As one of Eastern India's largest MF distributors and clearly among the most experienced in the retail space, Pradip Chakraborty knows a lot more about retail and rural market penetration than most players in the industry. What Pradip sees around him today is a lot of effort by the MF industry, lot of ideas, lot of discussion on how to effectively achieve higher retail and rural penetration - but perhaps, many of these efforts are mis-directed. As an experienced grass root level player, Pradip shares with us his vision of what really needs to be done if the industry is actually serious about achieving retail and rural penetration at a level that is far beyond where the current efforts will take it. There are some novel thoughts that Pradip has - it is for the industry now to reflect on this and take concrete meaningful steps.
Imagine a situation where all the car manufacturers in India get together at their annual industry conference to discuss how to increase industry sales. The conclusion they reach is that the industry must make a determined effort to penetrate into smaller towns and rural areas - there are enough people in these places who yet don\'t have a car and can afford one. Then, all of them go back to their respective companies and begin developing strategies to penetrate new markets. Over the next several months, there is a lot of work done in product development - many newer models of cars get created - from very simple models to sophisticated models. In parallel, lot of work is done in making the driving experience more comfortable - there are new variants launched which are gearless, which have GRPS tracking systems etc. A year later, the industry assembles in their annual conference and takes stock of progress: lot of product innovation, many new convenience features added - yet sales momentum is still missing. Speaker after speaker talks about the huge untapped potential for cars and the efforts they are making in bringing to the market cars that are simple and convenient to drive. Industry veterans are wondering what more needs to be done, when one participant asks the question: Fancy cars, but where are the roads? If the road network in rural areas is either absent or in very poor shape, how do you think rural people will be motivated to buy cars? What should the industry focus on more - better and more convenient cars or more roads?
What comes first: new products, more convenience or infrastructure?
Our mutual fund industry is facing a similar issue. Retail penetration is the big mantra, untapped potential in smaller towns is the big story everybody wants to get into. What we see is a lot of good work on the product side, on the convenience side - but how much work are we doing on the infrastructure side? While I fully support all the good work on products and product features, I think that alone is not going to get you the desired result. The need of the hour is to focus a lot more on infrastructure for the industry. Before looking at the product, we must first ensure that these potential new investors are ready to invest in the category. Product and convenience of investing comes next.
Before we focus on the product, we must address the following core issues vis-A-vis attempting to attract the retail investors in small towns and rural areas:
Previously, many distributors like ourselves spent a lot of our time and energy in reaching out to retail investors with simple and effective education programs that made them aware of what is a mutual fund and how they can benefit from it. With the current margin pressures, most of us have cut back significantly on these developmental activities, as they are simply unaffordable now. What is needed is a nodal agency that drives high quality, effective investor education programs as a separate business model. The industry will need to think of setting up a body that can do a good job on this very critical aspect, on a commercial basis - across the length and breadth of the country. We are seeing that AMFI\'s initiative is not delivering very good results - and that is because it is executed by different AMCs as a side activity, with differing levels of commitment. Unless a prospective investor first understands - in a simple manner - what is a mutual fund and how it can help him - he will not invest. If we all understand this basic fact, we must first re-think our investor education process. Such an initiative can only become a success if it becomes a commercially viable proposition for the entity that is delivering the education.
Every business that reaches out to consumers in smaller towns first ensures that it has a good distribution infrastructure in place and only then goes and promotes its products there. Today, mutual fund distribution is shrinking. How will investors from small towns and rural areas invest when there are practically no distributors there to facilitate the process and offer ongoing service after the investment is made? If we are talking about simple products for the common man, we must also think about simple certifications and low certification fees for the small IFA. We must re-think distribution models and see what is it that will make large number of youngsters from small towns to want to become a mutual fund agent.
I remember my early days in this business. I started out as an agent of LIC and for some years carried on in my job in parallel, until I could be confident that I was earning more from my agency than my job. Its only then that I quit my job and became a full fledged advisor. We had development officers who would look out for and recruit new agents. The process was very simple - and it worked. LIC alone managed to reach into 7% of Indian households. All the private sector players collectively in the last decade have moved it up to only 9%. We need to look at what worked well in the LIC distribution model and replicate that - if we want MF agents in small towns and rural areas.
We can keep debating about loads and commissions - but unless we find a way in which small agents in small towns find it remunerative and simple to get into MF distribution, we are unlikely to scratch even the surface of the potential that exists.
Account opening process
For the few IFAs in small towns who are still committed to this business and who educate their investors about mutual funds and get them warmed up to the idea, the next big challenge is to get an investor started in his mutual fund journey. Doing a KYC is a time consuming and largely duplicative effort, which also costs money. If the investor does not have a PAN card, you have to arrange for that too. The industry is losing many prospective clients for this reason - that it is just too cumbersome for an advisor to go through all of these processes to bring a new investor on board - especially when he does not get separately remunerated for this activity. He naturally chooses to continue going after existing clients - where this incremental effort is not required.
Who should create this infrastructure?
In the past, when volumes and margins were high, distributors found it viable to do all three of the above activities - executing investor education programs, enhancing distribution footprint by inducting channel partners and assisting investors with their account opening process. Today, these activities have slowed down considerably, given the new market realities.
So, the question is - who should create this infrastructure? Who should get Indian savers "mutual fund ready"? I think we need to learn from the way mobile telecom operators have built their business models. Do you think India would have reached anywhere near the mobile penetration that we currently have, if mobile operators did not focus on creating the infrastructure? Today, even in villages, you will find mobile towers. It is because the mobile companies set up towers across the entire country, that connectivity is assured. It is only when connectivity is assured that you can ask rural people to buy mobile phones. Now, this is what we need to consider - who owns and operates these towers? Does each mobile company have its own towers? No ! There are dedicated mobile infrastructure companies - tower companies - that operate on a commercially viable business model - and who sell the usage of their infrastructure to all mobile operators. Infrastructure is a common resource for the industry, and is made commercially available to all players.
Time for the MF industry to think out-of-the-box
The MF industry should likewise get together and promote a separate MF infrastructure entity. This entity should be tasked with three responsibilities:
Once the list of "MF ready" and "DISTRIBUTION READY - Rural Advisors" in each town is made available, all we need to do is connect them with each other - which means that the distributor will get "informed" Investors and investors will get "qualified advisors". Both can now leverage the "investing infrastructure" and start the investment journey!
Other important point - The entity tasked with the above three responsibilities should NOT be from/into financial product distribution business to avoid conflict of business.
There is another model that the MF industry can consider - and that is what the banking industry has done with its banking correspondents. RBI has permitted banks to appoint business facilitators and business correspondents - both of whom have well defined activities. A facilitator does not conduct any business - he merely facilitates identification of prospects, assists in filling loan applications, does a preliminary vetting of applications etc and then hands over these prospective cases to the nearest branch of the concerned bank. A correspondent has some more responsibilities - and can transact banking business (including disbursing loans etc) upto a defined limit - but there is a higher due diligence that banks have to conduct before appointing a correspondent.
The MF industry can similarly consider creating a cadre of Fund Facilitators and Fund Correspondents - who can conduct education workshops, assist interested investors with their KYC etc and then hand over this list of "MF ready" investors, and be paid a commission / retainer for their services.
Its time to act
The MF industry, we hear, is likely to get additional expense ratio for facilitating penetration into smaller markets. The industry can earmark a portion of this incremental money towards financing the infrastructure company and making it run as an independent, commercially viable entity. It can alternatively look at creating a new cadre of facilitators and correspondents. Unless the industry takes concrete steps towards the infrastructure side, we are likely to keep talking about under penetration, year after year. If the industry decides to act on the infrastructure aspect, many advisors like us will gladly partner with the industry in this effort.
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