First published in Mint Dec 2, 2013

There have been numerous articles, discussions and forums on the failure of the MF industry to increase penetration, to stem recent redemptions or to increase AUM significantly. But I think that the Indian story is still very nascent for us to start brooding or even turn morose about the outlook. We seem to be in a hurry to write the epitaph of the Industry! As far as our Economy is concerned, it has been just 22 years (1991) since we attained our Independence. The MF Industry is still younger! (I use the term MF Industry in this entire article to include AMCs and Intermediaries).

We attempt to analyse here a few aspects of the Industry, and how it can be possibly made more successful.

1^st Generation Fund Managers : Continuing from the point that the MF industry is a young one, we admit that equity stocks and investing have been around for 100+ years, but as stated above, the pre-1991 world was completely different. In the last 22 years, we have seen only 3-4 business cycles and my contention is that this is not enough for Fund Managers to be able to predict what will happen after “this particular” cyclical downturn. I think that we will have to see the next 30 years or so more for the economy to have gone through 8-10 cycles in all, and then become knowledgeable (perhaps still not wise) enough to be able to classify these cycles into 2-3 types, and be able to predict as to what happens after each such cycle.

The current bunch of Fund Managers who all have 15-20 years of fund management experience are the 1^st Generation Fund Managers for the Industry. They have done a great job of guiding the Industry through this nascent stage so far. They should not forget that they are the custodians of experiential knowledge for the coming generations, and they should continue to focus on building the foundation of the Industry, which will help in times to come.

The saga of the Retail Investor : The waning interest of the Retail Investors has been a topic of moaning (almost mourning) in all such discussions. This of course has hit the direct equity broking Industry more, but even MF folios have decreased in the recent past! There are three different points I would like to cover on this topic :

• The Customer is not naive – while I have commended the 1st generation Fund Managers above, I am afraid that their attitude towards the Retail Investor is one of the most damaging aspects of the problem statement. Each one of them keeps on lamenting that Retail Investors buy at high PE multiple and sell at low ones. The Fund Managers shrug their shoulders with helplessness that in spite of their wise guidance, these retail investors will never learn. Implied in all these statements is the very dangerous assertion that our Customer is naive. The day any Industry starts thinking this way is the day when it becomes almost impossible to redeem the Industry from the clutches of failure. What happened to “the customer is always right”, as taught in our b-schools? That the customer has invested and made money in real estate and gold in the past 4-5 years, and that the customer has made lots of money in his main life / business shows that the customer is not a fool. And let’s not be in a hurry to reach that conclusion. It’s our job to educate customers and evangelise our concepts of asset allocation, and show long-term trends of other countries till he gets convinced that MFs should be the main route to invest his funds.
• Penetration may not be the holy grail : Out of the 260mn households in India, not more than 10-15mn have invested in MFs. Hence, many Industry participants keep on talking about accessing the remaining 250mn households and mention penetration of Cat B towns etc as a strategy. But if you see the wealth distribution within the country, the top 10% households (unfortunately) possess 70-80% of the wealth. This is actually true in most of the countries around the world. Hence, penetrating beyond the top 20-25mn households is not going to result in disproportionate benefit to the Business. Let’s not get carried away with the rural penetration stories of mobile or FMCGs – that’s a completely different product category.
• Retail is not actually retail : Further, imbedded within the Retail segment is the famous HNI and Mass Affluent segments, which by some definitions are the top 2mn households of India. The top 2 lac HHs of these are the HNIs with >Rs 5 Cr wealth, with the next 18 lac HHs  being in the Rs 25 lacs-5 Cr wealth segment. Now, this segment is by no means to be taken lightly while designing one’s products or communication strategy. And furthermore, they account for a lion’s share of the overall wealth held by Individuals in India. The point is that the Industry needs to do this basic segmentation within Retail and design different strategies for each sub-segment.

Increasing the share of MFs in the overall Wealth of Investors : So, where will the next burst of growth come from for the MF Industry, if not from penetration? Well, one answer is by grabbing Wealth Market Share from other competing Investment products. Out of the Rs 93tn wealth held by Individual Investors in India (please refer Karvy’s India Wealth Report 2012 for detailed slice and dice at www.karvywealth.com ), only about 3.1tn is held in MFs (hence, of the 8tn MF AUM, 4.9tn should be institutional/corporate/Govt). There is a whopping 24tn in promoter equity, 23tn in Fixed Deposits, 18tn in Insurance and 13tn even in Savings Bank accounts! MF companies have to make a targeted effort to “attack” each of these bastions and convert as much as possible from the above into MFs. Promoter equity has single-stock risk, FDs have a post-inflation, post-tax negative return and Insurance should not have been an “asset” in the first place itself! Each of these categories presents itself on a platter for the MF Industry to go after it hammer and tongs. In addition to the 93tn financial wealth, there is about 30-40tn of gold holdings by Individuals, and 25-30tn of investments in real estate apart from primary residence. Even these categories are competing categories to make share-grabbing plans for. The sheer small size of MF holdings today makes it easy to double or treble the AUM by single-mindedly working on these six buckets. No new towns to be penetrated, no new fresh money to be wooed.

Adding asset classes to the Product portfolio : If customers are clamouring for a particular asset class which we don’t have, we cannot roll over and play dead. We need to get those asset classes within our products portfolio. I am talking about Real Estate, Gold, International Investments. The Industry has done some work in getting Gold ETFs and some international feeder funds, but there’s miles to go there as well. There is a case for 15-20% of all portfolios to be invested in international funds. That’s a whopping 18tn of wealth of Indian investors (or 30tn if you include real estate and gold in “Wealth”). The Industry has to further think on how to get Real Estate into the products portfolio, not merely investing into listed RE companies. What representations need to be made to the Regulator or even to the Government for all of this, should be discussed and debated, and then carried out.

MFs to move from “being Products to becoming Solutions” : MFs are wonderful products to manage the entire wealth of Investors. The entire asset allocation of an Investor into Equity, Debt, Gold, International investments can be carried out through a combination of MFs. Within equity, the portfolio can be made further diversified or targeted based on market cap of companies or based on Industry sectors. Within debt, the portfolio can be made to cover the client’s Investment-time-spectrum through smart laddering. Different levels of liquidity and risk can also be covered through appropriate MFs. To be fair, some Distributors do make portfolios with MFs for clients – conservative, aggressive and moderate. And that’s a good start! This can be extended to designing distinct MF portfolios for your Life Goals – First home, Child education, Child marriage, Retirement, Philanthropy. The same Goal-packages can be converted into SIP mode and invested monthly. The options for converting MFs from “products into solutions” are endless, and we can keep on micro-segmenting to make this more relevant for the customers.

Preventing mis-selling is hygiene but is not the Industry-multiplier : Too many inches have been devoted in most of personal finance magazines on churn in portfolios and high commissions during NFOs. These ill-practices need to be reduced to the best extent possible. But this is not the lever which is going to expand the Industry manifold. There are only a small percentage of clients who are smarting after a mis-selling experience – no doubt that we need to correct that, but we should also realise that the real expansion game is elsewhere. All in all, The MF Industry has only completed the first phase of its journey. At the risk of being pilloried for the use of the term, I am personally “bullish” about the Industry. We need to take the paper away from our face, and set an audacious goal of targeting Rs 8tn AUM going to Rs 100tn, and a bigger target of happy AMCs & intermediaries through happy customers. As Azim Premji said in one of his speeches, “If people are not laughing at your goals, then your goals are too small”. Individual Clients NEED this “product” to meet their life goals. If there is a genuine customer need, and there’s an Industry which meets that need, then growth of that Industry is unstoppable. Now, we just need to stand up and deliver. It’s our responsibility towards our future generations!