For the past five years, money has been flowing out of most types of mutual fund schemes. For a while, it seemed to many experts that investors' faith was shaken by the market crash of 2008 and they would start investing when the equity market revived. Well, equity prices rose but investors continued to pull money out. In the face of savers' utter indifference, almost all of the 44 asset management companies in India are clueless. They have tried to advertise, incentivise and evangelise. But savers are ignoring the pitch that equity mutual funds are the best tools for creating long-term wealth. Where is the problem? It is - and asset management companies don't want to see this - in the deeply flawed model of mutual funds.
Last week, the Confederation of Indian Industry (CII) held a mutual fund summit with the theme "Unearthing the growth potential in untapped markets". This seemed strange because mutual funds have not even tapped the savers in metros, far from reaching into semi-urban areas. Maybe the theme was chosen because selling equity schemes to villagers is the pet idea of the current chairman of the Securities and Exchange Board of India (Sebi), U K Sinha. Moneylife research shows that very few people even in urban areas are investing in mutual funds, especially equity mutual funds, while most of those who have invested in the past are either bitter or unenthused by the experience.
Neither the regulator nor the mutual funds are interested in digging deeper into this experience. The regulator, under two successive chairmen, has made things worse by messing around with the rules. Everybody seems to believe that investment through mutual funds is a great invention that would boom if only we can spread its gospel through "investor awareness" programmes conducted in far-off towns.
Well, I have been analysing the performance of mutual funds and examining their business model closely for the past seven years. I am now convinced that "investor awareness" or "discovering the various routes which can help them reach out to a larger belt of customers beyond the Tier 1 cities", as the CII session intended to discuss, are useless exercises. Asset management companies will never be able to connect with savers, whether rural or urban, with the current model.
Businesses that appeal to the masses should have certain basic features. Customers must:
- clearly perceive benefits out of what they buy;
- be able to buy the products without hassles;
- actually experience performance that matches the promise; and
- experience the same benefits repeatedly without fail.
Mutual funds do not pass even one of these tests. Perceived benefits:
Funds have created too much complexity for their own good. So investors cannot perceive the benefit of investing in mutual funds. Even the very few that are performing well do not talk about it imaginatively. Net result: most savers don't know or don't believe in the benefits of using mutual funds. Hassles:
Regulations have made it too difficult to invest in financial products. How many people would buy a bottle of shampoo if they had to take the following decisions: eliminate the ones that may make one go bald; read and follow complex instructions on timing, quantity and technique of application, rinse and wash; and risk the fact that a mistake in any of the above would permanently damage one's hair? If shampoos were so bothersome to use, they would not be a viable consumer product. Mutual funds present the same problems: how to select, how much to invest, when to invest and when to sell are not written on simple, easy-to-apply labels. Savers who are unwilling in learning end up losing money - and then they stay away. Yes, there are "advisors" who are supposed to give the right advice, but, as I pointed out a few months ago, advisors are not doctors. Promise vs performance:
There are innumerable examples in which performance has fallen far short of expectations. This is the seamiest side of fund management, and you don't see any introspection about it. Consistency:
The human mind hates anything that is not linear and consistent. But markets, by their very nature, inflict different experiences and savers cannot deal with it. Mutual funds do make some effort to explain the variability of returns, but they do a half-hearted job. Besides, many fund companies have proven to be untrustworthy. They have frequently pushed the wrong products at the wrong time. So, unlike a good soap, savers' experience with mutual fund investment - barring exceptions - isn't all positive.
It is foolish to think mutual funds can be popular like soaps or shampoos. The stark truth is that the business model of fund companies (unlike a good soap or shampoo) is not delivering as much value. And yet, two of the sessions in the recent CII summit focused on trying to learn how consumer products and mobile phones managed market penetration. Nobody seems to have realised that financial products are very different and their model is flawed.
In fact, mutual funds are like a car company that ships out completely knocked down self-assembly parts, some of which are unreliable. The customers are supposed to figure out - without a manual - how to assemble the parts to ensure a workable product. Look at it this way and you realise why the current mutual fund model is doomed to limp along.