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MF News Answers to why mutual fund penetration is low

Answers to why mutual fund penetration is low

A study to gauge the awareness of investors on mutual fund uses a behavioural science lens to understand the reasons why the Indian investor has a sub-optimal engagement with MFs.
Nishant Patnaik Feb 14, 2018

A study on investor behaviour titled, ‘An examination of Indian Mutual Fund Investor’s Awareness 2018: A roadmap to improve mutual fund penetration among Indian Investor’ uses a behavioural science lens to understand the reason why the Indian investor has a sub-optimal engagement with MFs.

Sponsored by Foundation of Independent Financial Advisors (FIFA) and carried out by Final Mile, a behavioural research company, the research study finds six key reasons why mutual fund penetration is low in India.

The study says these are the reasons:

Income < aspirations: Investors engagement with mutual funds is largely dependent on their current income and aspirations. If an investor’s income and aspiration do not match, he is unlikely to invest in mutual funds. For instance, if an individual earns Rs.8 lakh a year, he can easily afford to buy Maruti Swift; however, if he aspires to buy an AUDI, his current income will not support this expense. Such a mindset is determined, not by absolute income, but rather by an income lower than what is required to satisfy investor’s immediate aspirations. These people find it difficult to engage with long term product like mutual funds because they think that mutual fund is a rich man’s product. These people dedicate cognitive effort to achieving unfulfilled, short term aspirations such as car, vacation and house and are less concerned about the building long term wealth.

However, specific events that nudge these investors to look at mutual funds, some of which align with their goals of short term gains such as tax savings, and some that help them break out of short term focus like in the event of the birth of a child.

Unfamiliarity: Investors with income greater than their aspirations, also experience barrier to engagement with mutual funds due to unfamiliarity. Since mutual funds are less familiar to the average Indian investor, these investors are satisfied with traditional investments. In addition, people evaluate less familiar products as riskier.

High return expectation: In the context of investors mostly engaging in familiar products such as FDs, the comparison of risk from FD is practically nothing (with an average return of 8%). This unfair reference point causes unusually high expectation of returns from mutual funds to compensate for perceived risk and higher cognitive effort.

Over disclosure: Choice overload and a number of product attributes that investors are not familiar with, leads them to astray them to over-simplify the decision making to one attribute that they understand i.e. returns, thus often leading to sub optimal choices.

Advice gap: Because of too much product information and choices, which they do not understand, many investors either limit their engagement with mutual funds or seek out professional help from distributors. The difference between those who seek advice and who do not among MF investors represents the advice gap.

Irrational decision: Absence of advisory services causes many investors to enter the asset class at the wrong time. This leads to a subset of investors to withdraw from the asset class, since they are unable to cope with some of the inherent characteristics of the product such as volatility.

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2 Comments
Prashant · 6 months ago
The only reason why we have less penetration is because of AMCs greed which SEBI is fulfilling. They want to cut down on distributors and want to go direct and dupe the investors because they want to sell without solicitation. Last article shows how direct customers are frantic in recent dip of market. Also By reducing brokerage in the product which is the lowest remunerating product in the india which still hurts SEBi's, AMFI's and AMCs eyes. When brokerage was 2% upfront then also people created wealth better than any other asset class then why reduction in brokerage? I agree that when upfront is given The distributor tends to churn to earn more but this issue was sorted long back since only trail model is existing now but still they want to reduce brokerage further and discourage existing distributors and new distributors to join this industry who can actually will give the kind of growth and penetration to our economy but it seems AMCs are satisfied by what they have and are now confident that they can manage to get more AUM without us and that is why these moves are being made to eliminate us. We are being punished for whatever wrong happening in Banks who are the biggest missellers in our country. Banks should be desallowed from selling all third party products and more and more IFAs are to be brought in to this field which will solve unemployment issue as well to a great extent and we will get more enterpreneurs who actually can generate more employment and open doors for new and different employment field.

Shame shame shame
vikas Gupta · 6 months ago
Good Parshant ji & I would like to add 1 more thing that even Govt. is doing partiality with MFs as GST is applicable only on MFDs & LTCG would be applicable on MFs only.
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