In the last few days, two mutual fund companies have lowered the entry price of fund investing to Rs 50 and Rs 100 per month. While investments at this level may not be of much direct interest to the readers of this newspaper, there is no doubt in my mind that in the long run this lowering of entry barriers will lead to a significant extension to the investing population.
As launched, these micro-investment schemes (and I have no doubt that most fund companies will launch similar plans soon) have some limitations that are actually features. For a start, you can't actually invest just Rs 100 and stop there-you need to invest Rs 100 a month for at least 60 months. Which is fine because regular investing of a fixed amount is about the best way of investing. There are also limitations on withdrawing the money before five years and in my opinion that's fine too because there's isn't much to recommend in short-term investing.
Why are these micro-investment schemes so important? Because there's no other way that someone who's going to invest a hundred or two hundred rupees can participate in the high returns that the steady, long-term investing brings. Those of us who analyse investments and investing in the media are often guilty of overly sophisticated thinking. While we're dreaming up and explaining sophisticated ideas like asset reallocation, a vast mass of people who could have invested in a more optimal way are grappling with very basic questions.
The use of different ways of saving and investing tends to be stratified with income and/or education level. The less people earn, the simpler their saving choices tend to be. Assuming, of course, they are earning enough to save at all. By another measure, the less educated people are, the simpler their saving choices tend to be. And when I say simple, I really mean that. For a lot of people, simple starts with cash kept in a box, which is may or may not be savings but is certainly not investment.
For too long, funds have kept skimming off the cream of the investing public, concentrating on the richest investors in the bigger cities.
Expanding the market for mutual funds beyond these low-hanging fruits is difficult and requires effort and deep pockets. However, if a large mass of people are to benefit from the equity markets, and I guess if the fund companies are to push beyond the easy markets and grow to their full potential, then they will have to attempt this downward extension of the investing public.
Of course there are potential problems. Any investor who is used to bank and post office deposits is going to ask the basic question about any investment, “How much money am I going to make?” For mutual fund investments, the correct answer is that no one knows. And to the question, “Is my money absolutely safe?” the answer is that there are no guarantees. Will these answers be acceptable to the new market that is opened up by the 100-rupee-a-month ticket? Only time will tell.