As a new player, how do you plan to differentiate yourself?
We have the power of a huge brand. People recognise us so we have to figure out how to turn that into an advantage.
Our differentiation comes from the focus of Mahindra & Mahindra Financial Services group on the underserved markets in financing tractors and rural housing finance. Similarly, Mahindra Insurance Brokers which started five years back, is one of the largest insurance brokers in India which is also focused on serving the rural market. So our aim is to extend this approach to mutual fund business. We will tap those customers who have never invested in mutual funds. Having said that, we will also be present in metros catering to corporates and urban investors but our priority is semi-urban and rural towns.
How would you build your distribution network in semi-urban and rural towns?
In financial services business, being present physically in front of the customer is important. In that sense, we have an advantage as our parent Mahindra Finance is already located in over 1,200 locations. At this juncture, we are figuring out which cities could provide us the initial thrust. We are doing a pilot launch in Jodhpur, Bhopal, Rajkot and Jabalpur which are not the high priority cities for mutual funds.
Currently, in the North East, mutual funds are not spread beyond Guwahati. So in the next phase, we will look at North East where Mahindra Finance has 70 offices.
We are also open to enrolling distributors in these cities but the fact is that there are very few distributors in these areas. So right now my team is working on a plan to make inroads in Gorakhpur. You will not typically hear about Gorakhpur in the launch phase of an AMC. After six months we may find that Gorakhpur or Jabalpur is not a city where we should concentrate but we are willing to experiment in at least 10-15 such locations.
Will you be tapping the low hanging fruit who are your borrowers?
We will try to extend our products to them. However, it is wrong to conclude that those who borrow from us will make great investors. People having money may not necessarily invest in mutual funds unless they are looking for wealth creation through equities. So I’m hopeful that our customers from Gujarat, Punjab and Rajasthan who have a deeply ingrained preference for stocks will invest in mutual funds.
Will your product positioning be different in urban and rural markets?
We will try to segment the market. I think goal oriented products will be accepted in semi-rural markets. For instance, people put money in gold to save for children’s marriage. So products linked to such goals will work.
What kind of challenges do you see in terms of communicating the benefits of mutual funds in small towns?
We try to explain the product and its benefits in their context. We have a script. We ask them which products (durables and automobile) do they use and whether they are satisfied with them. We ask them if they are good companies and whether they would be making money. They usually say yes to this question; we then ask them if they would like to invest some money in these business. They respond positively. So we tell them that we will help them invest in these businesses.
We take the analogy of agriculture business when they show concern about businesses failing. We tell them that crops also fail sometime and similar is the case with businesses. So they understand there is some risk. Thus, talking in their language helps us make them understand what we offer.
Do you think there is more wealth in rural markets as compared to urban markets?
I read a government survey which said that average rural household wealth in India is 10.50 lakh and 80% of that value is tied to land. Over the last ten years, the minimum multiplication factor in land prices India has been 10 times. Our experience shows that rural households have monetised real estate wealth which has caused asymmetry in lifestyles. You can see Mercedes standing outside Punjab farmers homes. So there is wealth and they don’t know how to manage it which is the biggest challenge. I think it is a good time for MFs to focus on this market.
The breakeven time for AMCs has gone up. In how many years do you plan to break even?
If you set up an AMC now, you can break even at Rs. 25,000 crore AUM. The gross margin for AMCs is 65 basis points. About 10 years back, AMCs would require Rs. 8,000-10,000 crore to break even. The margins for AMCs as well as distributors have shrunk over the last ten years which has led to a higher break even time.
To be realistic, it can take five years for us to reach this AUM. But since our focus is on rural markets, it might take a little longer.
What is your roadmap for the fund house for the next three years?
We hope to build a strong distribution network in rural markets. At the same time, we will also concentrate on building business in T15 cities by reaching out to corporates and urban households so that we are able to sustain our business.
