of funds. They have an ability to limit some of the downside in weak markets while capturing most of the upside in good markets. They have a combination of equity and debt which is allocated prudently and in a disciplined manner. They can, over a 3-5 year period, provide a relatively smoother and therefore a better investment experience - an experience that can enable creation of trust and confidence.
Put these 3 aspects together - more distributors reaching out to investors, a simple customer onboarding process, and solutions that can offer a superior investment experience - and that's all that you need to progressively enhance retail penetration. There is a lot of support in the form of awareness building that the industry is doing with the IE pool, and AMFI's recent "Mutual Funds Sahi Hai" initiative is a great step in the direction of building mass awareness using a common message that everyone can relate to. If you look at where we are today in terms of retail penetration and compare it against where we were 3 years, 5 years and 10 years ago, we have made good progress. We will continue to make good progress in the years to come, but if we can get our act together on the 3 aspects I mentioned, the process can be speeded up considerably.
Karan Datta, Axis MF
If you had four publications on a coffee table in front of you - Filmfare, SportStar, GQ and an MF SID/KIM, which would you pick up to read? The key issue why investors are not engaging with MFs as the FinalMile report says, is that we are not communicating with them in a manner they understand and relate to. Our communications delve deep into product characteristics - most of which is Greek and Latin to investors. We have become way too technical in what and how we communicate. What we are losing sight of is that for an investor, saving and investment is all about fulfilling his goals, his and his family's dreams and aspirations. It's his dreams and aspirations which we need to speak to him about, and not the technical aspects of how a mid cap fund differs from a large cap fund.
Take the insurance industry - name one ad that talks about performance. They only talk about dreams and aspirations and how they can help the investor achieve these, even if they are no longer there to fulfil their family's aspirations. As AMCs, we need to adopt a similar communication strategy that investors can relate to and connect with. And as distributors, I would urge you to see your role principally as emotional managers. Manage your clients' emotions, the rest will take care of itself.
Vinod Jain, Jain Investments, Mumbai
One of the key conclusions from FinalMile's work is their insight about young investors. They say that young investors don't wish to engage with MFs because they don't relate to long term goals as yet. Their horizons are short term, their focus is on fulfilling their short term aspirations. Ironically, the MF industry and a lot of distributors are putting in considerable effort to try and engage with exactly this audience, and trying to get them onboard with a "start early, SIP your way to wealth creation" message.
FinalMile's insights have intuitive appeal and are also corroborated by investor experience in developed markets a few decades ago. What really moved the needle in markets like US was the introduction of a mandatory investment plan (popularly known as 401(k) in the US), where every salaried person, young or old, has to earmark a certain portion of their salary towards a mandatory savings plan, which can be invested in funds of their own choice, and which remain invested until retirement. This builds up a sizeable retirement kitty for them, and gets them instantly familiar with the world of mutual funds. With this familiarity and actual experience, they then invest surpluses beyond the mandatory limits, also into mutual funds.
We need to take the FinalMile findings to the regulator and to Finance Ministry and impress upon them the real challenge of getting young investors to commit to long term investment plans and the benefits of getting them to do so, through mandated investment plans like 401(k). Unless we get some form of mandatory investment, we will face an uphill struggle in getting retail penetration among India's growing youth population - which is incidentally our biggest population segment.
The final word
When asked by Nikhil to react to the observations made by Vinod Jain and Karan Datta, Nimesh Shah shared the following observations:
Mandatory investment plan akin to 401(k): I don't see this happening in the foreseeable future. We have a PF mechanism in place for all salaried employees, and the Government is encouraging EPFO to step up its equity investment through ETFs. That is becoming by default, the salaried person's exposure to equity markets from his existing mandatory savings plan. For people without a mandatory PF (self employed) as well as for long term savings beyond mandatory limits for those with PF, the Government is actively propagating NPS as the flagship voluntary retirement savings solution. In this context, to expect either another mandatory or another voluntary long term/retirement savings plan endorsed by the Government, may be unrealistic. We should perhaps work under the assumption that this may not happen in the foreseeable future, and focus our efforts on enhancing penetration without this booster. Communication: Clearly, enhancing our communication and connect with investors is an imperative, but one must be careful of drawing too many lessons from other industries, particularly when it comes to packaging. One of the best aspects of our industry and our products is its purity and transparency and therefore its credibility. Our communication may seem complex, but the benefit for an investor is what you see is what you buy. No packaging that conceals material product features, which then surprise or disappoint him and lead to a poor investment experience. So, while we strive to connect better with our investors, I would only advice caution on not letting go of the biggest asset we have - complete transparency and purity of product. Our effort should be to simplify our products and simplify product description so that every person can easily understand what they are buying. Beyond this, we should work towards expanding distribution to enable distributors to reach our products to investors and help them make prudent investment decisions.
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