Financial Literacy and Mutual Fund Adoption in India

Financial Literacy and Mutual Fund Adoption in India

Money is a powerful motivator, and much like their counterparts around the globe, Indian consumers are steadily increasing their appetites for saving and investing. Liberalization has transformed the market from a state-dominated, structured playing field to one where private players are now making their presence felt. As a result, consumers have an array of financial options to choose from. Interestingly, however, they’re not exploring them.

In fact, despite widening choice, Indian consumers prefer to stick with what they know and trust. And that means consumers fail to learn about or consider newer, oftentimes more modern options. Notably, investments like life insurance and bank deposits are significantly more preferred than options like property, health insurance and mutual funds.

Among the less-chosen options, mutual funds represent a particularly lucrative opportunity for financial institutions. Only 9% of urban Indian households invest in them, but the financial services market has done a great deal recently to promote the tax saving nature of mutual funds as financial literacy improves and consumers seek diversification.

Identifying the Mutual Fund Customer

Not surprisingly, the growing appetite for mutual funds is in the metro areas, where consumer investment in them has grown 5% in the past three years. Growth in the non-metro areas has trailed, coming in at 2% since 2010. Aside from area of residence, a couple of other factors are driving investment: age and affluence.

Investment growth among consumers ages 30 and older, for example, is high, whereas growth among younger consumers is low. It’s also not surprising that middle- to high-income individuals are more likely to invest in mutual funds than their lower-earning counterparts. These consumers typically believe in saving their money rather than growing it.

Overcoming the (Biggest) Barrier to Entry

Compared with many traditional investment options, mutual funds represent somewhat of an anomaly to Indian consumers. As such, the average investor views them with suspicion and caution. This isn’t new insight, however, as the Securities Exchange Board of India (SEBI) took it upon itself to mandate that all mutual fund companies set aside a portion of their revenue for investor education and awareness initiatives. Individual companies and asset management companies have taken up the cause as well, drumming up media campaigns geared toward answering investor questions.

Today, financial literacy in India is still low, but consumers appear to be growing more comfortable with the basics of investing in mutual funds. They’re more aware of terminology and they better understand the risks of investing. They also have more access to information than they ever have before, which may make them feel less reliant on independent financial advisor and banks for knowledge.

Even with the campaigns and access to information, Indian consumers are not entirely comfortable with mutual funds. While they may be relatively obscure for some, others avoid them because they don’t believe they can deliver strong returns or because they feel the risks outweigh the rewards.

The biggest battle mutual fund companies have on their hands is that of perception. The best consumer is the informed consumer, and right now, consumers don’t see mutual funds as high-performing investments. Companies that position mutual funds as a safe way into the stock market will have an edge over those that don’t, and firms that highlight stable past performance will gain a more receptive audience than those that don’t.

This article is an abbreviated version of a longer article published on our India site. For the longer version, click here.