Govt should announce an MF product like budget 2013 to drive financial inclusion

All the buzz around equities and markets continuously performing well has attracted new investors to mutual funds. Among these are many first-time investors, especially the youth. Interestingly, even the vulnerable low-income segment is asking about mutual funds.

However, investors face various challenges in investing in mutual funds, like figuring out what fund to invest in and opening a folio. While many options like banks, online platforms, and MFCentral exist, not everybody is able to navigate these avenues easily. 

Even though the regulator is considering the ₹250 SIP and a few asset management companies have also implemented the same, the above two issues discourage investors from investing in mutual funds. 

How to address the issues

This can be done by setting up a new scheme akin to the Rajiv Gandhi Equity Savings Scheme (RGESS), which was announced in the Union Budget 2012-13 with the goal of encouraging savings from small retail investors to enter domestic capital markets. 

The RGESS scheme allowed new investors with income up to ₹12 lakh to invest up to ₹50,000 per annum in a specified set of equity-based securities. The scheme provided a tax deduction of up to 50% of the amount invested. However, the scheme was closed in 2017 due to the lukewarm response. 

The time is ripe to introduce a new scheme in this budget that can help investors participate correctly in the equity markets.

Amid recent market rallies, influenced by financial influencers, many investors are approaching equity investing wrongly due to the lack of knowledge. 

A recent report from the Securities and Exchange Board of India (Sebi) shows the younger generation starting their investment journey with the riskiest investments like futures and options (F&O) trading. Further, the proportion of young traders grew from 31% in 2022-23 to 43% in 2023-24. Over 72% of the total F&O trader base is from beyond top 30 (B30) cities, a higher proportion than mutual fund investors, of whom 62% are from B30 cities. 

The study also revealed that 75% of individual F&O traders in 2023-24 had declared an annual income of less than ₹5 lakh.

There are many novice investors who would like to invest in equities but are flummoxed by the plethora of options and their lack of knowledge. These investors, along with the youth, form a large segment of investors who can be guided to invest correctly.

What is required is a simple scheme with low investment and ease of implementation. This can be achieved by having a special index-oriented mutual fund scheme open to all (experienced and inexperienced investors!). The scheme can have a minimum investment of ₹250 and invest in a broad-based index like the Nifty 50 or the Sensex. A five-year lock-in would be a good way to teach good investing habits and the need to remain invested in equities.

Given the issues that some segments may face in understanding and operating through online platforms, accessible transaction points, apart from regular banking channels like post offices or banking correspondents, need to be established, which can help these segments complete know-your-customer (KYC) process and open mutual fund accounts.

Finally, providing a tax deduction for individuals at certain income levels, in both old and new tax regimes, will encourage inexperienced investors to start investing properly.

With markets doing well, there is even more need to educate investors about the risks of equity investing. Most new investors have come in the last three to four years and have only seen the equity boom cycle and no down cycle. Even the drawdowns have been for short periods.  

The Association of Mutual Funds in India (AMfi) and mutual funds can work on an investor education campaign specifically for this product to ensure people know the capital risk associated with equity investing.

A product like this can serve as a catalyst for building a culture of saving and right investing. Encouraging consistent savings and fostering disciplined investment helps individuals take control of their financial futures. Over time, it can instil good financial habits and make smart, long-term investing more accessible and manageable for everyone. 

This, in turn, can pave the way for greater financial inclusion, reaching a broader, underserved population and providing them with the tools to participate in the financial ecosystem.

Mrin Agarwal is the founder-director of Finsafe India.