The latest buzz in the last week was that of GOOGLE being mistaken for a mutual fund company. Apparently the company was sitting on so much of cash - $4 billion to be exact and $5.8 billion in marketable securities that it had to ask for exemptions from certain prevailing laws. Any company in India would have loved to be in this situation but the domestic mutual fund industry in particular must have turned green with envy.

The mutual fund industry which is the smallest investment vehicle in terms of size in India, when compared to conventional investment products like bank deposits, company deposits, insurance and postal savings, but in terms of glamour and popularity it is way ahead of everybody. The race for the AUM within the industry has been well and truly on for some time now, and the fund houses has turned themselves into NFO factories, churning out one scheme after another, regardless of the value addition these new schemes bring to the unitholders.

Recent SEBI guidelines on initial issue expenses, rendered this NFOs a little unattractive, but that did not deter the industry as after a small lull the storm is back in full force with a series of close-ended funds. The growth of the industry in the last few years has been due to a variety of factors like effective regulation, overall good performance of the stock markets and implementation of best practices. But still, mutual fund is not the first investment first choice for retail investors across the countries.

The mutual fund have been guilty of focusing on only large ticket clients and still much of the money comes from institutions and banks which chiefly use mutual funds for their treasury management functions. While the increased inflows look well on paper, for the growth momentum to continue, the focus now has to shift to the retail level.

According to estimates, the total equity investments by retail individuals in India are just around 2% and mutual fund investments may well be an even smaller number. As an observer, this translates into opportunities for the industry.

The problems are similar to what the insurance industry faced after private players were allowed to set shop, LIC, which had monopoly powers till then, suddenly came under pressure. But it took the industry long time to create a balance as LIC retained close to 95-97% of the market share till a long time.
Private players were initially hesitant to expand beyond major metro cities till they had a firm foothold, and LIC with its strong agent network across the country enjoyed a good reputation, making it doubly difficult for the private players.

The situation is comparable to the mutual fund industry, with certain differences. The fall of the Unit Trust of India made it a little easier for the rest of the competition. Although, insurance is not investment and mutual funds don’t guarantee any repeat of past performances, but in India, insurance has been traditionally sold as an investment product, and mutual funds continue to cite past performance as reasons to invest in a fund. However, the above anomaly apart, what the major difference between the industries is the penetrative reach. While the insurance industry players has left no stones unturned in wooing the retail public, whether it by setting up offices in the remotest of areas or by product innovations, the mutual fund industry is happily sitting on its laurels.

The reasons why UTI mutual fund still is one of the biggest fund house even after the debacle is chiefly because of the kind of network it enjoys in smaller cities. The movement to tap this retail base is already underway as some fund houses have started focusing on the number of investors that they have in their folios apart. Retail investors characteristically are long term investors, as against corporate investors who have a very short investment horizon. Though the cost of acquisition of these types of investors is pretty high but in the long run it is worth the effort as they are the ones who are probably going to stick with the fund the longest.

Although, everything in India can’t be multiplied by 1 billion as is the general perception of all foreign company that comes to India, the mutual fund industry must realise that the race is not within the industry, but to establish mutual fund schemes as preferred investment choice, for which the retail investors can be ignored at its own peril.