Low-income investors shirk micro SIPs for high costs & complexity.

The initial enthusiasm of mutual fund houses to promote micro-systematic investment plan, or SIP, an investment route to attract low-income individuals to invest regularly in equities, is waning due to high costs and regulatory hiccups.

Higher costs to service such accounts without adequate growth in investor base had been deterring mutual funds from promoting this channel. Now, the Securities and Exchange Board of India's decision to make know-your-client, or KYC, norms mandatory for even investments of less than Rs 50,000 in mutual funds has hit the final nail in the coffin of micro SIPs.

SEBI had made it mandatory for every mutual fund investor to be KYC-compliant from January 1, in a move intended to check fraudulent practices and money laundering activities. To be KYC-compliant, an investor is required to submit valid identification documents. Earlier, only those individuals investing Rs 50,000 or more needed to quote their permanent account number, or PAN.

Now, the revised norms mean even low-income investors, investing smaller amounts in mutual funds through micro SIPs, also need to provide the required documents. Mutual fund officials and distributors said a majority of the investors opting for micro SIPs, mostly workers in the unorganised sector in the two and three-tier cities, do not have documents to complete the KYC procedure.

"Many low-income individuals look for convenience while investing, as they get intimidated by procedural challenges," said Surajit Mishra, national headmutual funds of Bajaj Capital . "Greater legal requirements have discouraged them from investing in mutual funds through micro SIPs," he said.

Many top asset management companies jumped the bandwagon to offer micro SIP services to grow their business in the largely untapped rural India, but soon found that the costs incurred in selling and servicing these accounts were prohibitively high, since the investor base was not registering substantial growth. The key to profitability in micro SIP accounts is volumes.

Currently, UTI Mutual Fund , Reliance Mutual Fund , SBI Mutual Fund , ICICI Prudential Mutual Fund , Sahara Mutual Fund and Birla Sun Life Mutual Fund offer the micro SIP facility. Schemes of some of these mutual funds accept as low as Rs 50 per month through micro SIPs. The minimum accepted amount under normal SIPs is usually Rs 500 per month. A majority of the fund houses lack distribution strength to cater to small towns across the country and are finding it difficult to garner more accounts.

The problem is compounded by distributors' refusal to push mutual fund products following the ban on entry loads, the fee that mutual funds charged investors to pay distributors, since August 2009. A top official with a large mutual fund house, which offers micro SIPs, said the breakeven period for a mutual fund selling micro SIPs could be at least five to seven years.

"Micro SIPs do not make sense at all for most mutual funds as profitability is a key issue here. The costs involved in selling them were a hindrance; now KYC rules have made buying mutual funds through this route more complex," said Dhirendra Kumar, chief executive of Value Research , a New Delhi-based mutual fund tracker.

Source: http://economictimes.indiatimes.com/personal-finance/mutual-funds/mf-news/low-income-investors-shirk-micro-sips-for-high-costs-complexity/articleshow/8096214.cms