The Indian mutual fund industry has been a subject of much discussion and debate as the industry has hardly grown over the last four years after the Securities and Exchange Board of India introduced a ban on the entry load — fee charged to cover the distribution and some other cost — in 2009 and also due to the weakened global and domestic economic condition.
While the average AUM of the industry has grown at a compounded annual growth rate of 2.6 per cent since December 2009 to Rs 8.82 lakh crore in December 2013, a recent study released by the Securities and Exchange Board of India points out that lack of healthy participation from a large part of the country is a major reason for this slow pace of growth.
The report titled, “Penetration of Mutual Funds in India: Opportunities and Challenges” prepared jointly by two senior Sebi officials and an ED and a Research Associate from Bharti Institute of Public Policy, Indian School of Business, Mohali, picks up lack of penetration, low supply of products in cities beyond the top 15 as major reasons for the slow growth of mutual funds.
While the top 15 cities contribute to 87 per cent of the industry’s AUM, the top five (Mumbai, Delhi, Chennai, Kolkata and Bengaluru) contribute 74 per cent of the entire AUM. This clearly shows that there is concentration of AUM in few cities and thereby reflects on the need to break new grounds and bring new investors from tier II and III cities in the net.
Issues hampering the industry growth
Pointing out the reasons for low penetration beyond top 15 cities, the report attributed it to both demand and supply related issues. While low levels of financial literacy, cultural attitude towards savings are the issues on the demand front, low supply of mutual funds from AMCs outside major cities and lack of quality manpower in these areas have been suggested as supply related issues.
Having distributed Indian districts in ten parts with the 1st decile comprising districts with highest GDP and the last decile comprising those with lowest GDP, the team compared the AUM to GDP ratio of these ten segments. It found that against the AUM to GDP ratio of the country of 7 per cent, there has been a sharp contrast in the numbers for the first decile and the rest of India. If it stood at 29.5 per cent for the first decile, for the rest of India it stood at a low of 1.8 per cent.
“This skewed origination of AUM in India is its single biggest challenge and its biggest opportunity at the same time,” said the report adding that, “This under penetration of financial inclusion is not unique to mutual funds, but a deeper structural problem characteristic of the Indian financial sector. More than half of India’s population does not have any access to formal banking services.”
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