MUTUAL FUNDS IN SACHETS: PATHWAY TO FINANCIAL INCLUSION OR A GIMMICK?

This post is authored by Aditya Kumar, 3rd year B.B.A. LL.B. (Honours) student and Samridhi Singh, 2nd year B.A. LL.B. (Honours) student at CNLU, Patna.

I. Introduction

The Securities and Exchange Board of India (“SEBI”) in its consultation paper released on 22nd January, 2025, introduced the Sachetisation of Mutual Fund investments with the objective of embracing financial inclusion. Its primary objective was to promote financial inclusion and systemic saving via mutual fund investments. Financial inclusion, as defined by the Committee on Financial Inclusion and the Committee on Medium-Term Path to Financial Inclusion revolves around a) access to formal finance and b) ensuring affordability of such financial services. It is pertinent to note here that the definition of financial inclusion considers the stratified nature of the problem and specifically addresses marginal farmers, low-income households, and vulnerable groups. In pursuance of such a definition being recognized by the Reserve Bank of India (“RBI”), the onus on SEBI, when releasing a scheme to follow through on the cause of financial inclusion in this scheme has been left unfulfilled.

The consultation paper introduces small-ticket Systemic Investment Plans (“SIPs”) of Rs. 250 while ensuring reduced intermediary costs for the first three SIPs. Moreover, in order to secure the interests of Asset Management Companies (“AMCs”) and to ensure a break-even situation for these companies, it suggests that the investment commitment should be for at least 5 years, i.e., 60 investments. They aim to achieve their objective through a novel plan for the entire industry to come together to facilitate the financial inclusion of all sections of society in the financial market.  

This article aims at critically evaluating the sachetisation scheme from the point of view of social welfare while highlighting several challenges that the scheme, in its current form, might face at the time of implementation. Considering that the lingo of the scheme has the flair of social welfare and inclusivity, the interest of the primary stakeholder, i.e., the investor, followed by that of the fund managers, is briefly discussed here. The article opts for a welfare-based approach while evaluating both short and long-run implications of the scheme.

II. Selling mutual funds in sachets

The scheme provides  , a revised reduced cost will be made available via partnership with the AMCs to ensure that prices remain minimal at the other end. However, the twist lies in the reduced cost being available only on the first three payments undermining  the objective of the scheme. For someone who lacks the financial viability to invest by paying the intermediary costs, including Know Your Customer (KYC) charges, payment gateway charges, platform fees, registration fees, etc., it  it will not simply become feasible to address such costs within three months or three instalments. Furthermore, especially when the SIPs are offered under Growth option which reduces the inflow of capital for the investors in the short-run. The privilege of investing money somewhere and forgetting it for a considerable period is uneconomic for a majority of the Indian population living on subsistence. This fundamentally becomes a sore end for many budding investors who might be comfortable investing with reduced costs, but not when the system turns to normalcy.

Additionally, the scheme  suggests that the commissions of distributors and Execution Only Platforms (“EOPs) will be covered with a meagre amount of Rs. 500. Owing to the fact that the commission of these distributors depends on the investment size, it would be unfavourable for them to indulge in this cause of financial inclusion when they have bigger fishes to catch. Furthermore, the incentive will only be delivered when the investor has successfully paid 24 instalments which pushes the burden on these distributors and EOPs to ensure that the investor follows through for at least 1 year for fortnightly SIPs and 2 years for monthly SIPs. A simple cost-benefit analysis of  distributor will throw light on the disparity between the incentive involved and the resources consumed.  Additionally, the presence of SIPs worth Rs. 100 and other small-ticket SIPs by AMCs further discourages the distributors and the investors from subscribing for the small-ticket SIP . The overall scheme requires conscious, consistent effort on the part of both investors and the fund managers; however, the structure of the scheme fails to sustain their interest as the promised incentive lacks longevity.

III. Achieving Financial Inclusion for investors or Break-even point for AMCs?

The objective iterated by the regulatory authority includes terms such as “financial inclusion” and “systemic saving” which naturally brings one to question the target beneficiaries of such inclusion. Will the regulatory authority do any categorization of investors to ensure that the small-ticket SIPs will be availed only by the desired economic group? It is understood that investors who have prior investments or investments other than small-ticket SIPs will not be considered small-ticket investors however, what mechanism will be put in place to ensure the access to financial products to the marginalized sections of society?

In order to chase the objective of financial inclusion, the scheme needs to categorize or demarcate the target areas specifically. Usually in the financial sector, such demarcations are based on the geographical categorization of cities into tiers. Taking into consideration that only 8% of the Indian population invests in mutual funds but the penetration of financial products is estimated to have reached B30 cities, it is inevitable to note that within these cities in which accessibility of financial products is claimed, access and affordability to and for these financial products is not the same for all. In such a situation, a universal application of any policy will not lead to any significant results. A simple comparison between the chances of a wage labourer in a tier 1 city investing in mutual funds to a farmer in rural India can make one understand the stratified nature of Indian society and how one cannot take it for a stride when framing welfare policies.

Further, the chances of converting someone into a first-time investor depend upon key sociological factors of family background, educational qualification, financial status of the family, and their level of understanding and trust in financial products and markets. With the advent of the global middle class, converting young groups would be fairly easy but the real challenge lies in penetrating deep into the rural and marginal sections of society. The concern of financial literacy here takes primary importance. It is fairly established that financial literacy alone cannot lead to financial inclusion, however, its underlying importance is hard to deny. Even though the significant negative perceptions about the financial market and the stock market in the Indian middle classes evident in the early 2000s have mellowed down, trust can  be established with a deep understanding of the functioning of markets.

This essentially requires the providers to follow a pull-based approach to meeting the specific, context-based needs of the target groups. As opposed to offering generalized, pre-defined financial products as per push-based approach, customizing financial products to populations, personalizing them can foster greater customer engagement and satisfaction. Engineering models specific to stratified target groups in society based on either their economic status or viability, cultural and social milieu will render better results as opposed to universal application. 

Another interesting observation in relation to financial inclusion and increasing accessibility is the advent of private digital platforms like Zerodha, Groww, and payment platforms like Paytm which offer micro-financing and small-ticket investing. The American alternative Stash, which is a micro-investing platform offers investors with a small-ticket size of $5 while educating them on concepts of finance and investing providing an all-in-one solution to the problem of inclusion and literacy. Considering the digital penetration, rise of private platforms in the trading sector, collaboration between the public and private sector to ensure both commitment to welfare and profitability can enable a sustainable model with financial inclusion. Utilizing the potential outreached available to both the sectors, a breakthrough can be made into the restrictive world of stock market by deinstitutionalizing the system and making the experience more personal, which is something that private platforms are already doing. Combing this experience with the required financial push for achieving inclusion can give people a chance to invest on the bigger table.  To facilitate the inclusion of a country like India, especially in the context of the digital penetration and mobile banking, this route of public-private partnership should be explored. It would enable the regulator to better manage the interests of investors, fund managers, and AMCs.

IV. Conclusion

The initiative to promote financial inclusion, although is commendable, but the mechanism utilized to achieve the same lacks practical utility. It fails to demarcate the precise methods to  further its objective and  the mechanisms the authority will ensure to sustain such a novel cause. SEBI tries to cover the incentives and considerations for the AMC and the distributors or EOPs but on the part of investors, the authority blatantly assumes that financial literacy and economic viability will just suddenly appear.

The imbalance between the interests of the corporations and the target investors leans unilaterally on the side of corporations owing to the stress levied on incentivizing the former at the cost of  long-term financial inclusion. The short-run implication of such a scheme might result in a sudden rush of investments, but its continuity cannot be guaranteed in the long-run. Even though it is fathomable on the part of the regulatory authority to incentivize the AMCs and distributors to ensure the coming together of the ‘entire market’, it dissuades the scheme from its original objective. Ensuring financial inclusion does not imply a fleeting moment of inclusivity but to go the extra mile to ensure its continuity.