1. Editorial: Equity culture

Editorial: Equity culture

Cutting mutual fund commission worsens matters...

By: | Updated: December 27, 2014 12:23 AM

While high inflation has ensured the share of household financial savings has plunged from 45% of the total savings in FY91 to around 32% in FY13, the share of equity shares within this remains minuscule. According to National Sample Survey data for FY13, just 0.07% of all rural assets were held in the form of equity, and the number was marginally higher at 0.17% in the case of urban households. Put this way, the conclusion remains unchanged over the years, that India needs to include financial literacy in its school-level curriculum. That more financial literacy is desirable is obvious as it would save Indians a lot of money since, as most data shows, investing in options like gold and even property is not as lucrative as investing in the stock markets over the long-term. This is more true today since, thanks to the government and Sebi being very pro-active, the levels of stock market scams are down dramatically compared to the past.

A few points, however, need to be kept in mind. A large part of the problem will get fixed as income levels rise, and as people move to bigger cities and get greater levels of education. The NSS data is not granular enough in that it does not have information on how purchases of shares rise with incomes rising, but it is clear this is the case. Also, the levels of savings vary dramatically across income groups and geographical location. The average assets in rural India were R10.1 lakh per household as compared to R22.9 lakh for urban India; while there were virtually no assets for the lowest urban decile, the assets rose to R1.5 crore in the case of the topmost urban decile. In other words, India’s low equity market participation is also a factor of its level of economic development.

Also, even if you assume financial literacy will help improve investor awareness, there have to be products available for investors in small towns and in rural areas. While the government has a role here in ensuring the tax treatment is equivalent—EPFO investments are tax-free while NPS ones are not—Sebi’s steady reduction in mutual fund commissions is not helping. There is a lot wrong with the way in which mutual funds have reduced themselves to just being the treasury arms of large corporate, but the only way to get mutual funds to move to smaller towns/villages is through higher commission structures—even with technology, the fact is that setting up distributor networks does cost money.

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Tags: Inflation
  1. V
    Vinit Conrado
    Dec 27, 2014 at 9:14 am
    Private sector mutual funds have been around for 21 years. Let's look at what they inherited. Between 1989 and 1994, on an average, 15% of household savings went into equities and debentures, directly or through UTI. 30% of UTI's s in 1993 came from from semi-urban/ rural areas. Fast forward to 2007-08. Two bull runs later, less than 10% of household savings were going into MFs, equities and debentures. Over this period, they were given enough leeway on the fees (entry loads up to 6%), they had enough time to build financial literacy. Plain and simple, the mutual fund industry squandered its inheritance. The answer going forward does not lie in incentives. In a study initiated by SEBI, 49% of fund houses felt it was difficult to recruit distributors, regardless of reasonable incentive/ commissions. 29% of fund houses had no view to offer on this. Sure, financial literacy is a laudable objective but that may not be the best answer either. Investors in the US are not financially literate. Their investments into MFs are not because they understand MFs or that there is an 'equity culture.' It is partly necessity, and partly, the absence of choices. A better solution may be to rebuild trust with investors through debt FMPs and gradually build upon that with simple, pively tactical et Allocation funds (e.g. FT Dynamic PE Ratio Fund). Neither of these products require great expertise at selling which does away with the need for great sophistication amongst distributors.
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