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SEBI’s new order may hit mutual fund penetration in B30 towns and beyond

The latest order released by market regulator SEBI to segregate advisory and distribution of MF products is good to protect the interest of informed, experienced and big investors.

SEBI’s new order may hit mutual fund penetration in B30 towns and beyond
Indians are mostly risk-averse investors and prefer to stay away from market risks.

Indians are mostly risk-averse investors and prefer to stay away from market risks unless properly advised about the benefits of taking calculated risks to meet long-term financial goals and persuaded to test the water with small investment. Most importantly, they also need counseling to stay invested during short-term market turmoils.

In big cities, more and more people, especially millennials, are gradually adopting the market-linked products through SIP (systematic investment plan) route – thanks to investors awareness programme by Association of Mutual Funds in India (AMFI) and other investment platforms.

But in B30 towns and beyond, it still needs aggressive persuasion to make prospective investors ready to leave the comfort of non-linked investments like bank FD and enter the market-linked segment.

So, basically in the vast untapped territory of B30 locations (B30 means tier 2, tier 3 cities beyond the top 30 cities (T30), where mutual fund awareness and penetration is low), it still needs pushing the mutual funds for deeper penetration to make sure that new investors enter the market-linked segment.

However, the spree of reductions in expense ratios have led to stopping of upfront commission and drastic reductions in trail commission, which makes MF distribution as a career for new distributors unviable. This has already raised serious doubts about the success of MF penetration in the untapped areas.

The latest order released by market regulator Securities and Exchange Board of India (SEBI) to segregate advisory and distribution of MF products is good to protect the interest of informed, experienced and big investors, who know the value of financial advice and benefits of investing through direct plans over the regular ones.

However, for prospective investors in untapped areas, who have little knowledge and will to take market risks, seeking financial advice to achieve financial goals through MF investments and paying for the advice is unthinkable.

Availability of commission, whatever low it may be, makes existing distributors move forward to advice and educate the prospective novice investors to make them agree to invest in regular MF plans.

Moreover, there may be large number of people with low income, who need MF to realise their financial goals and may be persuaded to make small investments, but charging fees only for advice may not be possible or may be so low to justify time spent and efforts made to persuade them.

For example, after spending much time and effort, an advisor may make a prospective investor in a rural area agree to start an SIP of Rs 1,000 per month. But in case the advisor can’t sell a regular MF plan, how much fee the investor would agree to pay for the advice of starting the monthly SIP of Rs 1,000?

So, unless some special provisions are made to reach out to the untapped prospective investors from B30 towns and beyond by making advisory/distribution viable, penetration of MF products would suffer a major setback, and mutual funds would remain as an investment product for elite class only.

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First published on: 18-02-2020 at 08:23:00 pm