PayTm planning to launch a money market mutual fund, will it help a consumer?

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PayTm is planning to launch a Money Market mutual fund, as reported in news today.

For a long time it was being speculated that PayTm will foray in the mutual fund space as a distributor i.e. they will allow PayTm account holders to invest in any mutual fund schemes and earn commission from the Asset Management Companies (AMC) i.e. the ones who operate this mutual funds – ICICI, Reliance, HDFC etc. However, this move by PayTm is unprecedented and definitely a shocker for the Industry, PayTm is actually planning to become an AMC itself and compete with the existing (aforementioned) stalwarts in this field.

But will it help a normal consumer? To reach a conclusion, let’s understand first what a money market mutual fund is –

A money market mutual fund otherwise commonly called as Liquid/Ultra Short Term Debt Fund, invest your money in Govt. Securities, Commercial Paper and very short term debt instruments, it is almost as safe as your savings bank account or fixed deposits but generate returns higher than the bank account or FDs (usually to the tune of 7%-9%) and the best part is that it pays out interest daily without any lock-in i.e. you can withdraw your investment anytime instantaneously.

Basically, it’s a far superior savings option than the traditional bank or Fixed Deposit.

a) So, why isn’t investing in money market funds popular in India?

It is not popular because the commission paid out by this funds to the distributor of mutual funds is to the tune of 0.05% per annum i.e. if you invest Rs. 1 Lac and keep it for a year, a mutual fund distributor will make only Rs. 50 on it, so this mutual fund distributor instead of promoting liquid funds will promote other funds (esp. equity) where they earn commission to the tune of 1% – 1.5% per annum.

b) So, Why don’t PayTm distribute an existing money market fund instead of creating their own Mutual Fund?

Purely for the economic reasons. There are two main components of a mutual fund business – 1st is managing investments and 2nd is distributing. Now, PayTm is by far the biggest distributor of Financial Products in India with it’s extra ordinary reach. So, it has already mastered 1 of the 2 major components of the mutual fund business, all it now needs to do is master the 1st component (which is not very difficult if you are only starting a money market mutual fund) and instead of earning a paltry 0.05% per annum, it will earn a handsome 0.5% to 1% i.e. a 10-20 fold increase in it’s revenue. Also, though PayTm is just starting off with a single mutual fund scheme, it will launch more schemes later and because it doesn’t need external distributor to promote it’s business, PayTm will be making money hands over fist!

c) Will it help a consumer if PayTm launched money market fund?

Answer is both Yes and No. If you are already an existing mutual fund investor and understand money market funds then you don’t need PayTm to launch a new fund for you, because most reputed money market funds (i.e. of Reliance, ICICI, DSP etc.) generate similar returns (with a different of 10, 20 bps) as they invest in similar securities.

But if you do not understand mutual fund and aren’t currently investing in them, it will be a God send for you as you will quickly understand how much better it is to keep your money in money market mutual fund instead of keeping it in bank saving account or fixed deposit.

We have launched FinoZen mobile app around a year back with the same concept of getting a user to invest money in a money market fund and we currently have 55,000 users. However, this nos. for PayTm will atleast be 10 times higher in 1 year because of their significantly higher reach. So, if executed correctly they will help bring a lot of awareness of mutual funds in India.

Author: Varun Gupta

Varun is the CEO of and FinoZen.

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