Investing in innovation

The mutual fund industry may be going through tough times but this does not seem to have slowed down the players who have come up with several interesting innovations and measures in the last few years.

Some of these include the use of mobile phones to carry out mutual fund transactions; allowing easier redemptions by linking funds to a debit card; allowing investment in gold exchange traded funds even without a demat account as well as bringing in a protection angle to investments to take on rivals in the insurance space.

However, it's a fair bet that most investors haven't heard of them, considering the state of mutual fund penetration. The mutual fund industry has 41.3 million folios or investor accounts, according to data as on September 30, 2013 from the Association of Mutual Funds in India. For a country with a population of 1.2 billion, this represents a penetration of around 3 per cent, assuming no duplication in the folios, which is said to account for a fourth of the folios.

The first of the innovations looks to leverage the widespread use of the telecom industry to improve the penetration by bridging the gap between investors and mutual fund products. This is done by allowing them to transact through the use of the messaging service on their mobile phones. Investors, however, must first register for the facility with the fund house. They will then receive Personal Identification Number or PIN to authenticate these transactions.

If the investor wishes to buy a mutual fund, he messages 'buy' followed by the amount and the PIN. A similar procedure is to be followed if he wishes to sell or redeem his units. The facility can also be used for switching the investment from one scheme to another. There were 1,600 transactions in October through SMS and use of internet through mobile phones, according to an estimate by Reliance Mutual Fund.

A joint report by the Confederation of Indian Industry (CII) and consultancy firm PricewaterhouseCoopers entitled 'Unearthing the growth potential in untapped markets' noted the need for innovative delivery mechanisms, especially in rural areas.

"Some fund houses are riding on the mobile wave and using this route to make the operational procedure simpler and hassle-free for investors. They can either opt for application based or SMS-based investing. The latter is simpler and does not require the user to have a smart phone or high-speed internet connectivity, whereas application-based services require a smart phone with GPRS connectivity," said the report which was released in June 2013.

General Packet Radio Service or GPRS is a telecom technology allowing internet access. The report also suggests exploring other means to enhance distribution.

Another interesting service innovation is the linkage of investments to debit cards.

Bank accounts are generally seen to be more accessible as well as easier to use than the typical mutual fund investment. One can access the funds parked in a bank account through multiple routes and withdrawal of cash no longer entails even a trip to the local branch.

Mutual fund schemes are generally seen to be more onerous in terms of access to capital. The industry has been looking to change this perception through the use of a mutual fund-linked debit card. The number of such mutual-fund linked debit cards are estimated to be over 500,000 with assets of Rs 1,500 crore.

The debit card allows investors to spend the money that they have invested in mutual funds without going through paper-work and delays typically associated with withdrawal from a scheme. The card allows both cash withdrawals as well as purchases at various points of sale in a manner similar to debit cards linked to a bank account. It can also be used at ATMs for checking the balance or total value of the investments. The card can currently be linked to both equity as well as debt schemes, and allows for withdrawals from the same subject to daily limits.

The third, a product innovation, that has found traction amongst investors is a structure which allows them to invest in a gold ETF (exchange traded fund) even without a demat account.

Mutual funds which were looking to sell ETFs as a safe and secure alternative to holding physical gold, were often stymied by the fact that many investors did not have the demat accounts which are required to hold the ETF units.

An ETF essentially tracks the price of gold by holding the physical commodity while issuing units to its investors. These units can be traded on the stock exchanges but require a demat account, as is the case with equity shares.

The industry came up with a product which allowed investors to use the mutual fund route to invest in gold, even if they did not have a demat account. Such funds collect money from investors and act in the same way as a feeder fund does, investing on behalf of the investors into the ETF. The investors put their money into these 'Gold Savings Funds' and are issued units of the fund. The fund in turn holds the units issued by the ETFs. During the time of redemption, the fund can sell its ETF holding and pay back the investor. The product is said to have reached 700,000 investors, with assets under management of Rs 4,755 crore according to industry estimates.

Recently, the industry also sought to add a protection angle to its investments.

After losing out often to insurance companies with their pitch of 'insurance plus investment,' mutual funds launched their own version of the hybrid product. They came out with a Systematic Investment Plan (SIP) which would come with its own insurance cover.

At least three major fund houses, including ICICI Prudential, Reliance and Birla Sun Life, came out with SIPs which also have an insurance component. One fund house has a scheme under which the insurance cover takes care of the remaining instalments if the person making the investments passes away. Such an insurance pay-out would be subject to a limit of Rs 10-20 lakh depending on the fund house. The nominee of the investor can continue in the scheme without any additional investment. Essentially, this would mean that the investor's nominee would get a pay-out, which would have to be reinvested in the scheme till the SIP instalments end as planned originally. Another fund house would have the amount paid out in addition to the fund value at the time. This may or may not be reinvested. Fund houses said that the additional cost of insurance would be borne by the mutual fund at no extra charge to the investor.

Vikaas M Sachdeva, the Chief Executive Officer at Edelweiss Asset Management said that innovations which tapped into a product with existing demand have tended to do better. That is why the gold savings fund eliminating the need for a demat account worked but the debit card concept has not taken off as well, he said.

"Gold was a pull-product. There were returns. Convenience (which would come with a product like the debit card which links to a mutual fund) has not been so much of a pull," he said.

Sundeep Sikka, CEO, Reliance Mutual Fund suggested that the industry's innovation or structural measures should not be judged in terms of immediate returns.

"Innovation should not be seen as a short-term process. These structural changes are required to facilitate investors over the longer term. They can cover not just product innovation which is where the industry largely looks at, but also service, distribution and customer engagement," he said.

However, not everyone believes innovation is a good thing for the industry.

Dhirendra Kumar, chief executive officer of fund tracker Value Research, suggested that the mutual fund industry could do with less innovation.

"Product innovation does not help a great deal. Simpler and less complicated products are likely to attract more investors," he said. "Savers first have to invest to experience service innovations. Mutual funds need to make it more straightforward and easy for the investor. Funds should focus on doing the essentials well considering the state of penetration," he added.

The good part is that these innovations and measures today account for nearly 2 per cent of the combined retail and HNI (high networth individuals) assets under management of Rs 3.84 lakh crore, which is impressive given the short-span of time they have been at work. Experts believe, their share should go up in the coming years as customers embrace them.

The next major innovation in the works is from the Association of Mutual Funds in India. It has announced plans for a unified platform through which investors can transact in the schemes of all mutual funds. The platform is likely to be launched in the next calendar year and is aimed at easing transactional hurdles for investors by creating a single point of access for all mutual fund schemes, irrespective of the fund house. The investors can use a single account number to buy or sell units of various mutual funds.

All of this can be done online, once the platform becomes operational.