As Internet penetration expands, more investors will gain access to advice and investing.
By Dhaval Kapadia and Chintan Mehta
As a country with a high savings rate but a low access to financial advisors, India seems to be a prime market for automated advice, or robo-advisors.
Hovering around 30% of GDP, India’s domestic savings rate has been impressive, especially when compared with other emerging and advanced economies. (The U.S. domestic savings rate was 17.3% of GDP in 2015.) Sixty percent of the country’s savings is household savings (the remaining amount is corporate and public-sector savings), but Indian households put a big portion of their savings in the form of physical savings, such as gold and real estate. What financial savings they have is usually in conservative vehicles such as bank deposits, insurance, and pension funds. A small slice of savings goes into equity shares, debentures, and mutual funds.
But this savings dynamic is beginning to change, as Indian savers look to invest in more-liquid investments and earn higher rates of return. We see this trend in India’s growing mutual fund industry. The industry’s assets under management have increased five-fold over the past 10 years to more than $230 billion. But as a share of GDP, the industry’s AUM has stayed at around 5%. The percentages of other emerging and advanced economies are in the double-digits, indicating that India’s mutual fund industry has room to grow.
Traditionally in India, mutual funds have been offered through banking channels, nonbank national distributors, and independent financial advisors. The result? Mutual fund assets have been concentrated in the large markets where these financial services are established. Eighty percent of the mutual fund industry’s AUM has come from India’s 15 largest cities. This means the rest of India is lacking access to mutual funds and other financial products.
Enter the potential of robo-advisors, which have the ability to reach these new investors via the web.
At only $30 billion, India’s online retail market is small, just 5% of the country’s total retail industry. But India is experiencing a surge of Internet availability and usage. Internet penetration leaped to 26% of the population in 2015 with more than 315 million users, recently surpassing the United States in number of users and second only to China. The surge is expected to continue for years as the country works to expand Internet availability to all corners of India. As more Indians gain access to the web, digitization will change the conventional way they shop.
We think this move to digital will carry over to the way Indians invest and get financial advice. Distribution of mutual funds via online platforms in India is not new. Players such as ICICI Securities and HDFC Securities have existed for more than five years. But new robos are entering the market every year. Currently, there are more than 40 in India, and the number is growing.