India has one of the highest savings rate in the world. The latest report by the Prime Minister’s Economic Advisory Council expects the savings rate to be around 34.5% in 2009-10, which is extremely high. But despite such mammoth savings, Indians do not invest much in Mutual Funds. According to the ‘Invest India Incomes and Savings Survey 2007’, produced by IIMS Dataworks, one out of seven people in India with savings are aware of Mutual Funds. Penetration is still restricted to the top eight cities and about 3% of the Indian households have invested in funds. The major reason that is keeping investors away from the Mutual Funds is lack of knowledge.
Equities are high risk, high reward product and majority of the people with savings are not fully aware of the equity market. Mutual Funds are the safest bet for anyone wanting exposure in equities. One can easily beat the inflation and earn decent returns provided one picks the fund well and stay invested long term. Despite all the benefits of Mutual Funds, the sector is yet to develop and the market is growing very slowly. The recent melt down of the equity market triggered by the global financial crisis has only made the task more difficult. Although the stock market is improving, getting investor faith back in equity is a Herculean task. And adding to the exiting woes is the latest SEBI directive abolishing the entry load that the Mutual Fund houses charged. Investors are no longer required to pay any upfront fee or entry load if they buy mutual funds directly from the fund houses. Mutual funds are generally sold by various agents and distributors. The bulk of the entry load charged by the fund houses was passed on to the agents as commission. Now with its removal, the fund houses are finding it difficult to pay the agents and distributors. And with the removal of incentives, agents seem to be no longer interested in pushing Mutual Fund to the customers. They are looking towards other financial products.
The Mutual Fund sector in India remains untapped. The fund houses need to do more to increase investor knowledge and must reach out to the small towns and rural areas. They should also solve the agent commission issue urgently. Agents and distributors are the backbone of this industry. Without their active participation Mutual Penetration cannot improve. The fund houses need to look at Life Insurance Corporation of India (LIC) to get inspired. A LIC agent is present in almost every village and most of them with some basic knowledge of Insurance. This is not the case with Mutual Fund. Somebody needs to take the lead.
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