January 14?In Hindu Business Line, Sangeeta Singh and Nandita Jain of Nathan India, explore how more small investors?especially in India?s small cities?can be attracted to mutual funds. In India, three-fourths of mutual funds are owned by residents of the eight largest cities, even though they account for only one-third of the country?s income.

In September 2012, the Securities and Exchange Board of India (SEBI) announced that mutual fund and asset management companies can charge an additional total expense ratio (TER) of up to 30 basis points on daily net assets so long as inflows from locations other than the top 15 cities make up at least 30 percent of gross new inflows or 15 percent of average assets under management, whichever is higher. To encourage long-term investment, SEBI also specified that the TER will be clawed back if the scheme is redeemed within one year.

Companies now have incentives, but potential investors in small cities need to be informed about and encouraged to try mutual funds. Here, the Association of Mutual Funds in India and professional financial planners have a role to play. New sales methods?mobile alerts, SMSs, ATM transactions, Internet banking?can be successful if well trained people communicate the details of mutual funds. And long-term investors can be attracted if the funds can compete with or complement the Public Provident Fund, which gives assured returns and helps individuals with tax planning.

Mutual funds have grown popular worldwide for two reasons: (1) operational transparency relative to banks, thrifts, insurance companies, and pension funds; and (2) pressure to lessen dependence on social security schemes. In India most jobs, including government jobs, are eliminating pensions and well-designed mutual funds can fill the gap.

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