Fund managers, however, say it will be costly and difficult to tap into these millions of small, and often sceptical, investors, many of whom live in small towns and rural areas and don't trust big city stock markets.
"One thing's very clear: the government's intention is to make mutual funds more acceptable as an investment option on a pan-India basis, said Kailash Kulkarni, CEO of L&T Mutual Fund, which this year bought Fidelity's fund business in India. "But there's obviously a cost that will go into this, especially when it comes to getting the manpower in these small towns, and the time that has to be invested."
While the scheme could help reduce gold imports, and the damage that has on India's current account deficit, the government also hopes to reduce market dependence on volatile foreign flows.
India first allowed foreign investors to buy local shares in 1992, and they now hold nearly a fifth of the total, according to Morgan Stanley data.