Cracking the MF code in rural India: Mahindra MF looks to expand markets

Unpredictable income, poor banking habit and a dearth of distributors will be key hurdles in the way

Somewhere close to Jalandhar, the chief executive of a fund house is trying to explain the patriarch of a wealthy Punjabi joint family the concept of mutual funds (MF). At first, this 50-year old mistakes the CEO for a share dalal or an agent of sorts. The asset management company (AMC) CEO quickly changes tack. “Imagine you are investing in the business of Maruti, Pepsi or ITC...’’ The CEO lets him ponder over that for a moment. “How is that possible? Why would these big guys need my money?” He is puzzled and excited at the same time. As an organised contract farmer who caters to several consumer companies, he has latched onto the return potential of the investment.

The conversation above gives a glimpse of the challenge the 42-player MF industry is grappling with. “Even wealthy families in rural India are unaware of mutual funds. The conversations are likely to be more challenging when AMCs try to reach out to daily-wage earners or landless farm labourers,” says Ashutosh Bishnoi, managing director and CEO of Mahindra MF. As of now, most fund houses are not engaging the second category given their little or zero investing capacity, which, Bishnoi says, is fine at the moment, as the MF business is not strictly a financial-inclusion business.

However, he adds, financial inclusion is important as without the habit of banking, the MF industry’s growth will remain stunted.

Mahindra MF, which began operations in July 2016, was set up to cater to the investment needs of the existing clients of Mahindra Finance. The non-banking financial company, along with its subsidiaries, is present in over 300,000 villages. “The business started with the idea of extending the relationship with these customers beyond their financing needs,” Bishnoi says.

Mahindra MF has an advantage as it can leverage the large presence of its parent company. Bishnoi adds that there is a ready customer base and franchisee network in markets where even some of the large banks don’t operate. But Mahindra MF is also beginning to realise that prising open the market will not be as easy, unless the fund house starts thinking differently. The issue is simple — while people's inflows are not certain, the outflows are fixed. “Unlike top cities, where the starting discussion point would be systematic investment plans, in the rural markets the conversation begins with systematic withdrawal plans.”

Bishnoi shares what made him arrive at this conclusion. “There is unpredictability to their earnings. Almost all of it comes from farm or related activities. However, their expenses are fixed. For instance, most of them will definitely have a mobile plan and a feature phone to get updates of mandi prices through SMS service. A sad, but the real picture is that due to low life expectancy, funeral is a recurring expenditure. So the idea of a regular outflow is unlikely to appeal to them; the idea of some regular income is more likely to strike a chord.”

Bishnoi, who has extensive experience in consumer marketing, says that to grow in the smaller markets, the key is to speak their language, use relatable examples and not confuse them with jargons such as ‘large cap’ and ‘small cap’.

He shares how his early experiences in these markets helped him to devise Mahindra MF’s strategy. “About two years ago, when I was making a presentation at the launch event of our business in Varanasi, I realised that I was not getting through to the audience. So I switched to Hindi. After that, we made a rule that all presentations must be made in Hindi. Except in the south, where people prefer English, we make all investor presentations in Hindi. This was an important lesson for us,” Bishnoi says.

However, an acute shortage of independent financial advisors (IFAs), who typically hand-hold the first-time investors, remains a big missing piece in the puzzle. Mahindra MF is trying to deal with this, with a hub-and-spoke model. “Our official mandate is to reach out to rural and semi-urban markets. Around 400 people across the 1,350 branches of Mahindra Finance have recently received certification to distribute MF products. But they cannot move the needle alone. We want each of them to create distributor networks and also support these distributors,” Bishnoi says.

The players are working on two fronts. The industry apex body, Association of Mutual Funds in India (Amfi), is pushing a campaign Mutual Fund Sahi Hai, to help increase awareness of mutual fund products, while individual AMCs are trying to get more people to see the business potential of becoming distributors. Amfi has even put posters of the Mutual Fund Sahi Hai advertisement on long-distance trains with the aim to drive home the message in smaller markets.

A Balasubramanian, chairman of Amfi and CEO of Aditya Birla Sun Life MF, says his firm is reaching out to insurance agents to make them consider distributing mutual fund products. “Earlier we held the Big15 initiative for the B15 (beyond top 15 cities) market to highlight benefits of mutual fund distribution. This year, we will hold a Big30 initiative for the B30 market.”

However, there is some disconnect between the product-mix that the AMCs think will drive the next leg of growth and the product preference in the rural and semi-urban markets. Many players are of the view that over a three-year period, fixed-income schemes are better than fixed deposits. But most fixed deposit investors in smaller markets have little interest in debt schemes. Junargadh-based Amit Charadva, one of largest independent financial advisors in the city, who by his own admission, has a 20 per cent market share in the Rs 9.2 billion (Amfi data) AUM market of Junagadh, offers a different view. “Customers don’t understand the interest rate cycles. Neither do clients understand the various debt schemes. Even we don't. So, we don’t recommend them,” Charadva says.

Another issue with debt schemes is the return expectations. “Investors are not okay with even a slight dip in the NAV (net asset value) of their debt schemes. They prefer to stick to fixed deposits. So mutual fund investing is largely equity investing for them. They are okay with some volatility in their equity exposure,” Charadva points out.

Charadva touches upon the additional work that a distributor needs to do in smaller markets to fulfil KYC norms as not everyone can be expected to hold a PAN card in these markets. “This is the reason that we take it upon ourselves to not only to do their risk-profiling and recommend suitable mutual fund products, but also provide them assistance in procuring PAN cards and other required documents,” Charadva says.

IFAs have played a key role in expanding the market beyond the T15 cities, but their numbers are still limited. Technology offers some hope, but can it really bridge the gap? Most industry experts say gaining trust is the biggest challenge in smaller markets and as technology cannot replace face-to-face interaction, it cannot be expected to build trust. Charadva adds that at least for the first few years, hand-holding is crucial. “The new investors come into mutual fund as a form of experiment. If the initial 15-18 months go well, they tend to stay. Otherwise, they pull out and go back to fixed deposits,” he says.

In the last five years, assets from B15 cities have grown at 37 per cent annually. The share of these assets in the overall industry assets has climbed from 13 per cent to 19 per cent as of March 31, 2018. The location-based incentives introduced by the Securities and Exchange Board of India in 2012 may have had something to do with this spurt, but it is clear that if the industry needs to go beyond the top 30, it needs to make some early sacrifices.

Can the Rs 23-trillion MF industry replicate the strong growth seen in B15 cities, in B30 locations?

Year	B15 AUM (Rs trillion)	% share in industry AUM
FY13	0.9	13.0
FY14	1.4	15.6
FY15	1.9	15.7
FY16	2.2	16.2
FY17	3.1	16.7
FY18	4.3	18.9
Source: Amfi