Keeping it simple for small-town investors

While Sebi's proposals tackle the risk factor for retail investors, the challenge will be to sell it to them

For small-town investors, the friendly neighbourhood Life Insurance Corporation of India (LIC) agent could soon be replaced by a mutual fund distributor.

The Securities and Exchange Board of India (Sebi), in a recent circular, allowed postal agents, retired officials from government, banks, retired teachers and others to sell mutual funds. The registration process for these agents have already been made simpler and cheaper at Rs 1,500.

The target: investors in Tier-III and Tier-IV cities. Even cash investment up to Rs 20,000 will be allowed with no Permanent Account Number (PAN) and bank account.

While the market regulator is still to come out with the complete guidelines on this (these are expected soon), a member of the mutual fund advisory committee says safeguards such as allowing these distributors to sell simple products and labelling these have been built in, to reduce mis-selling. The labelling process (for products sold in cities as well) will look at making the investor aware about the risks in certain types of schemes.

“For instance, in the case of sector or thematic funds such as a foreign feeder fund, there will be a clear warning that these products are only meant for investors who have appetite for high risk,” says the member. There is a proposal to even use colours such as green or red to indicate the riskiness of the product.

In addition, to curtail mis-selling in smaller towns, the school teacher or retired person is likely to be allowed to sell only simple products like large-cap equity schemes, pure debt or balanced funds.

The market regulator is giving fund houses the necessary incentive – allowing them to charge a higher expense fee of up to 30 basis points from all investors – to expand their investor base. But, it is also putting in checks to ensure investors aren’t sold wrong or riskier products and get disillusioned very quickly.

The problem lies elsewhere, say experts. Only a higher expense ratio and including a wider variety of people will not attract funds for too long. Given the volatile nature of the stock market, the new people will have to be trained properly to handle queries during tough times. Otherwise, many will not give it priority and servicing of the client over the long term will suffer.

Last year, the Insurance Regulatory and Development Authority (Irda) had a similar plan – allowing insurance products to be sold in kirana shops. The agent network, called monoline, was to sell only one general insurance product. The plan is yet to fructify.

This plan shouldn’t remain just on paper. For that, the mutual fund industry will have use the estimated additional income of almost Rs 1,000 crore earned through the higher expense ratio and passing on of the service tax, to train distributors and service small-town clients - something, LIC has done over the years. Selling insurance, for many, is a full-time profession. Mutual fund distribution has to strive to become that.