Why Millions of
Indians Choose Not to Invest in Mutual Funds?! - 6 Reasons...!
by Ms.Uma Shashikant,
MD, CIEL
The people who do not
invest in mutual funds (MFs) offer interesting insights. It's a puzzle why a
sensible & useful product, with a highly regulated and transparent
structure, is not the number one choice of households.
As part of our job,
we speak to investors who love bank deposits; we meet those who punt on the
stock markets; we find those who will not look beyond the post office; and we
find those who love gold & property.
However, we do not
find many who speak with pride about how MFs have helped them build long-term
wealth.
There is something
about MFs that does not invoke the confidence to act decisively.
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| Ms.Uma Shashikant, MD, CIEL |
First, investors are
not used to open-ended investment products.
When we tell them
that they can begin with an investment of Rs. 5,000 in a fund, keep adding amounts
as per their convenience, and draw as needed, they do not believe us.
To many, an
investment product has a defined start and end date, and offers a known return
at the end of that period. That a mutual fund is actually an investment
account, which can be operated with ease, much such as a bank account, is
unknown.
The operational ease
of funds is completely clouded by notions of cumbersome paperwork. The
widespread aversion to KYC (know your customer) formalities has not helped the
cause.
There is a case for a
simplified investor acquisition programme, which involves creating a folio,
making it known that it is an investment account, and showing how easy it can
be to build long-term wealth.
Second, it is not as
if investors do not understand risk.
They know that they
can not do much about the delay in getting possession of the house they booked
long ago.They know that the gold they bought the previous Diwali has
depreciated in value.They also know that the interest on the PPF was 12 per
cent a long time ago.
Their problem with
mutual funds is that there is an overload of negative information. When told
that past performance is not an indicator of the future, and that mutual funds
are subject to market risks, they worry about investing in a product that flashes
negative warnings & is covered in fine print.
In a country where
deep-fried snack is advertised as a healthy meal for a child--yes, noodles are
deep fried and that is why they cook fast--we have been too harsh with mutual
funds.
To promote good
investing habits, campaigns should be positive and form habits. Mutual funds
seriously need them.
Third, investors do
not care much about unrealised return.
We can go to town
talking about how Rs. 10,000 invested over 20 years became Rs.15 lakh. The
truth is that very few actually invested this much money so many years ago.
So, the story is
inspiring, but does not seem real. Investors understand cash flows very well.
They do not understand the compound annual growth rate that mutual funds are
required to publish. What they want to know is that if they invested today,
what would they get? The answer to that question cannot be that it depends on
the market conditions.
Nor can it be a
complex web of performance charts that provide the fund manager's history. In
rupee terms, investors should know how a fund has performed, year after year.
In try ing to be sure
that there is no misrepresentation or / overstatement of return, we have
ensured that the good return story has not been communicated at all.
Fourth, many
investors think that mutual funds invest in stock markets, and stock market
means reckless speculation.
They worry about the
right timing and selec tion. Diversification is a theoretical idea to many who
know profit booking, but can not see that it is a colloquial term for asset
allocation. Many think much about an investment process. Unless there is some
participation in the thrill of game and joy of victory, it is tough to get
crowds to see that a cricket team holds both bowlers and batsmen.
A large number of
people will buy into the idea of strategic team selection & tactics for
playing a specific ball after they have known the rules of the game. When it
comes to investing, very few know the rules.
In a chaotic world,
one that swings between avoiding equity completely or / day trading with
derivatives to make a windfall, mutual funds offer the hope of a process.
However, this is
neither communicated, nor appreciated.
Fifth, those who warm
up to the idea of investing in mutual funds do not know which product to choose.
Behavioural
economists have shown how investors do not make a decision if there are too
many choices since they can not deal with the regret of having made the wrong
choice.
The product
proliferation in mutual funds has been harmful. We have met many one-time
investors in mutual funds, who don't want to come back because they were sold a
wrong product at the wrong time & lost money.
Mutual funds cannot
afford this widespread inertia, apathy and negative experience among its
customers and prospects. It's time to fix the incentive problem in the
industry, pronto.
Sixth, investors do
not know whom to turn to in order to get their queries solved.
They do not know how
to get paperwork done to invest or / redeem, or / to switch from one fund to
another. They think the systematic investment plan, or / SIP, is a product.
Their distributors give them conflicting answers to simple questions. They want
to know from an independent source, in simple terms, the journey of their
money, its process & performance.
The educational
content on most mutual fund websites is patchy; awareness campaigns are
produced such as advertisements. Investors need an unbiased, central and
reliable source to turn to.
Fund houses are not
great collaborators despite dealing with the same set of distributors &
investors. They try to differentiate products that do pretty much the same.They
like to think that each one is exclusive.
They should look at
investor awareness collaboratively and find out ways to reach out, speak to and
listen to the millions who do not buy a sensible, cheap, diversified and
professionally managed investment product.
About the author..
Ms. Uma Shashikant is Managing Director at CIEL, is a PhD in finance & has been a trainer, researcher & consultant in the capital markets area since 1988.
She worked at the UTI Institute of Capital Markets (Now IICM) for ten years, during which time she has trained a range of market participants from commonwealth ministers, bureaucrats, fund managers, analysts, bank officers, and employees of various organisations in the financial services sector.
She was vice-president (knowledge management) at Prudential ICICI AMC & chief R & D officer at ING Investment Management before setting up CIEL. She had been involved in product development, process documentation, investor communication, distributor education, institutional sales and investment committee in these 2 mutual funds.
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