Over the past couple of years, the Indian mutual fund industry has witnessed phenomenal growth, especially with smaller towns becoming vital contributors. All this is changing the financial scenario and encouraging more investors in tier 2 and tier 3 cities to see mutual funds as a workable alternative for investment. In this essay, we shall look at reasons for the spike, the effect on the sector, and what it means for investors and financial institutions alike.
Introduction to Mutual Fund Folios
A mutual fund folio essentially stands for an account number that every investor gets upon investment in mutual funds. Every folio represents the investments made by an investor in various schemes of the mutual fund company. Opening a new folio suggests that either a new investor has entered into the mutual fund market or that an existing investor is extending his portfolio.
The increasing mutual fund folios mirror the growing awareness and acceptance of mutual funds as an effective wealth-generation vehicle. Though conventionally, investors from metropolitan centers have been dominating the sector, recent data indicate that small cities and villages are now leading this march in opening new mutual fund accounts.
A statistical overview of the growth of mutual fund portfolios in smaller cities
The mutual fund industry in India has grown exponentially over the last decade. According to data from the Association of Mutual Funds in India, folios have increased from around 4 crores or 40 million in 2010 to more than 12 crores or 120 million by the end of 2023.
This has come on the back of a larger contribution from smaller cities and villages, normally referred to as cities beyond the top 30-B30. These are considered tier 2, tier 3, and even smaller cities that account for a larger portion of the overall mutual fund investor base.
Cities comprising the B30 accounted for about 15% of mutual fund assets under management in the year 2020.
It has risen from less than 25 percent of the total by 2023, reflecting the increasingly widespread interest in mutual funds outside big cities.
New folios opened in B30 cities have already overshot those in top-tier cities and have grown at over 20% annually for the last three years.
Reasons for Rise in Mutual Fund Investments from Smaller Cities
A number of variables are propelling this trend of rising mutual fund investments from smaller locations. Let us take a closer look at some of the forces propelling this rise.
1. More awareness, more financial literacy.
The government, financial institutions, and AMFI have been working together for years to increase financial literacy in smaller cities. Indeed, the campaigns “Mutual Funds Sahi Hai,” investor education programs, and workshops have formed the bedrock of increasing awareness about the benefits of mutual fund investment.
With increasing awareness amongst people in tier 2 and tier 3 cities on the capabilities of mutual fund products to outperform other traditional savings instruments like fixed deposits, recurring deposits, and post office schemes, they will increasingly consider mutual funds as a viable investment vehicle.
2. Technological Advancement and Digital Penetration
This is the wide-based use of technology, along with easy availability of smartphones and internet, transforming the landscape of the financial industry. Easy availability of mobile apps, internet platforms, and robo-advisors makes it easier for the investors of smaller cities to study, compare, and invest in mutual funds without actually having to visit a branch.
This has been further fueled by the increasing use of the internet and digital payment systems in smaller cities, which have also enabled investors to manage their portfolios online. Consequently, several AMCs are targeting the requirements of such investor demography with digital-first platforms.
3. Attractive returns and diversification.
Traditional investment vehicles on which smaller city investors have depended for many years include gold, fixed deposits, and real estate. In general, the long-term returns from these investments are lower than those offered by mutual funds.
Mutual funds can provide an avenue for diversification amongst asset types like stocks, bonds, and money markets. Most first-time investors in smaller cities will also favor mutual funds for their possibility of higher returns and diversified portfolio.
4. Reduce minimum investment limits.
The other reason for the growth of mutual fund folios from smaller locations is the small minimum purchase amount. SIPs enable customers to invest as low as ₹ 500 in mutual funds. Affordability makes mutual funds accessible to people at large, including those with lesser incomes in smaller areas.
5. Government initiatives and regulatory support.
More importantly, for instance, government initiatives like Pradhan Mantri Jan Dhan Yojana have opened millions of bank accounts and facilitated access to the formal banking and investment ecosystem. Also, the Securities and Exchange Board of India has promulgated regulatory reforms toward increasing the transparency and investor-friendliness of the mutual fund market.
These steps have infused confidence among investors from smaller cities to take a plunge into mutual fund investments.
Smaller Cities: Challenges to Investors
While the mutual fund folio opening from smaller cities has increased manifold, there are certain challenges that need to be conquered before such a trend holds.
1. Lack of individualistic monetary counseling.
In smaller cities, many investors may have limited access to personalized financial advice. Online platforms and robo-advisors are convenient, but a lack of face-to-face engagement with a financial advisor may leave investors second-guessing their investment decisions.
2. Inability to understand many complex products
Though financial literacy has increased, a large number of investors do not understand sophisticated mutual fund products such as debt funds, hybrid funds, and sector-specific funds. Lack of understanding can lead to lousy investment decisions.
3. Market volatility and risk aversion.
Smaller investors are infinitely more conservative and risk-averse than their large counterparts. As an investment class, mutual funds-especially equity-oriented schemes-some small investors will simply avoid any confrontation with volatility.
Role of Financial Institution and AMCs
The financial institutions and AMCs must be more proactive to raise the growth in investments of mutual funds in small cities. Following are some entry techniques into this high-potential sector.
1. Widening Distribution Network.
Their first task would be to develop the distribution networks in smaller cities. This could be done by setting up branches, associating with local financial advisors, and tying up with banks and post offices for selling mutual fund products to customers.
2. Financial Education Campaigns Run Locally
While mass campaigns like “Mutual Funds Sahi Hai” have been very effective at the national level, localized programs for financial education by AMCs should be developed to meet the particular needs and concerns of investors in the smaller centers. These should be implemented in regional languages to ensure maximum outreach.
3. Providing Simple, Transparent Products.
Given the risk aversion and low level of financial literacy that most investors in smaller cities generally exhibit, AMC products should be simple to understand, full of transparency, and thereby mutual fund products. It will instill a sense of confidence among investors and may eventually draw more people toward mutual funds.
4. Application of Technology and Data Analytics
Such peculiar needs and preferences of investors in small cities can be furthered with the use of technology and data analytics by AMCs. Tailor-made investing solutions for individual risk profiles and financial goals will go a long way in retaining and growing the investor base in these locations.
Outlook for the Future: Small Towns to Drive Mutual Fund Growth
That the growing contribution of smaller cities to the mutual fund business is basically not a fad, With improvement in financial literacy, internet infrastructure extension and rise in mutual fund awareness, smaller cities are well-positioned to become the next growth engines of the industry.
In fact, with over 1.3 billion people and most living in smaller cities and rural areas, the potential for this investment to be captured has not even been tapped into yet. Mutual fund investors will need a flexible investment solution that’s scalable, and thus the business is poised for further growth over the coming years as B30 cities expand.
Key Takeaways
Rising Influence of Smaller Cities: Tier 2 and 3 cities are driving mutual fund portfolio growth, considerably contributing to the industry’s expansion.
Factors Behind the Surge: Increased financial awareness, technology developments, attractive returns, and fewer entry barriers have made mutual funds more enticing to small-city investors.
The constraints are related to the lack of specific advice, incomplete knowledge about specialized commodities, and aversion to risk.
Future Outlook: With increasing awareness and better penetration of mutual funds, smaller cities are expected to play a more significant role in the industry growth in the near future.
By ironing out these issues, and continuing with the interactions of investors in the smaller cities, financial institutions can ensure a long-term growth and themselves would help include millions financially in India.
