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.