Sunday, November 4, 2007

Market Size Mutual Funds - India - 2007

Till a few years ago, the incomes of most Indians were at levels too modest for mutual funds to be of active interest. This has rapidly receded into history as India seems set to shoulder its way into a more prosperous future and with average incomes in India rising by nearly 30 per cent from the 2004-05 levels. The mutual fund industry needs to come together to more effectively promote the industry as a whole.

According to Gautam Bharadwaj, Mutual fund investment opportunities have yet to come onto the savings radar of most individuals with incomes in India as nearly 90 percent of them do not know that mutual funds exist. Of those who are aware, over 30 per cent could not recall even a single mutual fund brand. The fact that the mutual fund investor base is small in India, therefore can be pinned substantially to this factor alone.

The existing retail mutual fund investor base represents some 18 per cent of the "aware" population. This suggests that the mutual fund investor base can be grown significantly if visibility levels among the larger audience, where visibility does not exist, is raised. In the mass market context, it is also significant that existing mutual fund investors are heavily influenced by social and familial networks in first being attracted to the mutual fund option.

Hence the underlying size of the investor base can play a key role in attracting new investors. In part, attracting the smaller investor can swing on effectively promoting the systematic investment plan (SIP) approach wherein smaller investors can more easily participate, and in the process spread risks more effectively when doing so. The problem is that the visibility of the SIP investment approach is lower again, with less than half of even the aware population relating to the possibility of investing in this way.

But there are signs that change is in the wind. According to new research posted by IIMS Dataworks, the mutual fund retail investor base is today at 5.3 million. In money terms, retail investment flow in mutual funds in the last 12 months stood at US $5.6 billion. This result has been achieved with a mutual fund penetration of the active workforce of less than 2 per cent.

Life insurers also are experiencing good success with selling ULIPs while equity markets are ramping up with over 4.3 million individual investors. Looked at in this way, the base investor mass of interest to mutual funds already stands at over 10 million, as lying at the bottom of all three investment options is the mutual fund industry's stock in trade - a booming securities market.

There is a potential mass market demand for mutual fund type products outside of this population. At a conservative estimate, an additional 34 million individuals, with the capacity and interest to invest up to US $14 billion annually in mutual fund type products already exists in India. However, over 57 per cent (19.6 million) of this population lives in rural areas.

Therefore, while most of the new demand from existing mutual fund investors will naturally come from middle and higher income earners, most of the potential mass market for mutual funds is likely to be found mainly among the lower and lower middle income groups.

For obvious reasons, this population is unlikely to be of much interest to the existing sales and distribution channels for mutual funds. Most of these potential investors (78 per cent) can instead be reached through the banking and postal networks. On the ground, promotional activities by the mutual fund industry at a bank or postal branch level also may reap rich dividends as three in four of these customers usually visit their bank at least once a month.

Excerpted from an article by Gautam Bhardwaj. He is director of Invest India Economic Foundation. This analysis is based on the Invest India Incomes and Savings Survey 2007 produced by IIMS Dataworks.

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