Reinventing Mutual fund marketing

Dr Ranjan Das
Professor of Strategic & International Management, IIM Calcutta Consulting Editor, Strategic Marketing
Raveendra C. Doctoral Research Scholar, IIM Calcutta

While the Mutual Fund industry in India has seen dramatic improvements in quantity as well as quality of product and service offerings over the past decade, industry experts concede that the growth witnessed in the last 10 years was considerably below potential. The mutual fund Assets Under Management (AUM) have grown from about Rs.470 billion in March 1993 to Rs.1,540 billion in April 20041 (CAGR of 11.4 per cent). In the United States, as high as 22 per cent of the household financial assets are invested in mutual funds, which is only slightly less than the proportion of assets invested in bank deposits2. Compared to this, the assets under management of the entire mutual fund industry in India are less than half of the deposits held by one bank, SBI and constitute less than 11 per cent of the Rs.14,042 billion total deposits held by the Indian banking industry.
One of the primary reasons for this slow growth is the fact that mutual funds are a new concept in India, which need to be still understood by large sections of Indian investors. In this scenario, the mutual fund companies have the onerous responsibility of not just selling mutual fund products, but ‘marketing’ them correctly. In other words, mutual funds should understand the specific needs of different segments of investors and sell the right product to the right customer. If sales of mutual fund products are not tailored to investor needs, there is the danger of the investor getting disillusioned with the mutual funds in general and the tremendous growth promise of the industry getting nipped in the bud. One such mutual fund product, which is likely to disappoint investors, is the popular Monthly Income Plan or MIP.

MUTUAL FUND CONCEPT
A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. The money thus collected is then invested in capital market instruments such as equities, debentures and other securities. The income earned through these investments and the capital appreciation realised (after deducting the expenses and profits of mutual fund managers) are shared by its unit holders in proportion to the number of units owned by them. Thus a Mutual Fund strives to meet the investment needs of the common man by offering him or her an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost. The flow chart below describes broadly the working of a mutual fund:

Operation of Mutual Funds - A Flow Chart3:
GROWTH AND INCOME SCHEMES
Mutual fund products or schemes are broadly categorised into Growth (also called Equity) and Income schemes. Growth schemes invest predominantly in equity securities and Income schemes invest predominantly in fixed income securities such as debentures, money market instruments and government securities. Equities are a riskier class of assets, as they are susceptible for severe volatility in prices and hence growth schemes are recommended only for those investors who are interested in capital appreciation over the long term (five years and beyond). For risk-averse investors who are interested in investing in fixed income instruments or those with a shorter time horizon for investment (less than five years), income schemes are considered suitable.

Table 1: shows scheme-wise break-up of assets managed by mutual funds in India. The Indian mutual fund investor has so far displayed a clear inclination to be risk averse with over 80 per cent of the funds invested in Income, Money Market and Gilt schemes and only about 20 per cent in Growth and Balanced (a mix of Growth and Income) schemes.

MONTHLY INCOME PLAN (MIP)
Monthly Income Plan or MIP is categorised as an Income scheme by all the mutual funds and seeks to generate regular income. It is targeted at investors who need regular monthly income such as retired persons, young people with monthly funding needs etc. Insert box
Even though MIPs are Income products, all mutual funds have kept a leeway to invest 15 per cent to 25 per cent of the total funds in equity securities while the rest are to be invested in fixed income securities such as debentures, government securities and money market instruments. Investment of 10 per cent to 25 per cent of funds in equity is justified as a ‘kicker’, as a means to enhance one’s earnings through capital appreciation in equities. In the highly competitive mutual fund industry, this acts a lever to show superior returns compared to others by riding on the wave of booming equity markets (when the times are good).
By all indications, MIPs have appealed well to the typically risk averse Indian mutual fund investor and at Rs.152 billion, accounted for close to one-fourth of the total funds invested in Income schemes. The recent boom in equity markets have helped the MIPs generate superior returns and attracted more funds.

Cont....