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Mutual
Fund for Rural india
Authored
By:
Vineet
Patawari and Anubhav Jain
IIM Indore
– Batch of 2008
Mail : . p06vineetp@iimidr.ac.in and p06anubhavj@iimidr.ac.in
The world’s population can be divided into three basic
segments based on the economic pyramid. Majority of them would lie at the
bottom of the pyramid with annual income less than $1000. This economic
inequality must be overcome to ensure the welfare and happiness of people all
around. The need of the hour is to develop innovative products or services for
these people.
The Mutual Fund Advantage
A mutual fund for the rural population is one such solution.
The fund would require minimal investment on the part of the people in the
rural areas and will be designed in such a manner that it helps them increase
their financial position with respect to the other strata of the society. The
fund will be designed in the simplest possible manner so that even a layman or
an illiterate can understand the way it will function and will have no complex
terms and conditions. The fund will not only boost the income of the rural
households but will also increase their spending capacity thereby leading to
the overall welfare and development of the regions in which they reside.
 If we
consider the case of India, even the irregularity of monsoon can play a role in
the overall functioning of the fund. By securing or insuring the rural people
against such natural phenomenon, the fund can extend its advantages to higher
levels.
But for all this to happen, private partnership in this
initiative is also a must. Large corporate houses must come forward and join
hands with the government in building a financial instrument of this kind so that
the people at the bottom of the pyramid can have something to cheer about and
lead a better life altogether. They should take up the responsibility of first
creating awareness about such a thing by educating the masses about it and then
taking up the cause of these people by developing a simple instrument of this
kind.
By developing this mutual fund and implementing it, the rural
population will definitely be moved to a new level in the economic pyramid.
Bringing about a change in rural investment pattern
The next wave of growth in rural areas will come from the
rural markets. Presently the underdeveloped world is facing a crisis in the
infrastructure sector. Once the growth story embraces this sector, the biggest
gainer will be the villages. Government policies and employment generation
programs will also improve the standard of living of rural masses by enhancing
their per capita income.
Now a question which lingers on everyone’s mind is: How can
ordinary, presently low-income earners, from rural background become rich? The
answer to that question is as simple as it is routine: Start by saving and
investing something regularly, even modest amounts, in anticipation of big
returns in the future. If a villager is looking for big returns, it cannot come
from the traditional sources like bonds or insurance.
Having said that, we must appreciate that although the rural
economy is looking to give the urban economy a run for its money, there isn’t
enough exclusively “rural” financial instruments to channel this money to
productive purposes. The most feasible tool seems to be “Mutual Fund” specially
designed to address the unique needs of the rural world. The concept of Mutual
Funds for the poor provides significant institutional mechanisms to move the
poor out of the village economy and into the more dynamic corporate sector, to
a stage where a significant share of corporate wealth could be owned by the
poor.
The Mutual Fund is but one institutional mechanism to link
the rural population to the corporate sector. The underlying premise of the
Mutual Fund is the notion of creating possibilities for the poor to own
corporate assets. Financial policy could accordingly be restructured to ensure
that all assets, from urban land to real estate development, from banks to corporate
trading houses, could be redesigned to accommodate the rural masses (indirectly
by the MF way) as equity partners. The two institutional instruments to make
this possible remain the Mutual Fund and the need for private limited companies
to transform themselves into public limited companies. Here monetary and fiscal
policy can provide incentives to encourage the corporatisation of private
wealth along with the reservation of space for equity ownership of this wealth
by the rural public
The savings of the poor can not only augment the savings base
but also broaden the investment capacity of the economy, whilst transforming
the poorest rural household into stakeholders in the process of national
economic growth. So any mutual fund that targets the rural economy for raising
the money and investing it at the best place can change the face of rural
investment pattern and has the potential to become a big threat to low interest
yielding insurance or post office products.
A good strategy has to be chalked out
To produce worthwhile returns any investment instrument which
can be offered needs to be linked with the equity markets but the returns have
to be assured. The only viable option is regular investment through a scheme
similar to Systematic Investment Plan (SIP), a scheme where you can
periodically invest a fixed sum, which could be as low as INR 500 per month.
Considered as one of the ideal low-risk methods of wealth accumulation, SIP
helps investors overcome the fluctuations of equity investment. Investing
through SIP makes timing and cycles of the share market totally irrelevant.
With SIP, farmers have to invest a fixed amount regularly. Therefore, they end
up buying more units when the markets are down (when the NAV is low) and fewer
units when the markets are up (when the NAV is high). SIP works as a
disciplined investment method as it forces you to buy even when the markets are
low, which is actually the best time to buy.
There must be no risk to the capital invested. Looking at all
these aspects a special type of mutual fund has to be designed for the rural
Indian market. The per capita income is below INR 50 per day for a huge chunk
of the population. So keeping their standard of living, risk profile, awareness
towards such instruments, etc. the concept has to be very unique. It’s very
difficult on their part to accept any instrument which can require even an iota
of their wealth. The device needs to be backed up by some assurance from a
trustworthy sponsor like the government or reputed business houses like Birla
or Tata. For a player who has low recognition in the rural market it is
difficult for the rural masses to accept it.
In the initial stage, the mutual fund can be introduced for
as low as INR 200 to join; this variant of mutual fund can be targeted to daily
wage laborers and landless farmers as they have the ability to pay that small
sum up front when they get their wages or remuneration. They have surplus cash
whenever they get their pay and will be willing to invest it if the terms and conditions
are simple. To keep the depositor involved and interested in the process of
making money from the savings, the mutual fund needs to bring in the option of
adding to their investment in increments as small as Rs. 20 and as frequently
as daily or weekly.
The average length of time an investor stays in a securities
scheme, other than a money market/liquid scheme, is one-fifth of the time in
the UK and two-fifths of the time in the US. Furthermore rural people will
normally remain invested for even lesser time. While designing the network this
point has to be kept in mind. One challenge is to tackle the liquidity issue of
the instrument. To make it customer oriented, the liquidation of the instrument
should be very fast and there should be no impediment to exit from the
investment. Communication and synergies between the channel partners thus
becomes a decisive issue in the overall state of affairs.
Leveraging the rural economy – The Grameen Bank Example
We believe that promoters of such rural world focused fund
have to follow a course that few others in the world have done -- and that is,
leverage the rural economy. This is something that most of the Mutual fund
companies don't do because it requires hard work. There have been some
incidences of similar instruments invented to cater to the investment needs of
rural population, but they were unable to tap such a huge population of
villages. So the main challenge lies in reaching to such a mammoth area. So
their challenge is to invent a new business model where they can create a
distribution base effectively in all the villages in the world, and to learn to
do that at one-tenth the cost of implementing it in the urban world. Just to
put that on a scale that someone could understand, to succeed in urban world,
they need to be able to do business at one-tenth the cost of the West. The
challenge is to be able to work with partners because that the branch-led model
will not work in this context. For example, they might partner with a local
financial institution (banks, post office, insurance agents, cooperative banks,
etc.), a micro-finance agency or companies’ outlet like ITC’s Choupal Sagar in
India or someone who is already in the village for a business purpose. The
Mutual fund might even partner with someone who is selling fertilizers or seeds
or tractors. How can we leverage these partnerships to do business? That
question drives the need for a new business model to reach out to this market.
A classic case in point for the overall setup is Grameen
Bank, Bangladesh. It has taken the initiative in launching the first Mutual
Fund of the poor, where it is providing opportunities for investing a small
fraction (15 Crore taka) of the savings of its members, in a managed,
close-end, Mutual Fund which would invest its portfolio in the corporate
sector. The potential of this experiment has to be tested within the small,
rather unstable capital market of Bangladesh. On the contrary, looking at the
huge, fundamentally strong and stable stock markets in India, the probability
of success of such Mutual Fund is much higher. Many clues can be taken from
this model to develop a similar instrument in other parts of the world.
Various Concerns
The biggest risk is the failure of the monsoon. Now, can one expect savings and investment from rural
population without fixing this risk? What they have to do, is to ask if this is
an insurable risk. Can they get such insurance? The answer is yes. Can they
then sell this insurance to the farmers? Again, the answer is yes. Finally, can
this insurance be further reinsured outside the home country so that the risk
was shared even more widely? Yet again, the answer is yes. This will create a
win-win situation for all. The farmers will be liberated of the jeopardy of
tribulations of monsoons. This can surely act as a side stream of revenues for
the same company which is coming up with the MF. Otherwise they can gain from
strategic alliance with insurance companies to get readymade insurance product.
The same distribution channel will be used to sale insurance products. This
protection provided to farmers will ensure a continuous flow.
The next point of concern lies in redistribution of the
returns as they understand simple things like the value of their money doubling
in 5 years. This is possible considering a modest return of 14-15 % compounded
annually over a horizon of 5 years. The money can be tripled in less than 9
years at the same interest rate. They can understand this concept better than
the complicated NAV for MF. Generating this kind of returns will not be a
daunting task for the expert fund managers who are at presently generating much
higher return than that.
Role of IT and Future
For this MF, information technology will play the most vital
part. Instead of making it too complicated by involving paper work, chip
embedded cards can be issued to all the investors. The rural population is
familiar with such cards like Kisan credit card, etc. These cards will store
all the information regarding the investor and all the addition to the fund can
be easily made without any paper work. The investor should be allowed to check
the value of his/her investment. Different schemes can be made based on the
requirement of the investor. The minimum time period for exit should be 3 to 5
years for any scheme. The people who start investing for the marriage of the
son/ daughter or retirement planning, etc can remain invested for a longer
period of time.
There should not be any entry load for the fund but exit load
of around 3-5% should be imposed. We can make this instrument a unique one
where the investor can see his money grow and be encouraged to invest more
money. The surplus money is generally wasted because it is difficult for them
to find rational avenues for spending this money or to invest them in a cogent
manner. The investment opportunity should be made as trouble-free and
effortless as possible.
People in rural areas should be educated about such
instruments with the help of Gram Panchayats and other influential people in
rural areas.
There are many complexities involved in the model. Keeping in
mind the basic framework suggested above, we can work upon the idea of such a
MF by presenting the idea among the people who have crystal clear knowledge
about the conditions prevailing in the rural market and those who are competent
enough to chalk out the intricacies of the MF. We are sure this mutual fund has
the potential to see the light of day and also show the rural Indians some
light at the end of the long tunnel.
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