Penetration of Mutual Funds Industry in India: Opportunities and Challenges

The Securities and Exchange Board of India released today the Development Research Group (DRG) Study titled, “Penetration of Mutual Funds in India: Opportunities and Challenges”. The study is co-authored by Prof. Rajesh Chakrabarti, Dr.  Sarat Malik, Shri Sudhakar Khairnar and Shri Aadhaar Verma.

About the Study

The Indian mutual fund industry is one of the fastest growing and most competitive segments of the financial sector. As of August 2013, the total AUM stood at Rs. 7.66 trillion. However, growth rates of AMCs have come down from the peak levels seen in the early 2000s. One of the biggest reasons behind this is the lack of healthy participation from a large part of the country.

The findings of the study are :

• The AUM are unevenly distributed across the country.  Presence of MFs is heavily skewed in favour of 60 districts, out of which a lion’s share originates from Mumbai.

• The study argues that lack of penetration may be due to low demand of MF from the public outside the top 15 cities (T-15). This may be due to low level of financial literacy, cultural attitudes towards savings and investments, etc.  Further, low supply of Mutual Funds outside the major cities may be on account of perceived lack of demand from general retail investors or due to lack of available manpower.

• The distribution costs as a function of AUM generated in the top districts are far higher than in the lower districts.

• The study reports that demographic and social development factors such as adult literacy, bank penetration (Savings accounts) do not show strong co-relation with mutual fund presence.

• As per the survey, the main concern raised by fund houses on lack of their presence outside T-15 cities was lack of good talent for training and hiring mutual fund agents.

• The major concern is also about investor awareness and the lack of financial sophistication outside T-15 cities.