In February, the market regulator flagged off ₹250 micro-SIPs (systematic investment plans) to widen India’s investor base and promote financial inclusion. However, just 9,000 investors signed up for the scheme until June end, a Mint analysis of industry data showed, paling in comparison to active SIPs of 91.8 million excluding such micro investments. The reason: small ticket sizes and low distributor commissions.
Revenue case
“Since the ticket size is smaller, typically, the revenue per case becomes lower,” said Ganesh Mohan, managing director of Bajaj Finserv Asset Management Ltd, which manages more than ₹25,400 crore of assets. In a low-margin business, one needs a different kind of solution, Mohan said at a recent industry event, adding his company is working with registrar and transfer agents (RTAs) to create a financial and technology model that ensures such plans are viable.
Currently, SBI Mutual Fund, UTI Mutual Fund and Kotak Mahindra AMC are among those who offer the ₹250 SIP.
An industry executive said an asset management company (AMC) spends about ₹40 to verify the address and identity of every new investor, while it earns 0.3% on the SIP annually. In the case of a ₹250 SIP, the AMC will take 4.5 years just to recover the cost of such know-your-customer (KYC) exercise, since the investor puts only ₹250 every month during that time.
Need for scale
“A ₹250 SIP is a great way to bring more people into the world of investing, but for it to really make an impact for the industry, it needs to scale,” Avinash Satwalekar, president of Franklin Templeton India, which manages nearly ₹1.22 trillion of assets. Every SIP, regardless of size, incurs a fixed transaction cost, he said at a recent event in July, answering a question from Mint. “To make this model sustainable, the industry needs to build volume over time.”
Apart from KYC costs, the AMC also pays the RTA to maintain investor data and handle redemption requests. There are also costs involved in money transfer from the client to the AMC, bank mandate charges and account statement generation.
Persuading mutual fund distributors—another key link in the mutual fund chain—will be hard too.
Commission conundrum
“The industry average for commissions to distributors is around 70 bps, translating to a commission of ₹21 annually from a single SIP and ₹1.75 monthly in the first year,” said Kartik Sankaran, founder of Fiscal Fitness a registered distributor. He added that this level of commission will not attract many distributors to take up micro-SIPs, and many may simply do it for free.
The distributor incurs several costs on operating platforms, software and employees for acquiring and servicing clients.
In its consultation paper in January on such ‘Choti-SIPs’, the Securities and Exchange Board of India (Sebi) had said an incentive of ₹500 could be given to the distributor—the logic being, since distributor commissions are tied to investment size, they would otherwise earn little from small investments.
Sankaran of Fiscal Fitness added that ₹500 may not be a game-changer for metro-based distributors, where most investors have already signed up through fintech platforms; however, it could be more meaningful in smaller markets as local distributors might find it easier to bring in first-time investors who are otherwise putting money into chit funds or unregulated schemes, he added.
‘Relationship product’
Amit Bivalkar, founder-director of Sapient Finserv, another distributor, termed the ₹250 SIP a “relationship product”, not a not a revenue product. “When positioned thoughtfully, it can serve as an effective customer acquisition funnel,” he said.
To be sure, some AMCs have earlier attempted ₹100 SIPs, but the initiative never took off due to the same reasons.
“Some AMCs have allowed ₹100 SIPs for over a decade—not due to any regulatory push, but to build customer familiarity. Back then, digital penetration was lower and costs were higher, yet they still did it. The idea: once a customer is onboarded and familiar with the AMC, they tend to stay, making it profitable in the long run,” said Amol Joshi, a mutual fund distributor and co-founder, PlanRupee Investment Services.
Folio count
Another AMC executive on the condition of anonymity said that the ₹250 SIPs make more sense for the listed players than the unlisted AMCs.
“For some AMCs, the ₹250 SIPs help show an increase in folio count, which looks good on paper; it’s a way to claim growth. For listed AMCs, it helps create the impression of customer acquisition but for unlisted players it doesn’t make a big difference,” the person added.
While that might be true, the numbers show that volumes are yet to pick up.
The sunny side
Data sourced by Mint showed that the ₹250 SIP is actually serving its purpose in tier III cities and beyond, where the intention was to expand the scope of financialization. This data showed that the highest micro SIP registrations at 27% of the total active SIPs comes from the next 100 cities.
“The hope is that someone starting with ₹250 will eventually invest more, recovering initial costs for the AMC,” said Swaroop Mohanty, chief executive officer of Mirae Asset Investment Managers, which manages over ₹2.1 trillion. Micro-SIPs bring first-time investors into the system, which can gradually improve financial literacy and awareness, he added.
The initiative is certainly a positive step for the industry, as it aims to drive financial inclusion by encouraging more first-time investors to enter the mutual fund space, said Nityanand Prabhu, executive director and business head at LIC Mutual Fund Asset Management, which manages close to ₹38,500 crore. While the initiative is definitely scalable, it may take time to gain momentum, given the multiple conditions attached to distributor incentives like the customer must be a first-time MF investor, a minimum commitment of 60 instalments, and the distributor incentives will be applicable only after 24 months, he added.
Level it up
“Along with reducing SIP size, simplifying onboarding—like using Aadhaar and bank details for initial KYC for Choti SIP investors—can help. Full KYC can be completed before redemption,” said Niranjan Avasthi, senior vice-president and head of product, marketing and digital business at Edelweiss Asset Management Ltd.
Doing KYC before redemption will give AMC time to recover the KYC cost, as investments would have reached a certain level by then.
The Sebi paper in January had also said that industry participants in the mutual fund space have agreed to offer discounted rates to help AMCs achieve faster break-even on the costs to sign up new investors on the ₹250 SIP.
Also, some of these costs—along with certain incentives to promote financial inclusion—are proposed to be reimbursed through the Investor Education and Awareness Fund (IEAF), Sebi said. This dual approach—subsidized charges from intermediaries and cost support from the IEAF—may significantly reduce the time taken for AMCs to recover their expenses.
