Personal Finance Outlook 2013: Mutual Funds - Overcoming hurdles

The Indian MF industry has a relatively narrow base, in terms of number and geographical spread of investors, compared to banks and insurance companies. In addition to its deficient spread, the industry lacks significant reach of its own, and relies more on third-party distribution. Retail investors have viewed MFs more as a surrogate to the equity market, and not as a patient wealth generation exercise through prudent asset allocation.

The retail investor has largely remained oblivious to the opportunities in the debt market, which the MF industry could generate. Debt-oriented MFs performed well in 2012, but the concentration of retail investors continued in equity schemes. Though there is an all-round expectation of rate cut, the retail investor's engagement with the MF industry continues to be through equity. In a situation of continuing uncertainty and wide fluctuations, retail investors exited equity schemes; now, they maybe missing out on an impending rally. The foremost challenge is one of customer engagement and investor education, which could make investors aware of the benefit of asset allocation and ensure continuation.

It is necessary to pursue strategy to increase and widen the investor base and spread for healthy growth. The industry continues to remain confined to a relatively small number of investors in a limited geographical base. Large parts of the country have not yet been penetrated. It is no wonder that the limited diversification of investors has resulted in more homogeneous behaviour, and made the industry extremely vulnerable. It is necessary to access new customers, and spread the distribution network through innovative means. The existing distribution network has serviced the industry well in its formative days. The industry would have to find ways to grow this network by expanding, diversifying and supplementing it. India has one of the lowest penetrations of the MF industry. As the unpenetrated market remains extremely large, there would be meaningful business opportunity for everyone, if pursued systematically. An important challenge is to find resources for meeting the huge sunk cost towards market development expenditure.

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