Mutual Fund Industry Should Focus On Structural Transparency Rather Than Folios And AUMs

The total number of MF investors grew to 4.69 crore in June 30, 2024; in comparison, active investors stood at over 9.5 crore on the NSE. This number has also come down from nearly 14 crore, post the Covid period when work from office was the norm.

There is no denying that growth in the unique investor base of the mutual fund industry is abysmally low as compared to the stock market. This is despite mutual funds being relatively safer and significant wealth generators.

Investor data for the industry is sketchy and industry body—Association of Mutual Funds in India—and the industry players need to be more forthcoming and transparent on the data front.

The industry is about to see two diverse product additions—one being the Rs 250 Systemic Investment Plan; and second, the new asset product for investors sandwiched between a mutual fund and portfolio management services. The regulator wants the MF industry to manage this product.

These two products capture the aspiration of wealth creation for the emerging demography, which does not believe in keeping idle cash in banks and fixed deposits. A trend that even the RBI Governor spoke about recently, when he said household savings are preferring stock markets or mutual funds, insurance funds and pension funds as compared to traditional parking bays of banks.

The answer lies in how the industry is more of a coterie of top 5-10 fund houses, while the newer and smaller fund houses find themselves isolated. It is not just in their involvement in the policymaking; the industry body also needs to be more transparent in sharing more incisive investor data.   

Democratisation of the mutual fund investor data will be the first step to push products and allow market forces to equally distribute products and take advantage of supply-side gaps.

The new Indian investor has moved out of the top urban cities and now can use technology and cheaper data to invest and park funds from any corner of the country. The mutual fund industry may not even have this information of how many investors come from each of the 70 cities, that have over 10 lakh population. Of the 4.69 crore mutual fund investors, it accounted for in June, how many are from cities other than the top seven urban centres? What are the average investments of these investors and average holding period, their age or demographic profile?

The stock exchanges have begun sharing data on the demographics and geography of new investors. It throws up newer cities that brighten up a new centre of trading, but there is no data that is shared by AMFI.

Do they even know about the same? AMFI is in perpetual denial. The industry body doesn’t even have this data, it claims it is at the mercy of KFin Technologies Ltd. and Computer Age Management Services Ltd. to provide such granular data. If AMFI claims to be the industry forum, responsible to push regulatory polices and financial inclusions, then it is time it begins with transparency and starts with data disclosures.

Between the two registrar and transfer agents of the industry—KFintech and CAMS—it should be able to generate all data on a monthly basis. Instead, the industry likes to portray folio additions, which is a sham like rising demat accounts. Folios like demat accounts increase compliance cost and provide nothing but a feel-good statement.

Why should an investor have multiple folios, why can’t one folio be linked to all schemes he or she has invested in? It is not just in mutual funds, why should a stock market investor require a separate demat account to trade with multiple brokers?

The best part is industry insiders agree. One even stated that his fund is not bullish on the listed depository because they know that the demat numbers are a sham and only a small proportion are active. What is worse is that it increases the cost for the retail investor and the market intermediary.

Discount broking and cost arbitrage have led to investors switching online brokers. Every time an investor opens an account with a broker, it comes with a compulsorily separate demat account, and they are not allowed or given an option to use existing demat accounts. Similarly, any investor cannot use the existing folio to make investments in schemes of other AMCs. This is despite the fact that all depositories are interlinked, RTAs are interlinked and accounts are interlinked; not to miss, all of them are now verified through central KYC. And at the end of the year, RTAs provide a consolidated statement to investors as well.

There is an urgent need to consolidate or merge folios and demat accounts, so that the market has one investor, one folio and one demat account linked to one central KYC for any financial market transactions.

The mutual fund industry is at a cusp, it could double every three years and if that happens, the regulator needs to step in to make the system leaner today. It may disrupt business models of depositories and RTAs… so be it. A vibrant and transparent investor base is a more important need of the hour. This would ensure more products could be designed, so financial instruments can spread far and wide.

We may be amazingly good and low-cost at implementing technology at the systemic level. We need to do the same at the entry level for the investor.