Stock market paradox

Mutual funds as a stock market instrument were invented in 1924, when three stock market investors in Boston pooled their money to create the Massachusetts Investors Trust. Since then-or perhaps more accurately, after John C. Bogle introduced the index funds in the mid-70s-mutual funds have boomed. In the US, there are an estimated 8,117 mutual funds with assets under management (AUM) of more than $10 trillion. One reason why mutual funds are so popular is that they make investing simple for retail investors. For a small fee, they can get expert fund managers to manage their investments. Not surprisingly, 87 per cent of the money with mutual funds in the US comes from individual investors.

Not enough of them: Funds need to woo more small investors

Cut to India, and the scenario couldn't be more different. Although the industry boasts of Rs 4 lakh crore in assets, contributions from retail investors account for less than 15 per cent. At an aggregate level, just 3 per cent of household savings get funnelled into mutual funds, unlike in the West, where the figure is 16 per cent. Numbers seem to indicate that a large number of India's 20 million investors prefer to invest directly in stock markets rather than piggyback on a mutual fund. So, where's the mutual fund money coming from? Corporate houses and high net worth individuals. This is a phenomenon that stock market regulators need to worry about.

A direct exposure to stock markets is not in the best interest of small investors. They don't have the skills to pick stocks or anticipate stock market movements. That's why every time the stock markets crash, it is the small investor who ends up bearing the brunt of it. Besides, as M. Damodaran, Chairman of stock market watchdog SEBI, said recently, "Large investments by corporate houses in mutual funds could generate conflict of interest and something more needs to be done to get more types of money into mutual funds." In other words, what Damodaran fears is that corporate investment into mutual funds may find their way back into their own stocks.

Industry experts say there are many reasons why the Indian small investor is wary of mutual funds. One is that, unlike in more developed countries in the west, there is no social security available to people here. Therefore, many of them tend to prefer the security of a bank deposit or any other fixed income investment. Another reason for low small investor interest in mutual funds is that the fund houses aren't wooing them aggressively enough. Even when they tap retail investors, it is usually those who live in metros. Agreed, there's a cost to reaching out to investors in small towns, but the industry's own future may depend on it garnering more of the relatively stable retail money.