How the mutual funds industry needs to factor in the 'youth factor'

Sorry, I don’t have answers. I do have some points to ponder. And I am not going to share lofty statistics on the growth of the Indian mutual fund industry. I am going to share what brings me to work every day after doing the same job (so far!) for 25 years.

There is excitement and optimism all around about India’s global standing as a nation, her economy and capital markets. On capital markets, the positivity is not just related to performance—absolute as well as that relative to emerging markets—but also the robust participation by domestic investors in equity markets, directly and via mutual funds. While direct equity investors have no doubt a big contribution in the vibrancy of markets, there is a lot of trading as well as futures and options activity, and the long-term impact on market movement is muted. Neither is there a concept of net inflow nor has the “non-promoter non-institutional holding” of listed entities risen in any meaningful manner over the years. Hence, from mid-2021 through to end-2023, in the face of significant FPI outflows, it is said that domestic investors—mainly via mutual funds—have supported the markets, preventing a meltdown, unlike previous such scenarios. Whether flows sustain markets or rising markets pull in more flows is as interesting a question as whether the chicken came first or the egg or if you are numerically oriented, the circular reference error. Most market commentators seem to suggest that there are a lot of greenhorns out there in the markets who have entered after 2020; they have not seen the nasty side of the markets and a bulk of the flows in the markets is because, well, the markets are going up. This is true. When people are investing, they start with the right intent i.e. SIPs are done for decades; invest systematically because you don’t know when markets can go down; they never go up unidirectionally; when they fall you automatically average; equity mutual fund investments are done for the long term, etc. Experience shows, despite all this, at the first hint of trouble, flows tend to be held back and even withdrawn altogether.

But somewhere in finding a balance between the scepticism around “this time is different” and the inevitability of “habits change with generations”, cohorts of people and their behaviours and reactions to situations change. Hence, our baggage of past experiences needs to be rebalanced between being an asset and a liability. I hate to use clichés, but this is how demographic dividend might look like in action. Are we prepared?

As I said earlier, I agree that rising markets do pull in people and a market fall can scare the most convinced; the role of human psychology in investing is critical too but there are a few other considerations to keep in mind. The last big correction before 2020 was in 2008-2009 and a longish lull in markets was last seen between 2011-2013. In 10-15 years, a lot of investors have become experienced enough to understand that corrections are a feature and not a bug. Some even see it today as the most profitable feature.

In the past 15 years, however, a new cohort of investors has come into the markets who are wired differently. Their education levels, socio-economic background, risk appetite, aspirations, the economic and market messages they have received, the India they have seen and how they react to stock market losses are very different. When they start earning, they don’t place deposits in public sector banks or post offices at 9%, not everyone opens a public provident fund (PPF) because it gives 10% and they are not thinking jobs and careers in a 10-20-year bracket. Even if you gave them something with 10% assured return, they would still choose something that was easily accessible on the friendliest UI/UX or simplified in a YouTube video; sorry, shorts or an Insta reel. Most youngsters now are opening accounts on an app or paying money on an app, saving or buying investment on an app and it is the app and its UI/UX, it’s gamification that matters and not the underlying bank or broker or even an investment idea.

This is not about my view on markets and retail participation alone. The biggest dynamic that one needs to be aware of today is that an overwhelmingly large proportion of our investors are going to be young in the coming years. Twenty years ago, if the median age of the investor in mutual funds was 45-55 years, in the next 10 years it will be a 30. And a 30-year-old with a very different journey to that point and a very different route map onward. This is the biggest dynamic the industry needs to prepare for. We are way too complex, way too boring and unnecessarily intellectual.

The entire digital ecosystem and changing consumer trends have made the industry democratic and meritocratic. In the past, most mutual fund companies were owned by a bank, insurance company, NBFC or broker or some sort of conglomerate. Today, professional managers with no institution buttressing their claim to competency but a reputation and track record to boot, are setting up their mutual fund companies, thanks to regulations in no small manner. More and more new players will come in based on the rise in market size, global investment opportunities, and the ability to create products and deploy investment acumen. But success will lie not just in managing money and generating returns, but it will depend a lot more on accessibility, communication quality, and, most importantly, relatability.

How does one stay young and keep an organisation young despite the much desirable grey of experience and competency is what I wonder most about nowadays.

The author is CEO, White Oak Capital Mutual Fund. Views are personal