Penetration of Mutual Funds in India - Opportunities and Challenges

We carry out a preliminary enquiry into the nature of geographical penetration and distribution of mutual funds in India as well as their likely determinants. Using a questionnaire survey we collect qualitative and quantitative evidence from fund managers on the nature and determinants of their geographical presence throughout the country. Distribution channels seem to play a major role in fund penetration and facilitating these rather than trying to boost demand through financial literacy may be a more effective way of achieving better fund penetration. 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. This lack of penetration can be due to two reasons: a) Low demand of mutual funds from the public outside the major (T-15) cities. This low demand in turn could be caused by low levels of financial literacy, cultural attitudes towards savings and investments etc., and b) Low supply of mutual funds from AMCs outside the major cities. The low supply could be due to perceived lack of demand from the general retail investor or due to lack of available manpower in these areas. The study first documents how Assets under Management (AUM) are unevenly distributed across the country and then proceed to scrutinize the reasons behind this uneven penetration. It focuses on the AMCs distribution networks using proxies such as the distribution of independent financial agents (IFAs) across the country, sales made by IFAs, distributional efficiency of AMCs etc., A survey of fund houses was carried out to gain a better understanding of the causes holding them back from expanding beyond top 15 cities. The study found that low number of agents (per capita) in sub-urban and rural areas and the slow growth rates in mutual fund sales in the corresponding areas are closely associated with each other.