Why you should care
Asset managers are eyeing the Cricket World Cup as a marketing bonanza.
Indians watching this year’s Cricket World Cup are being bombarded with advertisements for cars, cellphones and other trappings of middle-class comfort. Ads from another, less obvious group are also vying for attention among others: India’s young mutual fund industry.
Mutual fund investing in India took off after Prime Minister Narendra Modi’s controversial 2016 decision to scrap most of the country’s cash supply, forcing millions to put their savings into the financial system. India’s mutual funds managed assets worth 26 trillion rupees ($377 billion) at the end of May, almost double the pre-cash ban figure three years earlier.
But the industry is facing one of its first big tests of confidence, after a crisis in India’s so-called shadow banking sector last year prompted a severe economic squeeze. Fund managers had loaned heavily to nonbank financial companies like Infrastructure Leasing & Financial Services (IL&FS), which defaulted in September. That prompted skittish first-time investors to pull their money out of mutual funds. Only in April this year did the funds recover their previous highs.
Executives say the ads, which feature prominently on billboards across Mumbai as well as on TV, are designed to restore confidence and ensure investors are aware of the risks of investing in mutual funds. In one witty commercial, an astrologer who dispenses marriage advice instead seeks out guidance on what to do with his savings.
I think we’ve barely scratched the surface.
Sanjay Sapre, president, Franklin Templeton India
Nilesh Shah, managing director of Kotak Mahindra Asset Management Co., one of India’s largest, says mutual funds had made some misjudgments in their lending to IL&FS. “Most of the times we are successful, and sometimes we fail,” he says. “We have learned lessons from this episode.”
Shah says Kotak is planning to enforce stricter standards in its lending practices, including agreeing on limits with companies in which it invests, on how much debt the companies can take on.
“We have to build that faith through our conduct. … I have to be more transparent than banks, insurance and pension [funds],” Shah says. “I have to be more communicative than them. I have to ensure that my conduct creates the confidence, and that will bring the money.”
Indians’ traditional assets of choice have been precious metals and real estate, with savings often poured into elaborate jewelery to be passed on to children. But as returns on those investments have fallen in recent years, debt and equities have become more attractive. Physical assets as a percentage of household savings fell to 49 percent in 2017 from 59 percent in 2012, the Reserve Bank of India said, with consumer demand for gold falling over that period.
Mutual funds’ assets under management, meanwhile, grew at 25 percent a year between 2013 and 2018, according to the central bank. Such is that hunger for growth that Roopa Venkatakrishnan, a financial adviser, says she recently drove some 150 miles from India’s business capital, Mumbai, to Satara, a city in the agricultural interior. There she enlisted 28 farm laborers who — with new bank accounts and tax IDs — this month started their first investment plans at monthly contributions of 100 rupees ($1.45).
The proliferation of cellphones and internet has accelerated this trend. Startups such as Kuvera, an online investment platform, advise consumers on different funds and help them with financial planning. The company, whose investors include Fidelity’s Eight Roads investment arm, advises on assets worth 38 billion rupees ($550 million). “Technology is making a lot of these products available to a huge number of Indians for the first time,” says Kuvera Co-Founder Gaurav Rastogi.
Fund managers, however, say they are only getting started. About 20 million Indians invest in mutual funds, and Shah says he thinks this number will multiply tenfold. Indian mutual fund assets as a share of gross domestic product totaled 9 percent in 2016, according to the World Bank, compared with 58 percent in the United Kingdom and 101 percent in the United States.
No single event looms larger in the industry’s history than Modi’s shock decision in 2016 to scrap most of the country’s cash supply, ostensibly an attempt to crack down on illegal wealth. Some analysts say that helped set fund managers on a precarious path.
“The environment has been extraordinarily tough the last nine months,” says Radhika Gupta, CEO of Edelweiss Asset Management. “This has been one of the longest liquidity crises that we’ve seen in this country.”
Alongside their investments in IL&FS, fund managers also loaned to troubled companies such as media conglomerate Essel Group and nonbank financier Dewan Housing Finance. That prompted investors to withdraw their money, fearing that managers would struggle to recoup the assets.
Industry executives say that such bets represented a portion of higher-risk debt funds to which most investors were not exposed. They say the key is to continue marketing initiatives to highlight differences between funds and associated risks. “It’s natural for people to have turned a bit more cautious. For the first time, many of [them] are seeing volatility,” says Sanjay Sapre, president of Franklin Templeton India, one of the few foreign asset managers with a substantial presence on the ground.
Sapre is nonetheless optimistic: “If one looks at it in the perspective of the opportunity, I think we’ve barely scratched the surface.”
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