This post was written by Dhaval Kapadia, CFA, Director - Portfolio Specialist, and Chintan Mehta, CFA, Senior Investment Analyst, Morningstar Investment Management. It initially appeared in the Morningstar Magazine.
As a country with a high savings rate but a low access to financial advisers, India seems to be a prime market for automated advice, or robo-advisers.
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 there is plenty of room for India’s mutual fund industry to grow.
Working with the Securities and Exchange Board of India, asset-management companies, financial advisers, and mutual fund distributors are taking steps to get Indians to put more of their savings in mutual funds. They’ve made gains, but there’s still much work to be done.
Traditionally in India, mutual funds have been offered through banking channels, non-bank national distributors, and independent financial advisers.
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-advisers, 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.
Theses robo-advisers offer algorithm-driven advice at a low cost with minimal or no human intervention. Some firms offer fully automated advice, and a few function on a cyborg (robo-plushuman) platform. Firms such as ArthaYantra and Aditya Birla Money MyUniverse offer services such as expense management, loan advice, tax advice, investment advice, and goals-based investing. These firms charge annual fees to oversee a person’s investment and financial goals.
Other firms such as FundsIndia and Scripbox offer online mutual fund investment services by recommending a portfolio of funds in which to invest. There are no registration charges on these platforms, because they earn trail commissions from asset management companies, or AMCs.
One major difference between U.S. and Indian robo-advisers is the types of investments each uses. In the U.S., most robos offer low-cost exchange-traded funds; in India, they mostly use actively managed funds.
The share of assets managed by robo-advisers in India is minuscule (less than 1% of assets) compared with human financial advisers. But we think these factors will fuel robos’ growth:
- India’s very young, tech-savvy workforce.
- Rising Internet penetration.
- Appeal of getting financial advice for low costs.
- Appeal of user-friendly web platforms and mobile apps to make investments and monitor portfolios.
Also, regulators in India are exploring the option of distributing mutual funds through popular online retail platforms like Amazon and Flipkart to make investing more accessible to young savers.
Robo-advisers have a huge role to play in providing financial advice to underserved areas of India. This, in turn, would greatly expand the proportion of Indians’ financial savings and participation in capital markets—a win-win for everyone.