In a bid to enhance financial security, low-income households in India are increasingly turning to micro mutual funds, embracing them as a viable investment avenue. These micro mutual fund plans are designed to allow investments starting from as little as US$3 a month, opening up the financial markets to millions of small-time investors.
Mutual funds operate by pooling money from multiple investors, which is then invested in a diversified portfolio encompassing securities like stocks, bonds, and other assets. The Association of Mutual Funds in India (AMFI) aims to increase household participation in mutual funds from less than 4% to 15% by 2047. To achieve this, the Securities and Exchange Board of India (SEBI) has urged fund houses to introduce investment plans with minimum investments as low as $3 per month. Shriram Asset Management Company, for instance, launched such a plan in August, targeting underserved rural and urban households.
Microcap mutual funds focus on companies with the smallest market capitalizations, typically less than Rs. 3,500 crore. These funds diversify investments across sectors like IT, healthcare, and banking to mitigate risks and usually have lower minimum investment requirements. While these companies may be relatively unknown, they offer high growth potential, with the possibility of significant returns if their business models succeed.
Financial planning apps like Airpay Money are also contributing to this trend by training merchants in smaller cities and villages to promote micro plans to potential investors. While the shift towards mutual funds is not a quick fix, it requires persistent education to change established saving habits focused on gold or fixed deposits.
Goldman Sachs forecasts that India's household savings will generate $9.5 trillion of inflows into financial assets over the next decade. This shift can lead to new capital formation at the macro level and help individuals build savings that outpace inflation. However, some experts advise caution, pointing out the risks of exposing low-income savers to stock market volatility, especially given the low levels of financial literacy in the country.
Despite the potential risks, many are optimistic. By investing in micro mutual funds, low-income individuals can cultivate long-term savings habits and gain exposure to the equity market. While it may take time and effort, these bite-sized investment plans have the potential to gain traction and transform the financial landscape for the masses.
