Here’s what Rs 50 can buy

The first step towards old-age security has been taken — minus pension reforms

Pankaj Razdan is not a man you link with the poor, or even non-rich. Razdan represents the under-40, highly-ambitious, highly-aggressive breed of new managers who are attempting to change the financial services landscape of India. As CEO of ICICI Prudential Mutual Fund, India’s second largest asset management company (AMC), Razdan’s track record of growth and customers has been anything but poor — institutional, corporate and high net worth clients remained the centre of attention; at best, the fund targeted the growing arena of middle- and upper-middle class.

Last week, when Razdan offered his funds to people at a lower rung of India’s trillion-dollar economy by lowering the minimum amount required to get into a systematic investment plan to Rs 50, it was not only unexpected but delightful. Among many other things that this lowering will eventually do, the most important, in my opinion, is this: in a fractured polity that’s refusing to budge on pension reforms and give access to wealth creation and retirement security to millions, here’s a solution from the market. A profit-making, profit-seeking entity — working in the heart of, that dreaded word, finance — is enabling the holy marriage of finance with people, profits with development.

Razdan is not the first to do so. In this race, the first off the blocks was former joint secretary (capital markets) and current CEO of UTI Mutual Fund, U.K. Sinha, who in April 2006 couldn’t help but carry his long association, formidable knowledge and sensitivity to old-age security, to the fund. Although begun with the objective to provide retirement security to women workers operating in the informal sector, initially through SEWA Bank and to be expanded to other members of microfinance institutions like SA-DHAN, Sinha’s first cut to Rs 50 remains restricted to one scheme — UTI (Retirement Benefit Pension Fund). This is yet another solution from a fund operating commercially, run by a government official on commercial deputation, in the spirit of part pension reforms.

Last month, India’s largest mutual fund (MF), Anil Ambani’s Reliance Mutual Fund, lowered the minimum investment limit to Rs 100 for all its schemes. Here, you can take a little breather of predictability, for if it was one fund that would do this it was Reliance MF, given an almost genetic inheritance of scale that Ambani is attempting in telecom and now in funds. As Vikrant Gugnani, CEO, Reliance MF, told us, this lowering will act as an “entry point” for investors in smaller, tier 2, 3 and 4 towns. While investors from 75 new towns have invested with the fund following the Rs 100 limit, to know just how big a success it is, we’ll have to wait for a couple of quarters. Gugnani hopes to take a small bite from the “significant wealth” lying in bank deposits for lack of other investment avenues.

If the country’s three largest mutual funds are eyeing the “fortune at the bottom of the pyramid”, can others lag behind? We know of at least one, the Rs 7,700 crore Sundaram BNP Paribas AMC, that’s planning to tap this market; many others will follow. While this movement to go small should have happened earlier, the “time” perhaps has come only now — income levels are following rising aspirations. Perhaps an India celebrating wealth is around the corner, replacing one that honoured poverty. Threshold incomes are perhaps rising and riding the 10 per cent GDP growth.

Perhaps, this is a future that has already happened and the lowering and providing of access to the value-seeking household is merely a trigger being pressed by mutual funds. Then again, perhaps not. For, along with the lowering of investment limit must come a lowering of costs and loads that accompany these products. The 2.5 per cent upfront load that most schemes of most funds seek may be attractive when compared with 40 per cent commissions that investment products in insurance clothing seek, but it is nonetheless high. If the industry has to reach out to these households and sustain long-term growth from there, these costs have to fall.

Maybe, the industry is looking at new competition that will hit it between the eyes once pension reforms are initiated and is attempting to accumulate assets on the way (though almost every mutual fund promoter is looking at offering pension products, too). While increasing assets under management till then is all very well, Razdan, Sinha and Gugnani need to know that long-term costs for managing pension funds are expected to be in basis points, not percentage points, as D. Swarup, chairman, Pension Fund Regulatory and Development Authority, told us.

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For this to happen, the industry will have to move out of the clutches of distributors, who through their networks are able to keep these costs high and eat the cheese. All, repeat all, mutual fund heads have told me how terrorised they are by their distributors — just take a look at the new phenomenon of launching closed-end funds (a way to help distributors get 4-5 per cent commissions, which they now can’t get in open ended funds) — and how helpless they are. With all these challenges and opportunities around the corner, the mutual fund industry needs to decide whether it’s the fear-greed syndrome that’s going to take the ship forward or the mass-value plank.

I believe Indian citizens are shaking off the burden of words like “profit” and “finance” and realising that without them they will not see infrastructure creation — physical, commercial or regulatory — that will enable wealth creation. Going forward, it is this infrastructure that will facilitate fast cars and physical access as much as wealth creation and mass access to it. While we pat the mutual fund industry for taking that first step towards providing access, we simultaneously wait for it to deliver value as well.