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What is the future of Mutual Fund in India? 13 industry stalwarts answer your question in a roundtable discussion conducted by Cashfree.
Here are two questions that might require a lot of thought.
What is the future of Mutual Fund in India? Did the pandemic and the accompanying wave of digitization alter its course?
To answer these questions, we would need to thoroughly go through the industry’s history, current trends, and customer responses to the same.
We could help gather the most esteemed thought leaders in the Indian mutual fund industry for a roundtable discussion.
We did the latter.
Cashfree conducted a roundtable discussion titled The Growth Conundrum Amid the 2nd Wave of Pandemic on 22nd June 2021. The panelists included industry stalwarts who discussed the current industry trends and the pandemic aftereffects.
Moreover, they debated about the future of mutual fund in India. For anyone who missed the webinar (or wants to rehash their takeaways), here’s an all-you-need-to-know blog!
So what are we waiting for?
Let’s get started!
Digitization and Future of Mutual Fund in India
The first topic of discussion was focused on driving business growth from new users and existing customers.
Experts pointed out that the term ‘disruption in the industry’ must be taken in a positive light as it enables people to transact better and Digital has done just that in the mutual fund industry.
Lack of Structure in Compliance Network: A Challenge to Digitization
The group opined that India has an undefined legal and compliance framework on money transfer and our authorities are rather ‘conservative’ in terms of policies. After all, any transaction needs to pass through various levels of compliance before getting the green light. However, this itself is against the concept of digitization.
Digitization serves one particular purpose. This is to ensure ease of transaction without the intervention of any institution or similar entity/structure. One example of this is cryptocurrency. Evidently, India’s undefined compliance network might be an obstacle to the digitization of the mutual fund industry.
The regulatory bodies have rather strict regulatory norms and there is a need for a fusion of regulatory technology and the new digital technologies. This will ensure that the digital platforms, regulatory authorities and user expectations are all in sync with each other.
Furthermore, the mutual fund industry includes an ‘end of day affair’. This implies accounting work before the determination of ‘transaction value’. Naturally, this is the cause of probable delays.
Inter-Generational Bias and Effect on Digital Transactions
There are a lot of digital platforms offering mutual funds. Interestingly, they appeal to Millenials and Generation Z alike. Moreover, the pandemic has accelerated digital literacy among the masses. This is bound to affect the growth of digital transactions.
Gen Z is at an advantage over millennials and generations before them. However, this goes beyond the idea of being technologically advanced. Evidently, Gen Z has the lead there. However, it is also about adopting new practices. It is much harder to help older generations adopt the digital ways as compared to teaching the younger generation the same. As the larger percentage of the customer base becomes younger, the digital transaction is likely to become the norm.
Pre millennials have a higher need for physical assets as compared to millennials and post-millennials. The younger generations are far more experimental and willing to take risks.
Need For Seamless Customer Experience
Experiential marketing is the new norm. Millennials and Gen Z are used to the ‘instant gratification’ experience provided by companies like Facebook, Uber and Amazon. They expect a frictionless experience from digital platforms offering financial services as well.
The panel discussed how the concept of ‘integrated experience’ has come to the forefront. In essence, the customer expects all their desired services on one platform in a seamless experience. Experts predict that in due course, this will lead to a blurring of differences between retail eCommerce and fintech eCommerce. For instance, a customer on a retail eCommerce platform might want to buy a phone using his mutual fund assets as currency.
Moreover, there needs to be a more customer-centric approach to onboarding customers. With UPI, customers expect a unified payment experience of moving funds. The mutual fund industry might have to adapt itself to bring in a unified system in place. For instance, let’s assume that a customer avails the services of a mutual fund company. They are duly verified and the KYC process is carried out successfully. In such a situation, this customer should be able to avail the services of any other fintech company without going through the same KYC process again. This way, the customer will have a seamless experience across any fintech entity.
On the other hand, some experts had a contradictory view. They mentioned that a unified platform might be a far fetched dream. However, there are some recent developments in the financial industry that deserve a mention.
Mass Marketing Mutual Funds: A Golden Opportunity
The real challenge is to mass market mutual funds. Currently, there are a few distributor entities in the market. The industry players can provide standardized tools to help fintech platforms increase the number of distributors and onboard more customers.
However, one must heed a word of caution. Mutuals funds is an advisory led product. Naturally, customers prefer known sources while investing in mutual funds. In essence, digitization has made access easy, but advisory difficult. So, there is a huge opportunity window for fintech platforms to fill that gap.
Acceleration of Product Innovation
As discussed before, the new generation is comfortable with completing the three buying stages online. This includes decision making, transactions and reporting. This younger customer base moves at a faster rate and expects market players to deliver to their expectations.
In recent times, the efficiency on the investment side has increased multifold. However, product innovation is yet to catch up. He gives the example of South Asian markets here. They excel at product evolution, multi-asset investment etc. Interestingly, these aspects are led by technology. For instance, there are Asset Managers that solely work on AI-driven indices. Taking these factors into consideration, he predicts that customized/smart indices are a trend that will accelerate in the future.
Distributor Mindset: Obstacle to Digital Adoption
The customer and distributor mindset can pose a big problem to digital adoption. Distributors are wary of scams and forgeries in the online space. While the pandemic brought in some encouraging trends (digital adoption increased by 4 times), we still have a long way to go.
The upper-middle and rich households were not as affected by the pandemic financially. However, it freed up a lot of time for them. Interestingly, the number of new DMAT accounts shot up manifolds. Consequently, the spillover into mutual funds was noticeable.
After analyzing this trend, they deduced that this customer base might suffer from ‘hot button’ syndrome. They are digitally literate and comfortable with the digital route. They may be ‘quick’ in their buying decisions but have a significant churn off rate as well. The role of the mutual fund industry is to distribute financial literacy. They need to play an active role in making the customers understand the relevancy of long term investments and the role they play in wealth creation.
Passive Funds and Onus of Customer Financial Literacy
Passive Mutual Funds are extensively sought after in today’s times. This is because of their simple structure and low cost. However, this has resulted in higher competition. This, in turn, led to higher complexity within Passive Mutual Funds. Needless to say, the whole situation has evolved into a paradox.
Moreover, Active Mutual Funds require advisory. Now, advisory, as a service, is expensive. As a result, distributors are not attracted towards Passive Mutual Funds as there are no possible avenues for remuneration. After all, the advisory cost will increase the overall cost of Passive Mutual Funds and hence, discourage customers from investing.
Resultantly, the onus of customer education falls on the Mutual Funds industry itself.
On the other hand, this can be an opportunity to include fintech players. Fintech players can help MF houses to educate customers about mutual funds rather than investing impulsively.
Need for Branding and Marketing in Digital Space
Experts mentioned that the right marketing and branding tactics must source customer pull. It is critical for companies to invest in branding as customer trust might allow them to capture the market share.
Role of Fintechs in the Future of Mutual Fund in India
Usually, customers buy through multiple mutual fund houses. Resultantly, they prefer to buy through an aggregator instead of going to each individual website. The panel critiqued the present fintech players for only providing a transaction level service. They encouraged the fintech players to provide an end-to-end one-touch customer experience platform to fill this void in the market.
However, they stressed that these aggregators need to be sustainable as well. A customer expects financial services apart from the execution platform. For instance, a customer might want to change their contact information or bank mandate. If an AMC wants to partner with fintech, they need to consider the aspect of sustainability.
Promising Innovation and its Effects
As of now, the mutual fund aggregators seem to be in the ‘acquiring phase.’ In other words, they are focusing on acquiring customers and not providing value to the existing ones. However, they may evolve in the coming future as they get access to bank data.
The future of mutual fund in India (roughly 5-6 years from now) will be API-led. Customers will prefer to buy from aggregators as a default practice. Moreover, Innovation Sandboxes may help new fintech players to come up with customer-centric aggregator solutions. Moreover, the face of the wealth management industry is likely to change as new players get the backing of legacy banks.
Emphasis on Payment Solutions
Mutual fund digital transactions can be evolved and aided by using existing fintech innovations. For instance, payment gateways can offer subscription models, UPI based payment modes, IMPS, payment links, etc. to ease the process of payment collection and disbursals.
Can Younger Funds Houses Play It Safe?
While innovation is on the rise, the younger fund houses must practice caution. Most younger houses lack the funds to practice the ‘hit and trials method’. Evidently, they will not be dubbed as the ‘trendsetters’ if they take the tried and tested route. However, it is important to weigh the pros and cons associated with innovation when it comes to the field of mutual funds.
Fintech Help in Customer Buying Decision
Evidently, Asset Management Companies (AMC) compete with one another. Moreover, there is a dearth of existing customer literacy when it comes to investing in mutual funds. Most customers want to invest in funds that are booming at the time of purchase. Naturally, they become wary of investing again in case of a lack of returns.
However, there is a solution here. Fintechs can help customers decide which funds to buy taking the customer’s assets and goals into consideration.
To conclude, experts shared an optimistic view about the future of mutual fund in India. They were hopeful about the sandbox innovations, digitization, and the role of new players in the industry.
What are your thoughts about these insights? Let us know in the comments below!