MFs raking in big money from small cities

Regulatory incentives, awareness campaigns and good returns provide impetus

Mutual funds have been seeing record inflows in recent months, and it’s coming not just from big-city investors. Those in relatively smaller cities and towns such as Guwahati, Nashik, Coimbatore, Varanasi, Siliguri, Kottayam, Jalgaon and Haldwani have also been pouring in money.

In July 2017, assets managed by mutual funds touched ₹20.42 lakh crore, growing a solid 30 per cent y-o-y.

Even more impressive, assets from so-called B15 locations — that is, areas beyond the top 15 (T15) geographical locations, as categorised by mutual fund industry body AMFI — grew 41 per cent to ₹3.61 lakh crore. Even as on July 2016, growth in B15 assets (at 25 per cent y-o-y) was faster than the overall growth (19 per cent).

But a year prior to that, as on July 2015, the 12 per cent y-o-y growth in B15 assets was less than half the 26 per cent overall growth. The sharp pick-up in growth momentum in B15 assets over the past two years has seen their share in total mutual fund assets increase to 18 per cent as of July 2017, from 15 per cent as of July 2015.

Growth drivers

Many factors have aided the B15 rush. These include high-decibel advertising by fund houses and AMFI, and the rally in the equity market last year, which generated good word-of-mouth traction, in contrast to the weak returns in other asset classes.

The regulator’s incentive to improve mutual fund penetration has also played a key role.

In 2012, SEBI allowed fund houses to charge an extra 30 basis points in the total expense ratio if new inflows from B15 locations are at least 30 per cent of gross new inflows in the scheme or 15 per cent of the average assets under management, whichever is higher.For B15 distributors, this meant higher commissions (as much as 3-3.5 percentage points in some cases).

Incentivising distributors

DP Singh, Executive Director and Chief Marketing Officer, SBI Mutual Fund, says, “Reaching out to investors in smaller cities can be costly and long-drawn for distributors. Higher commissions make economic sense.”

Suresh Soni, MD & CEO, DHFL Pramerica Mutual Fund, points out that the majority of the distributor base is from smaller cities. “Of the nearly 86,000 registered distributors in the industry, about 45,000 are from B15 locations,” he says.

Unsurprisingly, individual investors’ assets account for the lion’s share — 72 per cent as of July 2017 — in B15 assets, in contrast to T15 assets, which are mostly held by institutions (57 per cent).

Also, given the distributor push, individual investors in B15 areas invest far less through direct plans; 92 per cent of individual investors’ assets in B15 areas are through distributors, against 85 per cent in T15 locations.

Fear of misselling

Is the additional incentive to distributors resulting in misselling in B15 locations? Fund houses, while acknowledging the risk, don’t think it is happening.

Singh of SBI Mutual Fund says, “There is always a risk of mis-selling or needless churn. But we drive home to distributors the importance of a good return experience for investors. For instance, for B15 investors, we recommend SIPs rather than a lumpsum in equities.”

Chandresh Nigam, MD & CEO, Axis Mutual Fund, agrees. “The industry should avoid high-risk or tactical products with limited shelf life, and instead promote high-quality, long-term strategies,” he says. Market experts think that big inflows from B15 locations will continue, given the small base and the increasing shift from physical assets to financial assets.

Says Jiju Vidyadharan, Senior Director – Funds and Fixed Income Research, Crisil Ltd, “The untapped nature of the B15 cities, currently accounting for just about 18 per cent of the industry, is the biggest opportunity for the industry. Sustained efforts to spread awareness could help the trend to continue.”

Nimesh Shah, MD & CEO, ICICI Prudential AMC, thinks that it is important for distributors to receive good compensation.

“Going forward, we hope that distributors can be compensated well, encouraging more to enter the B15 cities,” he says. “This, along with simplified KYC and constant communication with investors, are required for the trend to continue,” he adds.

(With inputs from Dhuraivel Gunasekaran)

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