Going beyond cities: How MFs are scripting the small-town success

Places beyond top 30 cities become a major source of business

India’s smaller cities and rural areas give a wider picture of how the economy is doing. Most businesses face crests and troughs here, but one stands out for its success: The asset management or mutual funds (MF) industry.

 

MF investments, once seen as primarily the domain of urban investors and institutions, have now established a strong presence across India. This expansion is driven by a digital revolution and booming equities market.

 

According to the industry, more than 50 per cent of systematic investment plan (SIP) accounts come from semi-urban and rural areas. These regions also hold a majority share in other key metrics as well, such as direct plan investment accounts and individual distributor counts (see charts).

 

 

The regulatory landscape divides the Rs 68-trillion MF industry into two segments: Top 30 cities (T-30) and cities beyond the Top 30 (B-30). Recent data indicates that MFs have been expanding their presence in B-30 cities at an unprecedented pace.

 

For instance, data for the last one year shows that B-30 delivered higher growth across parameters compared to T-30. MF investment accounts in semi-urban and rural areas went up by 43 per cent to 101 million in a year, compared to 30 per cent growth (114 million accounts) in the top cities. B-30 also overtook T-30 in SIP accounts in this period.

 

The growth figures represent a milestone for the MF industry, which in its 60-year journey has strived to expand beyond traditional investment destinations and into the hinterlands.

 

The geographical division of T-30 and B-30 was a tailored growth strategy to take MF to non-urban areas. In 2012, the Securities and Exchange Board of India introduced the B15 cities regulation which was modified to B30 in April 2018. The regulation aimed to incentivise asset management companies (AMCs) to increase MF penetration beyond major cities by compensating them for the additional costs required to attract and service clients from smaller towns.

 

The extra total expense ratio (TER) — a measure of the total costs associated with managing and operating an investment fund — was suspended in 2023, equalising the distributor incentive structure for T-30 and B-30. The two market segments are now only geographical classifications and have no regulatory distinction.

 

Wider reach

 

The Association of Mutual Funds in India (Amfi) says the classification is relevant for investor outreach. “The segregation helps the industry focus its efforts on widening the reach and penetration,” said Venkat Chalasani, chief executive of Amfi. There are no plans to advance B-30 to B-45 as it was done in 2018 (B-15 to B-30).

 

“While there is definitely an uptick, B-30 still is just about 20 per cent of the AUM at an overall level and about 25 per cent at individual investor level (excluding non-individual investors). The media campaign and investor education programmes reach far corners of the country. Therefore, we feel there is no need to change the nomenclature at this juncture,” he said.

 

B-30 penetration has been largely unaffected even after the suspension of extra payout to distributors. The individual distributor count in B-30 has grown at a faster pace than in T-30 in the past few years.

 

According to MF executives, the pull of strong performance and the ease of investing provided by online platforms have helped cushion the impact.

 

In the last one year, individual investor AUM went up almost 53 per cent for B-30 compared to 48 per cent growth in T-30. The trend is similar if we segregate the direct plan (75 per cent growth in B-30 vis-a-vis 58 per cent rise in T-30) and regular plan AUM (48 per cent in B-30 compared to 45 per cent in T-30).

 

Direct plan AUM is business obtained directly through online investment platforms or a mutual fund’s own websites, while business through distributors and banks is reflected in regular plan AUM.

 

Due to increasing investor interest, there are now at least 13 centres outside T-30 cities with mutual fund assets exceeding Rs 10,000 crore. Aurangabad, Allahabad, and Raipur are among the largest markets for MFs in the B-30 segment.

 

MF industry executives ascribe B-30 growth to two major factors: Investors’ word-of-mouth publicity and ease of investing due to smartphones, internet penetration and online platforms.

 

“Indian equity markets have done very well over the last three decades, delivering potential double digit returns in the long run. Equity mutual funds have thus created significant wealth for investors and the positive experience is driving growth. Also, the financialisation of savings (a trend seen across the country) is more pronounced in smaller cities and towns, which were hitherto underserved,” said Suresh Soni, chief executive officer (CEO) of Baroda BNP Paribas Mutual Fund. As people increasingly move their savings into financial instruments, MFs are a major beneficiary, he said.

 

Digital boost

 

Madhu Nair, CEO of Union MF, had a similar view. “The first important point is the market itself. Whenever equity markets deliver stellar returns for a consistently long period, there is always a rush of new investors,” said Nair. “The second factor is digitisation. Online distribution channels have allowed MFs to reach far away corners of the country. We also benefited from the JAM (linking of Jan Dhan accounts, Aadhaar and mobile number) trinity that happened in 2016,” he said.

 

Data on direct plans show how has helped MFs to reach across the country: There are 39 million B-30 investment accounts compared to the T-30 tally of 34 million.

 

“Overall, the ease of investing, aided by digital reach, focus on communication and strong market performance have helped the industry in B-30 penetration,” said Anand Varadarajan, Chief Business Officer, Tata Asset Management.

 

SIPs’ emergence as a primary investment option — at least for young Indians — has emerged as a key driver for the industry's growth in recent years. And the adoption is not just limited to big cities.

 

The number of SIP accounts is higher in B-30 than in T-30. B-30 SIP numbers, which first overtook the T-30 tally in August 2023, now stand at 54.7 million. In comparison, the number of active SIP accounts in the top 30 cities stands at 46.5 million. Except for a brief period, the gap since August 2023 has consistently widened with B-30 ahead by 8.2 million accounts at the end of October 2024. 

 

SIP success

 

Higher growth in B-30 SIP accounts reflects in the SIP contribution data. The SIP inflows from B-30, which used to account for around 35 per cent up until recently, is now over 40 per cent.

 

MF executives attribute the growth of SIPs to the digitisation of the economy after the coronavirus pandemic in 2020. Direct investing apps have been around since 2017, but they only began to gain significant traction in 2020. The sharp market rebound following the March 2020 dip captured public attention, and these apps facilitated easy entry into the equity market through both direct investments and MFs.

 

While market returns attracted investors, promotional campaigns by mutual funds, Amfi, and investment apps boosted the appeal of equities. Brand experts say that the strategic use of cricketers as brand ambassadors, coupled with extensive advertising during cricket matches has significantly helped the industry attract investors from across the country.

 

Other contributing factors included a surge in savings, declining interest rates on bank deposits and other fixed-income options, and people getting time to explore investing and trading when they were confined to their homes during lockdowns to slow down the spread of the pandemic.

 

The combination of advanced technology, affordable high-speed internet, and widespread smartphone usage across the country has been a crucial enabler for the MF industry. This is also clearly reflected in the direct plan data, where B-30 is much ahead than T-30.

 

While the cities are ahead in regular plan accounts at 80.3 million, B-30 is fast catching up with 30 per cent growth in the last one year.

 

The industry’s own publicity and the benefits of the JAM trinity in 2016 have assisted MF growth. JAM stands for Jan Dhan Yojana (financial inclusion), Aadhaar (unique identification), and mobile (communication).

 

The industry launched an advertisement campaign to reach out to prospective customers. Since the campaign called ‘Mutual Fund Sahi Hai’ is funded by the industry and not any individual MF, it had the financial wherewithal to feature across television, digital, and print media consistently over the years. MFs have to compulsorily keep aside 2 basis points of their total AUM every year (around Rs 1,300 crore at present) for investor education and they send that money to Amfi, which runs the campaign.

 

“Amfi’s ‘Mutual Funds Sahi Hai’ media campaign reaches the far corners of the country. AMCs regularly conduct on-ground investor awareness programmes all over the country, including B-30 and beyond locations. Over the last few years, all these efforts coupled with distribution outreach and increased tech adoption, has helped increase the share of B-30 in the industry AUM,” said Chalasani.

 

At the individual level, too, MFs have invested to ensure their messages reach investors in the hinterlands. Most fund houses have also established their physical presence in major B-30 hubs.

 

Peshotan Dastoor, group president and head - sales for UTI AMC said: “To cater to this growing demand, UTI MF has been expanding deep into these regions and as of September 2024, 72 per cent of our branches are located in B-30. In 2023, we opened branches in 29 cities and this year too, we will expand to 68 additional cities. This will take our presence to 256 cities by March 31, 2025.”

 

Wooing customers

 

Communication, according to MF officials and distributors, is key to bring in new investors and retain existing ones, especially in B-30.

 

“Given that many of these investors are relatively new to the market, it is early as well as inappropriate to pinpoint exactly how investors will behave if there is a panic situation in the market. It is fairly normal for investors to feel jittery when they see red (loss) in their holdings. And that is why instead of generalising panic behaviour, it is our duty to educate investors to have a long-term focus and be opportunistic if market conditions permit,” said Abhishek Dey, founder of Epsilon Money, a wealth management platform focused on B-30.

 

“Since a lot of these investors are fairly new to mutual funds, and by extension the stock markets; it is important for AMCs and distributors/advisors to hand hold these investors and emphasise and create awareness about the need to invest for the long term,” said Soni.

 

MF executives said their industry has a small customer base and its growth should not be compared with general consumer businesses. There are around 51 million MF investors in India.

 

Even though MFs have taken in investors from across the income spectrum, chances are that the lion’s share of the B-30 AUM is from the wealthier section of the society, according to experts.

 

In recent years, leading wealth managers have expanded B-30 to capitalise on what the industry calls the wealth effect. They see investments coming from two sections: A newer generation of wealthy families opening up to financial investments and the emergence of a young crop of entrepreneurs.

 

Additionally, a portion of B-30 investors might actually reside in top cities. Since investor locations are tracked via Aadhaar, many individuals who have relocated to urban areas in recent years are still classified as B-30 investors. This adds an interesting dimension to the growth dynamics of mutual fund investments in these regions.