Mutual funds ‘Sahi Hai’ — if you bridge the advice gap

 A few months ago, I met a young professional who had just started investing in mutual funds. He saw advertisements saying ‘Mutual Funds Sahi Hai’ (which translates to ‘Mutual Funds are good’).

He wanted to invest ₹75,000 for a year. He read a few posts and some news articles. Then he went to a website that displayed mutual fund returns data. He sorted the returns to find the scheme that had given the highest one-year return and invested in that scheme. He was pleased that this investment process took less time than buying online, where one must compare prices, coupons, and cashback offers from e-commerce websites.

But in actual fact, this investor inadvertently purchased a sector fund at elevated market valuation, with very high mid-cap allocations.

This reminds me of the 2007-08 period prior to the financial crisis when investors forgot that return of capital is more important than return on capital.

India’s middleclass relies heavily on “advice” from friends, family, insurance agents or bank employees. Often, this advice is not correct due to lack of financial education or intentional mis-selling of products. Unfortunately, the young professional’s portfolio size of ₹75,000 is too small for the well-trained wealth advisors.

With only around 755 SEBI Registered Investment Advisers (RIAs) for a population of 1.3 billion, India has a significant advice gap. Appropriate investment advice must reach the masses for real financial inclusion.

Technology tools to automate good quality, personalised investment advice are being developed by Robo-advisors. Robo-advisory in India is at a nascent stage and poised for significant growth. Successful Robo-advisors are expected to leverage advances in artificial intelligence and machine learning to transform the investment advisory landscape in the next decade.

When we discuss regulations for Robo-advisors, there can be various aspects such as security audit, periodic review of algorithms, disclosure standards and reporting requirements. When we hear the word “regulation”, the common perception is that some compliance processes gets added to increase the cost of doing business, eventually curtailing innovation. However, let’s focus here on positive regulations that can benefit all stakeholders in the mutual fund industry, including robo-advisors.

Steps to follow

The following regulatory steps will go a long way in deepening penetration of mutual funds in India.

Simpler KYC process: Paper-based KYC remains one of the most resource-intensive overheads. The Aadhaar-based eKYC only permits an investment of ₹50,000 per year per Mutual Fund House. This is insufficient for even a monthly SIP of ₹5,000 per month.

Unnecessarily, investors may need to purchase schemes of several fund houses to take care of this limit. If digital firms have to process paperwork for full KYC, costs will remain high. An annual total limit of at least ₹5 lakh with eKYC (no separate limit at Fund House level) is a better solution.