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A welcome expansion

A flood of new businesses and new ideas are entering the Indian mutual fund industry

A welcome expansion

There's a wave of new businesses that are entering the mutual fund business. Some of these are already operational while some are on their way. Some are set up as fund distributors, while others are AMCs which will run their own mutual funds. These new businesses are 'new' in a very contemporary sense. Many are financed by cheap and plentiful venture money, one way or another. Almost all have declared that they are out to reinvent the businesses that they are entering, with words like 'disrupt' and 'passionate' being used liberally.

The power of heads with new ideas and money to burn cannot be underestimated. It is entirely likely that over the next few years, the business of running and/or selling mutual funds will indeed be transformed. However, whether the transformation (or disruption) will be only in the sense of the industry's leaderboard being rearranged or whether customers will also be part of the disruption will be interesting to watch.

Over the last few years, most of the new types of businesses that have come up have indeed transformed the customer experience. Restaurant delivery, app-based cabs, wallets, e-commerce and some others have genuinely transformed customers' experience of the underlying activities. The transformation has been so fundamental that they have, in effect, created an entirely new experience which did not exist earlier. Of course, many - perhaps most - of these businesses have not been shown to be economically viable yet, so the story is still incomplete but the customer experience stands fully validated.

This kind of a transformational experience need not necessarily be delivered by new businesses which are running in this 'startup' mode. In fact, the transformation of banking and telephony/telecom is the foundation on which everything else stands and yet those were delivered in the most mundane way possible under existing business models. UPI is now a huge part of this transformation and yet that's essentially a government project.

Some disruptions are less fundamentally useful than others. One of the least interesting forms of 'disruption' is one in which someone uses free-flowing capital to charge an uneconomic price and attracts a large volume of customers from existing businesses but is then unable to make a sustainable business out of it. Once you have the money, this is an easy playbook to implement, but tends to eventually not do much for customers.

The curious thing is that none of these seem to have a particular fit with mutual funds. The reasons for this are straightforward. The fundamental value that has to be delivered to the customers is investment performance, which is not something that can be achieved by just throwing money at the problem. You can't get your funds' investors higher returns or lower volatility by spending more venture money. The other reason is that cost is invisible to the customers and easily outweighed by investment performance. Sure, you can use external funding to deliver lower cost and low cost is important. However, it cannot deliver what the investor wants by itself.

Nonetheless, it is most important that more and more serious, well-financed businesses should enter the Indian mutual fund industry and that they do so both as AMCs, as distributors as well as advisors. The reason is that there is a kind of a sameness about most incumbent businesses. They are all playing more or less the same game and following the same approaches to the business. A certain amount of a shake-up, where many new players come in bringing money and ideas and a desire to do something new is likely to be good for investors.

If nothing else, it may help in expanding the reach of mutual funds and bring in more investors, and investors of a new kind. That can't be anything but a big step forward for saving and investing.