Mutual Fund Industry Challenges and Opportunities | Kotak Securities (2024)

The Indian mutual fund industry has come a long way since its beginning in 1963. The industry's assets under management (AUM) has grown from Rs 8.90 trillion on November 30, 2013, to Rs 49.05 trillion on November 30, 2023, a fivefold increase in 10 years. While investors have embraced mutual funds to accomplish various life goals, the industry still has certain challenges to address. At the same time, there lies ample opportunities to be tapped, which, if done, can further boost growth.

Challenges for the Industry

Some of the challenges that the industry needs to overcome are as follows:

Need for Mutual Funds to Become a Pull Product

Mutual funds need to position themselves as a "pull" product rather than a "push" product. A pull product attracts investors with its inherent value, performance, and alignment with financial goals. On the other hand, a push product depends on aggressive marketing and sales tactics. Historically, mutual funds in India have often been pushed to investors through aggressive marketing and sales tactics. Over the years, the industry has pumped in several crores per annum on investors' education.

For the industry to truly thrive, mutual funds need to transition into a pull product. This involves leveraging digital platforms and technology to provide investors with user-friendly tools for research, analysis, and portfolio management. Adding mutual funds to the school curriculum can help spread awareness and inculcate the habit of early savings.

Robust Distribution Networks

The industry's success is delicately tied to establishing a robust distribution network. Though urban centers have witnessed significant participation, a gap exists in smaller towns and rural areas. A solid distribution network is imperative for extending the reach of mutual funds to a geographically diverse investor base.

A robust distribution network is pivotal in investor education, facilitating transactions, and building trust. Moreover, tailored strategies are needed to address different regions' unique needs and preferences, making localization an integral aspect of the distribution network. As the industry evolves, a solid distribution network becomes a key driver for sustainable growth.

Simplified Operational Process

While the industry has made rapid progress in standardizing processes, there's a lot of room for refinement. A prominent challenge is simplifying the know-your-customer (KYC) process to ease investor onboarding. Another significant challenge lies in integrating Aadhar, the unique identification system, with the Permanent Account Number (PAN) for mutual fund investments. The seamless interchangeability of Aadhar and PAN could facilitate a smoother and more efficient validation process for investors.

Also, there's a call for allowing investments based on 'Bank KYC,’ which aims to leverage the existing robust KYC processes implemented by banks. By recognizing and accepting bank-verified KYC data, the mutual fund industry can further enhance the accessibility and convenience of investment opportunities, thus fostering a more investor-friendly environment. Addressing them would contribute to the industry's evolution.

Opportunities to Tap

While there are challenges to overcome, the industry also has multiple opportunities at its disposal. Lapping them can further accelerate its growth. Some of them are:

An Increasing Inclination Towards Mutual Funds

A recent survey indicated an increasing inclination towards mutual funds among investors. The survey found that 54% of people chose mutual funds as their preferred investment option. This not only underscores a tectonic shift in investor behavior but also presents a significant opportunity for the industry to capitalize. By offering innovative products, mutual funds can further make inroads into an investor’s portfolio and become their go-to financial instruments to accomplish various life goals.

Rising Number of Millennials and Youth

India's rising millennial and youth demographic presents a vast opportunity for the mutual fund industry. India is one of the world's youngest nations, with more than 55% of the population under 25. This dynamic and tech-savvy generation can become the industry’s driving force in the coming days.

As per a report, more than half the first-time investors in mutual funds over the last five years were millennials. The report said that 54% of the 1.6 crore new investors who invested in mutual funds during FY 19-23 were millennials. Also, the rising income levels and changing lifestyle preferences indicate a growing appetite for mutual fund investment.

In Conclusion

In the coming days, technology is poised to be the biggest enabler for the industry. With a large population embracing technology, the industry has a tremendous opportunity to leverage. Adoption of fintech solutions will not only enhance accessibility and convenience but also redefine its landscape, making the industry more inclusive and efficient.