Should India’s Mutual fund industry have its Jan Dhan moment?

Nice piece by Gajendra Kothari of Etica Wealth Management.

He says MF industry needs its own Jan Dhan moment when overnight so many people got access to bank accounts. He says even insurance industry has much higher accounts than MFs:

Never before in economic history would 15 million bank accounts have been opened on a single day. Never before has the Government of India organised a programme of such scale,” Prime Minister Narendra Modi said on 28 August 2014, when the Pradhan Mantri Jan Dhan Yojana was launched. Twenty-one months later, in January 2016, the scheme reached all Indian households, according to official data, bringing 220 million additional families into the banking system. Can this ever be replicated in the Indian mutual fund industry?

I was reading a report in a pink newspaper, which stated that life insurance industry’s assets under management (AUM) have crossed Rs.25 trillion in financial year 2015-16 ( In comparison, the mutual fund industry is just above the half-way mark, at Rs.13.53 trillion, according to the Association of Mutual Funds of India, even though it has double the number of companies. There are 44 asset management companies and only 24 life insurers. Interestingly, both the industries had their genesis around the same time. The government-run Life Insurance Corporation of India (LIC) was incorporated in 1956, and Unit Trust of India (UTI) in 1964.

Well, not sure about this. MFs should be a slow and steady business. It neither is about opening a bank account nor about insuring. One is trying to tell people that MFs are a good avenue for savings (or investments?). A Jan Dhan moment where you will have many MF holders will just backfire as many people will enter the space without knowing the details.

It is but natural for there to be more insurance holders than MF holders.  This is partly due to the human tendency to react more to insure than invest. And partly it is due to better positioning by insurance firms than MF ones:

The way the insurance industry has been able to outdo its mutual fund counterpart presents an interesting case study given the basic premise that a mutual fund product is far easier to sell than an insurance policy.

One factor that clearly tilts the scales in favour of the life insurance industry is its communication strategy and positioning of products. Despite having a superior performance track record, mutual funds have always scored low on acceptance in any personal finance survey. The life insurance industry has thrived mainly on creating an emotional need for saving, while mutual funds have gone on the rational route. Be it saving for emergencies, wealth creation, a good future for children, or a comfortable retirement, one will find a product revolving around an emotional need.

You also have to give them credit for appropriate positioning of the product. Watch any television channel when a popular saas-bahu soap is on. One will find an emotionally appealing advertisement on child insurance plan. The idea is to convince the home maker, who will then pester her husband to buy an insurance product to secure the children’s future.

Insurance companies also have the liberty to bring in celebrities to endorse their products; as of today, mutual funds are not allowed to do this. Their advertisements tend to be dull, with the risk disclaimer eating away a good chunk of the time slot.

So what is the way out? MFs should offer more goal oriented products and get rid of MF names as bluechip. midcap etc:

What can they do then? Well, rather than focussing on confusing scheme names like ABC Opportunities Fund or XYZ Focused Bluechip Fund, which don’t resonate with an investor’s emotional need, mutual funds can come out with plain vanilla funds like children education plan, retirement plan, wealth plan, or house purchase plan, which can connect well with an investor’s requirement.

Target date funds, with a set number of years and varying asset allocations that become conservative closer to the goal, can make goal-based planning simpler. Of course, a few mutual funds in the past have come out with such offerings but efforts to make them popular were half-hearted.

Goal-based products can also make investors stick for the long haul. An associate of mine invested Rs.40,000 in a ‘child’ mutual fund in May 2004. It has grown to about Rs.2.55 lakh in 12 years, generating an internal rate of return of 16.58%. But he doesn’t want to touch this money because it’s for his child’s higher education. Following such a strategy will help mutual funds retain money for the long term, and investors, too, will avoid acting based on recent market movements. The US market has already demonstrated how goal-linked mutual funds can become a major category…

But until this happens, the fund industry can at least come up with simple products on its own. The newest kid on the block, Mahindra Mutual Fund, has launched schemes that investors can easily connect with. Their schemes have names like Bachat Yojana, Bal Vikas Yojana, and Kar Bachat Yojana. The step is in the right direction, but only time will tell whether this will be the “Jan Dhan” moment for the mutual fund industry.

Hmm..Will be really interesting to see how these MFs named as Yojanas will sell. I don’t think it is particularly new as these things have been tried earlier as well.

I just checked Mahindra MF website which got a licence couple of months ago (note: without any fanfare). It says:

Mahindra Mutual Fund endeavors to offer a variety of mutual fund schemes pan-India, with special focus in rural and semi-urban areas.

It has sought SEBI’s nod on its MF schemes  mentioned by Kothari (search Mahindra).

May be Mahindra manages to do well as these things happen in phases. One needs some income at the first place part of which has to be saved into these options. Even US having a retirement linked MF market did not happen right in the initial stages of development.

With growth of Indian economy, the MF industry is bound to grow leaps and bounds. But it should avoid having a single Jan Dhan moment. Slow and steady growth with several small moments leading to one Jan Dhan moment is a much better way forward..

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