Web Column: MFs should target cash economy

If mutual funds follow the Sahara's module with added transparency, they can raise significant amounts from smaller towns

While the Securities and Exchange Board of India (Sebi) has been fighting a tough legal case with the Sahara group in the past few years, it introduced an interesting guideline in November, 2012 by allowing cash investments up to Rs 20,000 in fund houses (as recently reported, Sebi chairman wants it to be increased to Rs 50,000).

Sebi chairman U K Sinha, at that time, had said that the move, along with allowing retired school teachers, postmasters to become distributors, was to tap money from the smaller towns. In a meeting with Business Standrd, a few months later, he clarified that while the mutual funds (MFs) could raise money in cash from people with no bank accounts, the repayments would only be made into bank accounts.

Sahara has tapped this market successfully for years. The difference: It raised and repaid in cash. Its recent submission that it made refunds of Rs 20,000 crore in cash is quite mind-boggling. Whether entirely paid or not, it tells us the bitter truth about the thriving cash economy where Sahara has raised money from and repaid successfully for years.

I visited an old friend (a businessman) in Patna few years back and was surprised to see him dutifully give Rs 500 to a Sahara collector every day. He explained to me that he (and a lot of friends in the business community) has been doing this for years. Everyone gets repaid, along with a decent rate of interest, every quarter. He went on to add that the police authorities have warned against these investment avenues, but even the vegetable vendors in the locality make this daily/weekly investment.     

It’s the market to tap. While fund houses have legitimately complained that it is too difficult to manage cash and have, therefore, shown little interest in doing so, they need to find ways. Fund houses with large banking networks can actually do some legwork to exploit this market. By offering to pick up smaller amounts on a daily or weekly basis in safe products and opening bank accounts for such customers  (at the same time), they can get into a largely untapped market. Many MFs have ‘chota’ systematic investment plans.

It won’t be an easy task. Most are afraid that they will come under the tax net or will face scrutiny if they invest through a bank. But even if MFs can tap small businesses (like my friend) with bank accounts, they stand a good chance to expanding their base and assets. The RBI has also lent a helping hand by proposing to make exchange of notes issued before 2005 more stringent after January, 2015.

Many people in smaller towns will be looking for avenues to get rid of old notes. Mutual funds, with a good network and strong banking channels, can exploit this market. If they show aggression, it could be a hectic 10 months.