Building the Mutual Fund Market in India: the Need for Financial Literacy

FEATURED INSIGHTS DELIVERING CONSUMER CLARITY

BUILDING THE MUTUAL FUND MARKET IN INDIA: THE NEED FOR FINANCIAL LITERACY

• Efforts to improve financial literacy have seen a corresponding increase in awareness. However mutual fund investors are choosy about the product they buy. • Investors are more frequently choosing mutual funds based on performance rather than by asset management company (AMC). • Returns and risk are still the biggest barriers to mutual fund penetration among Indian consumers.

Money is a powerful motivator, and much like their counterparts around the globe, Indian consumers are steadily increasing their appetites for saving and investing. Liberalization has transformed the market from a state dominated, structured playing field to one where private players are also making their presence felt. As a result, consumers have a dazzling buffet of financial options, but recent research shows that the Indian consumer prefers to stick to the tried and tested.

Mutual funds are currently not the first choice for investors. With only 9% of urban Indian households investing in them, mutual funds present a huge opportunity for financial institutions. Efforts to position mutual funds as a tax saving option have received an additional boost with the finance minister raising the ceiling on these investments.

42 25 24 15 13 11 9 8 6 6 5 3 GOLD SHARES CHIT FUNDS NSC/NSS/PPF MUTUAL FUNDS MUTUAL LIFE INSURANCE HEALTH INSURANCE HEALTH COMPANY DEPOSITS COMPANY BANK FIXED DEPOSITS POST OFFICE SAVINGS GOLD BONDS / TAX FREE GOLD BONDS / TAX BONDS (INFRASTRUCTURE / BONDS (INFRASTRUCTURE / PROPERTY - FOR INVESTMENTS Source: Nielsen PROPERTY - FOR SELF OCCUPATION

EVEN THOUGH ASSETS UNDER MANAGEMENT IN THE MUTUAL FUND SECTOR GREW, THAT GROWTH WAS OFFSET BY AN EROSION OF THE SECTOR’S INVESTOR BASE.

SO WHO IS BUYING MUTUAL FUNDS?

Not surprisingly, consumers in the metro areas are leading the slow and steady growth of mutual funds in India. In the past three years, consumer investment in mutual funds has increased 5% in the metro areas. Growth in non-metros has been respectable, increasing 2 percent since 2010. In looking at who is investing, the recent study findings show that investing in mutual funds is more often driven by consumer age than gender. For example, the survey found high growth among respondents 30 years of age and older. Comparatively, penetration is low among youths.

Affluence is another factor. Nielsen survey results indicate that middle- to high-income individuals tend to invest in mutual funds. More than 50 percent of respondents with lower incomes said they have never invested and do not intend to invest in mutual funds. Typically, these non-investors tend to believe in saving their money rather than growing it.

2 FEATURED INSIGHTS | BUILDING THE MUTUAL FUND MARKET IN INDIA MUTUAL ALL SEC ZONE TOWN CLASS GENDER AGE FUND NON 22-30 31-40 41-50 ALL SEC A SEC B NORTH SOUTH WEST EAST METRO MEN WOMEN METRO YRS YRS YRS OWNERSHIP 5 9 3 1 5 8 4 6 3 5 4 5 6 6 (2010) OWNERSHIP 9 10 8 5 6 15 4 11 5 9 8 7 10 9 (2014) INTENTION 3 3 3 2 3 4 1 3 2 3 2 2 3 4 (2014)

Source: Nielsen

GROWING THE MUTUAL FUND MARKET

ALTHOUGH FINANCIAL FIRMS DO NOT TYPICALLY FOCUS ON THE YOUTH, CREATING PRODUCT AWARENESS CAN HELP TOWARDS BOOSTING INTENT TO PURCHASE. YOUNG INVESTORS NEED MORE HANDHOLDING ON FINANCIAL PRODUCTS FROM COMPANIES.

FINANCIAL LITERACY IS THE BIGGEST BARRIER TO ENTRY

The biggest challenge that financial institutions and companies face with regard to engaging investors is the low level of financial literacy among Indian consumers, which leads the average investor to view options like mutual funds with suspicion and caution.

The Securities Exchange Board of India (SEBI) recognized this issue and took action by mandating that all mutual fund companies set aside a portion of their revenue for investor education and awareness initiatives. Companies have also stepped in to help educate. In 2012- 2013, for example, various asset management companies (AMCs) organized a number of mass media campaigns centred around investor questions.

So how successful have these campaigns been?

Our studies indicate that the investment of time and efforts is beginning to pay off. While financial literacy is still low, investors are showing increased familiarity and comfort with the basics of mutual fund investment. They are more aware of terminology and understand the risks better.

2014 2013

ADVISORY FEE 40 32

LOCK-IN PERIOD 37 25

REDEMPTION 36 29

SYSTEMATIC INVESTMENT PLAN (SIP) 34 35

ENTRY LOAD 34 26

PORTFOLIO 33 24

EXIT LOAD 32 26

NET ASSET VALUE (NAV) 31 23

SWITCH 30 26

AUM (ASSET UNDER MANAGEMENT) 29 22

NFO (NEW FUND OFFERING) 29 25

SYSTEMATIC TRANSFER PLAN (STP) 28 28

DIRECT TAX CODE (DTC) 28 23

SYSTEMATIC WITHDRAWAL PLAN 26 29 (SWP) ASSET ALLOCATION 25 22

BASE 2593 2352

THE BEST CUSTOMER IS THE INFORMED CUSTOMER

Increasing consumer financial literacy may be a long-term project but it is already yielding dividends. As consumer engagement increases, dependency on the independent financial advisor (IFA) is gradually decreasing. While banks continue to be the main source of information, investors are exploring other avenues of information. In keeping with the global trend of consumers seeking investment advice online, Indian consumers too are turning to the Internet for advice on mutual funds.

4 FEATURED INSIGHTS | BUILDING THE MUTUAL FUND MARKET IN INDIA 2014 2013

I HAVE CONTACTED MY BANK FOR THE SAME 46 46

I HAVE CONTACTED FINANCIAL ADVISORS 45 63

I HAVE SPOKEN TO MY FRIENDS/ RELATIVES TO GATHER INFORMATION 43 45

I HAVE DONE SOME RESEARCH ON THE INTERNET 39 30

I HAVE CONTACTED FUND MANAGEMENT 23 23 COMPANIES FOR GETTING MORE INFORMATION

I HAVE CONTACTED THE PEOPLE WHO HAVE BOUGHT A MUTUAL FUND IN THE PAST 19 23

NONE 9 4

Source: Nielsen

Increased awareness has also changed investment patterns. Consumers no longer make their choice on the basis of brand name. Instead, they are becoming more discerning about the products offered and their suitability to their own investment needs. IFAs and regional managers, usually the points of contact for the consumers, would benefit from increased training to enable them to better address these needs.

INVESTMENT APPROACH

2013

31 2014 41 59 69

I first choose the AMC that I want to invest in and then choose the best schemes that the AMC has to offer

Figs. in % I choose the scheme that best suits my investment requirements regardless of the AMC offering the scheme Source: Nielsen

Despite the plethora of awareness campaigns and financial literacy drives, the Indian consumer is still not entirely comfortable with mutual funds. Non-investors cite poor returns and financial safety as the main reasons behind avoiding mutual funds. Instead, investors say they choose to invest in bank fixed deposits and life insurance policies, believing that regularity in savings is more important than the amount saved. Additionally, life insurance products offer tax savings, insurance coverage and average rates of return that make them more attractive to the consumer.

REASONS FOR NOT INVESTING IN MUTUAL FUNDS

LOW RATE OF RETURN 19

DON’T HAVE MONEY TO INVEST 15

VERY RISKY 14

NEVER HAD SURPLUS INCOME TO INVEST IN MF 8

DON’T KNOW THE BENEFITS OF MF 6

Naturally conservative, the Indian non-investor also considers mutual funds a risky venture due to its proximity with the stock markets. Additionally, non-investors believed that mutual funds do not yield quick returns as they are looking at a shorter time period when investing in riskier assets.

POSITIONING MUTUAL FUNDS AS A LONG-TERM PRODUCT AND CREATING TRIALS THROUGH DUMMY PORTFOLIOS WILL INCREASE THE CONSUMER BASE.

Among investors too, mutual funds were chosen on the basis of track records, both of the fund as well as the AMC. Highlighting fund performance in advertising will create a positive perception among consumers.

6 FEATURED INSIGHTS | BUILDING THE MUTUAL FUND MARKET IN INDIA WINNING OVER THE INDIAN INVESTORS

The Nielsen survey reveals that investors choose a mutual fund scheme on the basis of its track record. The second criteria is the track record of the AMC (growth in AUM as well as returns of all the funds), while the third is the recommendation of sales agents. Compared to 2012, the track record of the AMC gained more focus, moving up from the seventh place to the second spot in the survey.

HISTORICAL PERFORMANCE OF THE SCHEME 40 HISTORICAL FUND PERFORMANCE OF THE AMC 38 RECOMMENDATION OF MY SALES AGENT 38 SAFETY OF FUND 35 RATINGS PUBLISHED BY MF RESEARCH 31 GROWTH OF MONEY 31 EXPENSE OF PRODUCT 30 OPEN ENDED SCHEME OR A CLOSE ENDED 28 EASE OF UNDERSTANDING THE PRODUCT 24 OVERALL BRAND STRENGTH OF AMC 23 INVESTMENT FOCUS OF THE SCHEME 22 MARKET SHARE & SIZE OF THE AMC 20 ACCESSIBILITY & PROXIMITY OF SERVICE CENTRE 18 RELEVANCE 6

The biggest battle that mutual fund companies have on their hands is that of perception. Mutual funds are not well received because consumers do not perceive them as high-performance investments. Positioning them as a safe way to invest in the stock market and highlighting past performance are key ways to shift those perceptions.

Television ads, especially those highlighting performance and historic performance of AMC would be a good way to reach consumers.

Besides, objective or need-based communication would help in increasing category penetration.

ANAND PARAMESWARAN DIRECTOR NIELSEN INDIA

Vikram Budhraja from the Nielsen Finance team was instrumental in creating this issue of Featured Insights.

ABOUT NIELSEN

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