Fund managers need to access the public
Stock markets have always been a point of attractive investment. The high level of risk and volatility in the stock markets induce investors to foresee higher returns to compensate the risk. But, the point that is more important is the opportunities in the stock exchange for the common man. I am talking about people who save money from their salaries or monthly income, those who lack technical knowledge but have the ambition to attain handy returns to meet their future monetary requirements.
I have mentioned several times on my blog that one of the reasons for the financial crises across the globe was that individuals were thinking like businesses, businesses were behaving like banks and banks were dealing like hedge funds. The importance of understanding of roles is very important. The stock market is not a lottery scheme, neither is it a cinema ticket for a three hour movie. Unfortunately many brokers market it that way. When we talk about investments in stocks of a company, it simply means that we are investing in a company as its owner. But in this world of greed, people present stocks as a lottery ticket that can generate returns within days. Even if this does happen, it is not good for the common man to take such a position in the stock market.
Investment in stocks needs a detailed company analysis and analysis of the industry and the economy. It is difficult to carry all these analyses for the common man so they generally invest in the stock market just by looking at the price boards. This is a risk that can mature and when it does, these people cry.
Across the world mutual funds are the best place for the common man to get investment exposure in the stock market. Mutual funds provide the opportunity to diversify even if you have only Rs5,000 to invest. Otherwise, you cannot make such an investment with such a little sum.
As per recent figures reported in national news papers (as on May 25, 2010) through the association of mutual funds, the Pakistan mutual funds industry is worth Rs221 billion. This consists of Rs187 billion in open-end funds and Rs34 billion in closed-end funds. As per the economic survey 2008-09 there are 99 mutual funds active in the country, out of which 76 are open-end funds and 23 are closed-end funds.
Now, if you take a look at the size of the mutual funds industry in Pakistan i.e. Rs221 billion in comparison to the total scheduled bank deposits of Rs4.5 trillion, (as on Jan 2010 by State Bank of Pakistan) the mutual funds industry is just 4.9 per cent of total deposits of scheduled banks. If I compare this tendency to the mutual funds industry of the USA (as on Dec 2007) it stood at $11.5 trillion against bank deposit of US banks of $7 trillion. It means that the US mutual funds industry before 2008 (pre actualize crises age) was 160 per cent of the total bank deposits. If we take a look at our neighbor India, they have assets under management of INR4.93 trillion (as in the 2009 KPMG report) against their bank deposits of INR5.8 trillion (Reserve Bank of India), which means the mutual funds assets are 84.5 per cent of total deposits of Indian banks.
I cannot deny that mutual funds or equity funds have been growing gradually in Pakistan but the proportion of investments in mutual funds is relatively low in comparison to the bank deposits that offer lower returns. It is a requirement of the time that fund management companies have to develop a marketing plan to access the masses. The masses are always keen on multiplying their limited savings. Even though they have limited savings, the large population of this country can turn it into a big success story.
The common man is not aware of the technicalities. They cannot understand how the beta of a stock is calculated. They cannot understand the risk management features of funds. Therefore, it is necessary for fund managers to develop easy to understand marketing material, so the common man can access the mutual funds with confidence. It would be good to train a mass marketing sales force for funds that would reach people who keep their funds parked in national saving schemes offer returns that even cannot cover inflation.
We need to have a new dynamic mindset for our mutual funds industry and it can be done by shifting the focus of selling funds to the common man by aggressive marketing. We need to develop comprehensive and easy to use online fund management tools that offer one window solution to invest in funds. It shall cover majority of our youth that is above 50 per cent of the country’s total population. They can definitely invest in multiples of five thousands.
Keeping in mind the many constraints to have savings for the common man in this country, they need to have a smart solution to invest the minimum and mutual funds is the way to do it. Equity, infrastructure, fixed income funds can be popular terms in the country if they are marketed by fund managers aggressively in the tone and style of the common man. It is in fact the common man who is more worthy fund management than big investors. Generally they have long term plans and it is always better to have a million clients than thousand. This is also a form of diversification on its own.