Penetration / Reach of Mutual Funds in Tier-3 Cities


Indians are mostly risk-averse investors

It still needs aggressive persuasion to make prospective investors

Indian cities are classified purely based on their population size. According to the government, cities with a population of 20,000 to 49,999 are classified as Tier-III cities. In a populous country like India, cities of this size are common and are called semi-urban centers with less potential for economic development. These cities comprise mostly of low net-worth and low-income individuals who rarely have idle cash lying around to invest in mutual funds.

What people of Tier-III cities think of Mutual fund?

“Mutual funds are subject to market risks. Read the offer document carefully before investing” – Most people can recognize this caption given on the television ad. But this is also the reason why mutual funds have been poorly subscribed in India.

Indians are mostly risk-averse investors, and they prefer to stay away from market risks. Banks, by far, are the most trusted means of safely keeping and increasing their hard-earned money though returns are much lower compared to mutual funds.

They need to be advised about the benefits of taking calculated risks to meet long-term financial goals properly. Most importantly, they also need counseling to test this channel with a small investment and stay invested during the short-term down market. Mutual funds are probably the most flexible of all, and even with the television ads clearly stating that one can start mutual funds with just 100 rupees, the market penetration has been less than satisfactory.

India’s Tier-III cities are on the verge of a major change

However, some Tier-III cities, situated in business-friendly states, have shown potential to become a business destination having several industrial clusters as these are well-connected to other major economic hubs. Some even have developed or will soon have improved infrastructure to support large-scale economic activity with their economical real estate, labor, and service costs.

How far are Mutual Funds successful in Tier-3 Cities?

In big cities, people, especially millennials in large numbers, are gradually adopting the market-linked products through SIP (systematic investment plan) because of the investors’ awareness program conducted by the Association of Mutual Funds in India (AMFI) and other trusted investment platforms.

But, mutual fund awareness and penetration as per June 2020 in most Indian states has been low in the vast untapped territory of Tier-3 cities when compared to the population. For deeper penetration of the mutual funds, it needs pushing new investors to enter the market-linked segment.

Future Prospect of Mutual fund among the prospective investors in Tier-III cities

It still needs aggressive persuasion to make prospective investors in these untapped areas ready to leave the comfort of non-linked investments like bank FD and enter the market-linked segment. These investors have little knowledge and are not willing to take market risks. They rarely think of seeking financial advice to achieve financial goals through MF investments, and that is also by paying money for the advice.

Why are people investing less in Mutual Funds in Tier-3 cities?

  1. Risk

Hearing the caption “Mutual fund is subject to market risk,” people of Tier-III cities start to worry about the returns in mutual fund and find less security of returns as compared to bank FDs. However, they completely ignore the financial benefit that mutual fund investments provide in the long run.

  1. Dependence on middlemen/organizations for investment

Dependence on other bodies for investments and paying fees only for advice make the unaware and uninformed investors in these cities lethargic.

  1. Lower literacy rate

For a person, education is vital, at least to understand the financial matters that would be beneficial for him/her. The lower literacy rate is the major obstruction here.

  1. Online Platform

Most of the Mutual Fund procedure is done online these days, so investors having computer awareness can deal with it better. However, in these cities, computer literacy and internet connectivity is a big issue.

  1. Limited money

Due to the people being in low-income groups, the availability of spare money is a limitation.

Role of Regulators

SEBI’s (Security and Exchange Board of India) have taken some counter-productive decisions to boost the already low amount of mutual fund investments in Tier-3 cities and other adjacent areas. Additionally, care is being taken by companies and Govt. bodies to popularize the concept of mutual funds among the commoners in these areas.

Still, unless some special provisions are made to reach out to the untapped prospective investors from Tier-III towns, penetration of MF products would suffer a major setback, and mutual funds would continue to remain as an investment product for elite class only.

Jago Investor!!!

The growing NPA (Non-Performing Assets) issues, among others, have resulted in diminishing bank interest rates. And the onset of the coronavirus pandemic has not helped matters either. On the contrary, in the long run, mutual fund investments promise the extended returns at a much higher rate than what the contemporary banking system, at best, has on offer.

To sum up…

In Tier-III cities, there are large numbers of people with low income who need Mutual Fund to fulfill their financial goals. If they open up and come forward to take financial advice once, they can easily start with small investments in regular Mutual Fund plans to gain financially.

That’s why Comparte Investment team asks do you have “Nivesh Ki Aadat”.

With this one can say “Mutual Fund Sahi hai”,  so let me do Nivesh