Small steps to equity: Lowering SIP threshold should increase penetration

The Securities and Exchange Board of India (Sebi) has proposed the “sachetisation” of systematic investment plans (SIPs) by allowing funds to offer SIPs at Rs 250 per month. If necessary, the regulator says it will help to subsidise transaction costs for asset management companies (AMCs) that offer these schemes. The small ticket size has been compared to shampoo sachets in the consultation paper and the objective is to further democratise investing by making SIPs affordable for lower-income groups. It could be a good product for Tier-III towns and rural settings, given the income match with those populations. In analogy, just as shampoo sachets opened up rural markets and reached lower-income groups, Sebi hopes this would lead to an explosion of interest in equity products in underpenetrated geographies and income groups.

 

Currently, the minimum SIP amount for most funds is Rs 500 per month. The new sachet SIPs can be offered by any fund, but an investor can take only three SIPs (from different schemes) at a rock-bottom cost. The mutual fund industry may welcome the concept in principle but there could be significant challenges in getting it off the ground. According to back-of-the-envelope calculations by members of the Association of Mutual Funds in India (Amfi), each instalment of the new SIP will cost around Rs 2, given transaction costs such as gateway fees and processing fees. This amounts to around 0.8 per cent, which is higher than the total expense ratio in direct mutual fund purchases (the investors buy the units directly from the AMC and save on intermediary costs). In effect, given the new target audience and geographies, AMCs will have to develop a distribution network, which will further drive up costs. This would leave funds with no headroom to invest in distribution or publicity, implying the schemes would not be well publicised. Since this product targets low-income groups, which aren’t currently part of the investment community, and it looks at geographies that are underpenetrated, the scheme may not be easy to publicise.

 

While Sebi may be prepared to subsidise the scheme to some extent, there would still be little headroom to publicise the sachet schemes or invest in distribution. Eventually, if the scheme becomes popular, it could be profitable at scale for the funds. Hence, big AMCs may be prepared to use this sachet concept as a loss leader to penetrate new geographies and investment cohorts. However, smaller funds may simply not have the resources. This could lead to an asymmetry in the market with smaller funds being elbowed out of the competition. The devil will be in the detail. How much subsidy will the regulator provide or, alternatively, how can it reduce transaction costs incurred by AMCs for mutual fund products? The former option cannot be a long-term proposition. Even if Sebi decides to kickstart the concept with a subsidy, it would not be healthy for the regulator to subsidise investors for an extended period because it would lead to distortions in the ecosystem. The latter possibility — bringing down costs — may be the way to go but it’s up to the regulator to find viable ways to do this without hurting the interests of stakeholders.

 

Net-net, the idea is attractive in theory, but a lot of detail would have to slot into place for it to be workable in practice. Floating the concept may, however, lead to solutions being found, since AMCs would like to bring low-income groups into the investment fold. However, the regulator would have to work out the designs carefully after consultations with the industry.