Why is MF penetration higher in Jharkhand and Odisha than developed southern states?

The penetration of mutual funds may have no link with the prosperity and literacy level of states. AMFI data shows that some 'less prosperous' and low literacy states like Jharkhand and Odisha have a better mutual fund penetration than more developed states like Telangana, Andhra Pradesh and Kerala.

As per AMFI data, the AUM to GDP ratio of Jharkhand is 11 and Odisha has a ratio of 8. On the other hand, states which are better on the financial and literacy fronts like Kerala, Telangana and Andhra Pradesh rank lowly in the penetration rankings. They all have an AUM to GDP ratio of just 5.

Only two southern states Tamil Nadu and Karnataka seem to be doing well in the penetration chart. But even that is debatable as Karnataka and Tamil Nadu have a very high percentage of non-equity assets in total MF AUM at 55% and 54%, respectively. This shows that a high share of their total AUM may be institutional money. In comparison, the non-equity share is 21% in Jharkhand.

East also has more number of cities in AMFI's T-30 list compared to South. There are 6 from east and 4 from south.

What could be the reasons?

The higher penetration of mutual funds in east compared to south is a result of a better MFD network in eastern India and south's obsession with gold, say industry executives and MFDs.

"West Bengal and Jharkhand have been a high savings zone. They have always had a large insurance agent base, many of whom are now also selling mutual funds. This is why even cities like Dhanbad, Asansol and Murshidabad are well-established mutual fund markets," said Swarup Mohanty, CEO of Mirae Asset MF.

Kumar Banerjee of Moldarin Investments says lower education levels in east actually works in favour of financial product distributors, leading to higher penetration. "People here look for easy money and due to their inability to understand and judge a financial instrument they have no option but to trust distributors and agents. This makes selling mutual funds easier," he said.

"However, this blind trust is also problematic. It is the reason why maximum number of money market scams happen in these states," he added.

MFDs based in south India cite affinity for gold and popularity of 'better return giving' NBFC FDs as the reasons behind a comparatively lower penetration.

"Kerala has a lot of NBFCs which offer good returns on FDs. Along with these FDs, chit funds, gold and even ULIPs are quite popular. In the end, mutual funds are left with too little room to penetrate," said Kerala MFD Philip Cherian.

Another Kerala-based MFD Jagadeesh R Pai also shared a similar view. "Kerala is biased towards gold and real estate. However, things are changing. People are slowly moving towards financial assets," he said.

'It may not be the way it seems'

Sales head of two top mutual funds said higher AUM to GDP ratio may be due to a lower GDP of these states and some big contributions from a few institutional investors.

"Jharkhand and Odisha have some big industries and they might be driving the AUM. It's also true that south has a high preference for gold and east has a large MFD base," one of the sales head said.

"The higher AUM to GDP ratio in east might be a result of some large institutional money. As their AUM is low, some large investments can jack up the whole ratio," the other executive said.

However, institutional money may not be the only factor as the non-equity assets (which are mostly institutional investments) of Jharkhand and Odisha is in line with that of other states.

Mutual fund penetration of each state (ranked as per AUM to GDP ratio):