Let’s first try to understand what products have been able to penetrate in rural markets and what are the possible reasons for their success?Investment instruments such as Fixed Deposits, Post Office Schemes, NSC’s, KVP’s, LIC’s, precious metals and property, etc. are some of the products which have been able to penetrate the farthest of the corners of the country.If we trace the history of human civilization we will find that the concept of a bank is very old. It is almost as old as the existence of money and the formation of an organized marketplace. The origin of the word bank comes from the term ‘banko’ which means a bench. The story goes that traders in the olden times used to sit on a bench and carry out money transactions and thus the origin of this word.Over the years, people have understood the concept of borrowing money from the money lenders and repaying the same with interest. Also, they have understood the concept of keeping their savings with the bank and earning an interest on the same. Thus, the concept of interest, which a person gets for giving his money to another person, is something which is clear to even the most rural of regions in the country.Most of the products in the above list are those which operate on the basis of the above formula. If we take the example of FD’s, PO’s, NSC’s, KVP’s, etc. we see that they all work on the same principle. The only difference is that they come with a clause that you need to keep the money with the bank or the respective institution for a fixed duration of time. This is not something that is unacceptable to any person who is promised a sum of money greater than the initial amount to be returned to him, guaranteed, after a period of time.Prior to the formation of the Life Insurance Corporation of India in 1956, there were 154 Indian insurers, sixteen non-indian insurers and 75 provident societies who held the insurance business in India. Post its formation, it held the monopoly for carrying out the insurance and the pension business in India. There are two kinds of products which were sold by LIC – assurances and annuities. Assurance plans would provide a fixed amount to the dependants of the person insured in case of an untimely death. Annuities, would act in the form of a pension which the person would get after retirement to enable him to maintain his standard of living. By the year 1997, LIC had spread to the farthest corners of the country with around 5,50,000 agents.The reasons for this growth and the subsequent impact on the minds of the people in the remotest parts of the country are interesting to note. Monopoly was one of the biggest reasons for LIC to grow. However, prior to formation of LIC, the insurance business in India was limited to the urban regions and little interest was taken to develop the rural business. There wasn’t an organization which was huge enough of interested enough to invest in developing the business from regions where there would be a longer gestation period along with low returns. LIC was the first mover and was reaping the benefits. The other reason for the growth of this business at a time when there was almost a complete absence of advertising or any other form of communication media is the strong network of agents who used to earn a good commission, work using the tools of personal interaction and word of mouth and also provide a good product and security. It is this network of agents, who used to earn their living out of these commissions that LIC was able to reach at a level where very few networks in the world would have been able to reach. Also, it is only because of these agents and the simple products, which were explained well by them, that the understanding and acceptance of insurance has been able to reach almost every possible corner of the country. Even today, just as Colgate is synonymous with toothpaste, LIC is with insurance.Also, LIC agents in the corners of the country, were not just people who would carry out business for the sake of profits. They were people who would get close to the families with whom they would work and would be a part of them in the happy as well as the tough times. They were people who would carry out all the necessary documentation from filling up the forms to getting the claims cheque when the time would come. They would become almost a part of the family as a proper well wisher.With respect to gold, it has been an adornment for the women since the time civilization has existed. They were the first units of transaction after barter system because they were precious and not everyone had access to them. It is for this reason that they were used to make coins which were used for carrying out the transactions.With the passage of time, owing to the preciousness of these metals monetarily and also because they are an intrinsic part of the adornment of women on auspicious occasions and otherwise, precious metals have been an investment which are usually on top of the mind with people anywhere in the world. It is also for this reason, that money lenders started lending money in exchange for gold and other precious metals.Property as a material of possession is almost a part of the human genes. The concept of possession of a place and how it would provide a sense of security and a feeling of power has been seen from the time human evolution has started. From animals who would fight for their own areas, to rulers who would conquer, to nations who would democratize, to owning a little house or a field or an office, the ownership of property is as old as we can possibly look back.If we go back a couple of decades into the history of this nation, we see that farmers would mortgage their lands to the money lenders for buying seeds, manure, etc and also for running their families. What would usually follow is a burden of a lifelong un-repayable interest and mercy at the hands of these rich landlords. Thus, the feeling of having a land of their own, is something which has been one of the greatest ambitions for the success of the Indian household.From the above, we see how people not only in rural India but across the country, have been able to understand and accept the importance of investment of their savings into any of the above products. All of these products have an immensely long history which has enabled their understanding and acceptance in the minds of the people.Now, let’s look at the growth of mutual funds in the Indian context.Mutual Funds were introduced in India in the mid to late eighties. They started to grow as acceptable products of investments by the late nineties. However, their penetration was extremely low. LIC had far more number of agents than the total number of applications which it had received by this time for LIC Mutual Funds. Also, the financial losses that people suffered owing to the turmoil in the markets made them extremely wary of investing in mutual funds. At the same time, this sector had just started to open up, become professional and start investing in the stock markets. There were far greater number of debt schemes at this time, which used to provide better returns than fixed deposits due to the falling rate of interests and the profits these schemes could earn on mark to market transactions.As this sector began opening up, we have seen a far greater number of financial goof-ups in the stock markets, entry of foreign companies to whom people are not familiar, maturing of the market regulators and a greater transparency over the years and also a large number of players leading to confusion in the minds of the investors. These new players who have entered the market, are still limited to the urban and semi urban regions and also their marketing efforts are limited to these regions. At the same time, there have been too many uncertainties which this sector has witnessed owing to the conditions of the stock exchanges on the equity side and negative to negligible returns owing to almost stagnated interest rates on the long term debt side. At the same time, they are competing with products which have a distinct understanding and acceptance in the minds of the people in urban and the rural India.Today, there are a total of 35 asset management companies with a total AUM of around 639130 crores. The largest being Reliance Capital Asset Management Company, followed by ICICI Prudential AMC, UTI Mutual Fund AMC and SBI Funds Management Pvt. Ltd. However, with so many fund houses and schemes in the market, there is still an extremely low penetration of MF’s among the paid workforce at around 2% of the savings. Also, there is a huge percentage of people who do not understand the product at all in terms of the risk and the reward which are associated with it.Some of the reasons for the success of the top funds are as follows:1) Huge distribution networks which spread almost all across the country. Eg. SBI, UTI, ICICI, HDFC, etc.2) Favorable image of the mother brand on the fund house. Eg. Reliance, ICICI, SBI, UTI, etc.3) Huge investments received from the banking channels by cross selling of these mutual funds. Eg. Reliance, SBI, ICICI, HDFC, etc.4) Huge investments received from the mother company and its subsidiaries. Eg. Reliance.5) Corporate short term funds parking money being invested in mutual funds. The major portion of the AUM of all of these fund houses comes from this source and not so much from retail investors.6) Extensive and established agent networks. Eg. LIC, UTI, etc.7) Huge marketing and advertising spends which have been made by these AMC’s.With assets under management of over 60,000 crores as on May, 2009, it cannot be denied that there is a huge amount of money that is being managed by the mutual fund houses. However, the issue lies with the fact that most of this money is from the urban areas, from corporate investors who park their funds for the short term and from a small number of investors with big ticket size investment. The money is divided between hundreds of schemes of these fund houses. Also, the corpus which is actually invested into the stock markets for a long period of time is too little. Mutual Fund corpus is not big enough at present to be able to substantially impact the market. On the other hand, it gets affected by the market turbulence very fast. To be continued…
