Lessons To Learn From The Western Markets

The Indian mutual fund industry is currently in a sweet spot. In the last few years, all the stakeholders of the industry, namely, regulator, investors, asset management companies and distributors are acting in tandem to facilitate the growth of the entire industry. But despite the growth witnessed in the mutual fund industry over the last few years, the penetration of mutual funds in India is still very low in India compared to other countries, including Asia-Pacific countries. Besides lower penetration, investment in mutual fund as a share of total financial savings among Indians is also quite low and is below 5%. Developed markets are way ahead from us in these areas. 

The factors that will help the Indian mutual fund industry to catch up with its western counterparts and get into the next orbit of growth is progress in three primary areas, namely, developing suitable products, using digital platform to improve efficiency in operations and pro-active regulatory environment. These three areas are well-developed in the western markets, but we are still at the evolving stage and we can learn a lot from them.

Products 

Indian mutual fund industry is still dominated by debt funds, which corner a large share of the total mix of AUMs. Globally, equity funds form a major part of total industry AUMs and it has been increasing. In western markets, equity funds form more than 40% of the total AUMs and in developed markets such as the US, it is more than 50 per cent, whereas in India it is still at 35 per cent. One of the reasons why equity has a large share of AUMs in developed market is better product alternatives. You can find various speciality funds, including sector funds and commodity funds. Globally, these funds account for almost 25 per cent of the total AUMs. 

One of the reasons for rise in speciality products is the change in attitude towards the mutual funds schemes. Earlier, every scheme was sold as a product with the main aim of providing better returns. However, in the last few years, mutual fund schemes are being sold more as a solution to achieving certain financial goals of the investors. Therefore, sector funds, despite being riskier, are accepted by investors because many times these acts as a hedge to their portfolios. Even in India, we are seeing the narrative changing, but returns remain the primary factor and sector funds are still not being promoted too frequently.

Another major shift that we are witnessing in the products in the developed markets is the increasing attractiveness of the passive products among investors. Passive products include ETFs and index funds that track some indices. More and more investors are withdrawing money from active funds and investing in passive funds, which now account for one-fifth of the total global AUMs. In India, passive funds are still in the infancy stage and account for less than five per cent of the total AUMs. One of the reasons why passive funds like ETFs are not much promoted in India is because advisory business in India is still commission-based, hence advisors have less incentive to promote such products.

Technology 

One thing that is really going to differentiate between a winner and a loser in mutual fund industry going forward is how successfully the AMCs use digital platform to transform every aspect of their business. In the developed markets, technology is being used right from selling the products to offering tailored products to individuals. Robo-advisory is one such use of technology to offer customised products to customers.

Nonetheless, the greatest benefit of technology can be used for disintermediation. Robo-advisory, which is very much prevalent in developed markets, is gaining traction in India. However, most of the financial planning and advisory services are still being rendered by advisors in person

Other important technology that is being widely tested and many asset managers in the developed markets are using is the blockchain technology. It has the potential of cutting costs and increasing efficiency in buying and selling of funds to a large extent. In India, we are yet to test this technology in the AMCs. However, once we start adopting these technologies, it will impart great efficiency to the entire industry.

Regulatory environment 

This is an area where India is marching along the developed markets. A testimony to this is the fact that few months back, SEBI Chairman Ajay Tyagi was being named among the top ten regulators in the world. The rankings are part of the World's Most Influential People in Market Structure, also known as The Exchange Invest 1000 (EI1000), which was launched by Patrick Young & Exchange Invest. We have witnessed in the last five years how the regulator is being proactive in promoting mutual funds. Better regulatory environment is a backbone for the healthy growth of mutual fund industry.

Conclusion 

Every market has its own character. Indian mutual fund industry is still evolving and can learn a lot from the development in the western market. This will help Indian mutual fund industry to increase the reach of mutual funds to the masses. The best we can learn from them is their product offerings and use of technology to deliver those products. 

Active funds in India are still dominant, however, in advanced countries more and more investors are leaning towards passive funds. We cannot replicate the same, as the demographic profile and income levels are different. However, smart beta ETF strategies is one of the product that can be adapted and promoted by Indian mutual fund industry. Besides the product we can learn a lot from the developed market on how they are using technology to migrate customers to low-cost channels. This will also help to increase the loyalty of customer and increase revenue through cross-selling.