SEBI allows investors to invest in Mutual Funds via Mobile Wallets, is this a right move?

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Mutual Fund is one of the highest regulated industry in India, even more so than some of the developed nations, this makes it easier for an investor to trust and invest their money in mutual funds (as the probability of wrong doing is incredibly low), however at the same time this curbs the overall industry to spread it’s wings, educate more people about mutual funds and get them to invest.

For ex: LIC and the other insurance companies have been marketing themselves heavily for a very long time without any restriction from IRDA, however all MFs have to follow a strict norm, though MFs are far more superior investment platform than Insurance, MFs can’t say that nor can they comment on any returns they can generate and to top it all they have to end any communication by saying that “Mutual Funds are subject to market risk”. Unfortunately, due to this a large majority of Indians think that Mutual Funds are always just market related and are very unsafe, made for only people with high income, which is absolutely not true!

Anyways, Securities and Exchange Board of India has realised this discrepancy and recently started making some welcome moves to increase retail participation in Mutual Funds, Association of Mutual Funds of India (AMFI) a body reporting to SEBI for Mutual Funds has recently started advertising with a tag line that “Mutual Fund Sahi Hai”, this is definitely a step in the right direction and this targeted marketing coupled with strong economic growth has resulted in huge inflows in Mutual Fund Industry (MF Industry recorded a growth of 36% YoY in 2017, click here to read more).

SEBI has taken some more steps, however this steps are marred by the basic inefficiency in the system, let’s understand this steps and why they haven’t been extremely popular –

a) e-KYC led by Aadhar

This was one of the greatest moves as the cost of doing a physical KYC was extremely high (to the tune of few hundred rupees) and the fact that now an e-KYC can be done instantaneously just by entering the OTP you will receive on the phone no. which is linked to your Aadhar Card was a God send! and this idea definitely had a lot of merit in it.

Unfortunately though, (talking from the 1st hand experience of running FinoZen and FinoTrust) majority of Aadhar cards were made in 2011-2013 period and the telecom industry has been going through such a tumultuous period that most people have changed their phone numbers and when I say most, I mean around 95%, this means that they can’t receive the OTP now before they change their aadhar linked mobile number and which is a big hassle on its own.

Moreover, the limit to investment was set at Rs. 50K for clients through eKYC which in itself is a road blocker.

So, though the idea of e-KYC is great but in the current Indian context it is difficult to execute at massive scale.

b) Investments in Mutual Funds allowed via e-Wallets

This was supposed to be a landmark regulation, unfortunately though and again talking from our own experience of running FinoZen and FinoTrust, it turned out to be a classic case of high on promise and low on execution. SEBI has been discussing this regulation from a long time and they did pass it as well in May 2017 that upto Rs. 50K can be invested in Mutual Funds via any e-wallet. Now, the Mutual Fund community was hoping for two things to happen –

i) Few e-wallets will start selling mutual fund, and as wallets have a very high reach this will result in huge increase of awareness and the overall mutual fund category will grow.

ii) Online Mutual Fund Investing companies like FinoZen and FinoTrust will be able to integrate with wallet players and again as the users of wallets are significantly higher than netbanking, it will become more convenient for people to invest money in Mutual Funds, again growing the overall category.

Though it’s still way too early, however current signs suggest that both of aforementioned items are a distant hope, following are the reasons –

  1. Though Wallet companies have a lot of downloads, active user base is only 10% of downloads (on an optimistic side) and moreover number of users who have done KYC to increase their wallet limit and subsequently invest in Mutual Funds is less than 2% of this 10% i.e. .2% of the overall user who downloaded that wallet app are eligible to invest in Mutual Funds. For PayTm with 100 Mn downloads 0.2% is 2 lakh users which though still is a decently high number, but is very grim in the light of point no. 2 mentioned below.

2. Wallet companies are private limited companies who have traditionally burned a lot of money to acquire users, now there focus has shifted to monetising this consumer base with an aim to earn profit. Their business model is very straightforward, user load money in wallet and when they spend money somewhere say to buy a movie ticket or order food or pay bills, wallet charge the merchant i.e. the service provider for Movie, Food etc. a certain percentage commission, this commission can be as low as 0.5% in case of utilities bill payment (services provided by Govt. organisation) or 20%+ in case of e-commerce purchases.

Now, you ask what is the cost of the wallet companies? Is it only their technology cost? Absolutely not and there lies the catch, a user loads a money in wallet by Netbanking, Debit Card, Credit Card or Cash. If the money has been loaded by the 1st 3 instruments, wallets have to pay banks a commission ranging from 0.25% to 2%+ and they make profit only when user use this money at merchants which pay them a higher commission than what wallets pay to banks.

Unfortunately, commission in mutual fund is lowest across all industries and that is including utilities. Mutual Fund commission will vary from 0.05% to 1.2% per annum i.e. wallet companies will make money only if a client has invested money for a period of time and even then they will most likely lose money as the commission is lower than what wallets have to pay to bank!

On top of this, caveat by SEBI is that if a person wants to invest in Mutual Funds, he shouldn’t have loaded money in wallet via Credit Card or via Cash. Now, this is really tricky. How does a wallet company tracks this? For ex: I have loaded Rs. 20K in my wallet, 5K via Debit Card, 10K via Cash and 5K via Credit Card. Now, I do multiple transactions and finally the remaining amount is Rs. 3K which I then want to invest in Mutual Funds, so did this money come from Debit, Cash or Credit Card? Difficult, isn’t it?

Anyways, the future of Mutual Fund Industry is certainly bright and this are just few execution problems to resolve.

If you want to read the news about investment via wallets in MFs then go to following link on economic times.

 

Author: Varun Gupta

Varun is the CEO of FinoTrust.com and FinoZen.

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