The Rs 250 SIP: Expanding access and growing complexity

Markets and investments regulator SEBI has recently announced an initiative that could expand access to mutual fund investments in India. Over the next three years, more investors can invest in mutual funds through SIPs with as little as Rs 250 a month. This announcement, made by the SEBI Chairperson at an event organised by SBI Mutual Fund, is a good step in broadening financial participation in our country.

As an observer of financial markets, I see this as a positive development in our gradual progress towards wider financial inclusion. The Rs 250 SIP potentially opens a door for many Indians who have previously been unable to participate in mutual fund investments. By lowering the entry barrier, SEBI invites a broader segment of our population to consider mutual funds as an investment option.

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This initiative aligns with one of the key objectives of mutual funds, particularly in the Indian context: to make a range of stocks and bonds accessible with relatively small amounts of money. Mutual funds pool investments from numerous individuals, allowing them to access a diverse portfolio of securities that might otherwise be challenging for individual investors to compose independently. The Rs 250 SIP extends this concept further, potentially bringing professional fund management and diversified portfolios within reach of more people.

This was referred to by the SEBI chief as the "sachetisation" of mutual fund products, drawing a parallel to how small packaging made consumer goods more widely available. It's an apt comparison, as this strategy could make mutual funds more accessible in a country where a significant portion of the population might find the current minimum SIP amounts of Rs 500 or Rs 1,000 out of reach.

However, while this initiative is a step in the right direction, maintaining perspective is important. The mutual fund landscape in India still faces significant challenges, particularly in terms of complexity. As we welcome new investors, we must also consider the hurdles they may face. The variety of funds available today, each with its own characteristics and risk profiles, can be daunting even for experienced investors. This complexity presents a considerable challenge for newcomers, especially those with limited incomes who need more room for financial missteps.

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This challenge is made significantly more difficult by the Indian fund industry's shift from simple-to-understand vanilla diversified funds to thematic, sectoral, or other specialised types of funds.

Consider this analysis, which I pulled out from Value Research's data warehouse: In 2018, of the total number of equity funds available to the Indian investor, 61 per cent were simple diversified funds. After that year, a shift started taking place, and now the pattern has almost reversed. In 2023, 48 percent of the funds launched were diversified, and in 2024, a mere 37 per cent of the funds launched are diversified! This is ridiculous. If the goal of mutual funds is to provide simple, easy-to-understand investment avenues, then this shift by the fund industry is 100 per cent anti-investor.

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Why is this happening? It's a by-product of the interaction of certain regulatory changes and the attitude the Indian fund industry has taken. While that's not my topic today (I've tackled it earlier on this page and will do so again), it does demonstrate a potential problem with the Rs 250 plan.

The exploding complexity of mutual fund choices and the difficulty of choosing appropriate funds warrant urgent attention. Considering the potential for broader financial participation, we must also recognise the need to simplify fund options and improve financial education. Otherwise, even well-intentioned initiatives will lead to worse outcomes.

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