The concept of the ‘shampoo model’ for SIPs (Systematic Investment Plans) is a novel approach proposed by SEBI Chairperson Madhabi Puri Buch. It’s inspired by the sachet marketing strategy that revolutionized the FMCG sector, particularly with shampoos. The idea is to make mutual fund investments more accessible to the masses by offering SIPs at a minimal amount of Rs 250 per month.
The sachet model in the FMCG industry allowed consumers to purchase small quantities of a product, like shampoo, at a low cost. This strategy significantly expanded the market reach, making products accessible to a wider demographic that could not afford larger, more expensive packaging.
Application to SIPs
Madhabi Puri Buch, drawing parallels to this model, suggests that the mutual fund industry could see a similar expansion. By reducing the entry point for SIPs to Rs 250, it could attract a new segment of investors who are currently not participating in mutual fund investments due to financial constraints.
Potential Impact
The implementation of this model could democratize mutual fund investments, making them as ubiquitous as buying a sachet of shampoo. It’s expected to encourage participation from various income groups, including those at the lower end of the economic spectrum, such as delivery personnel, rickshaw drivers, and street hawkers.
Challenges and Solutions
One of the main challenges is the viability of such small SIP amounts for Asset Management Companies (AMCs), given the cost perspective. However, the long-term benefits for retail investors could be substantial. Industry experts suggest that incentives or dispensations might be necessary to promote small SIPs, considering the costs related to KYC and onboarding every investor.
Industry Perspective
Some fund houses already offer SIPs as low as Rs 100, but making Rs 250 a standard could significantly expand the investor base. Ajaykumar Gupta, Chief Business Officer at TRUST Mutual Fund, believes that a Rs 250 SIP could act as a good entry point for many new investors. Once they become comfortable with mutual fund investing, they could opt for larger SIPs, potentially increasing the investor base from the current four crore unique investors to over 40 crore.
Regulatory Efforts
SEBI is reportedly working closely with fund houses to evaluate ways to make Rs 250 SIPs viable. The regulator’s efforts to increase mutual fund penetration by spreading financial literacy among individuals are seen as a step towards achieving this goal.
The ‘shampoo model’ for SIPs represents a strategic shift towards inclusivity in mutual fund investments. If successfully implemented, it could lead to a significant increase in the number of mutual fund investors in India, contributing to the overall growth of the financial sector.
Potential risks associated with this approach
The sachetization strategy in mutual funds, while innovative, does come with potential risks that need to be considered:
Market Risk
The most significant risk in equity mutual funds is market risk. This refers to the fluctuations in the value of the investment due to market ups and downs. Since mutual funds invest in stocks, and stock prices are never constant, the NAV of the fund also increases and decreases, which affects the value of your mutual fund investment.
Liquidity Risk
Liquidity risk pertains to how quickly you can sell an asset without losing its value. Equity mutual funds, especially Equity Linked Savings Schemes (ELSS), are highly illiquid due to their fixed lock-in period of 3 years. For short-term investors, this is an important risk to consider.
Concentration Risk
Concentration risk occurs when all your investments are in a particular stock, sector, or based on a theme. Thematic and sectoral funds carry high concentration risk. Diversified equity mutual funds, which invest in more than 50-100 shares, have a very low concentration risk.
Regulatory and Geopolitical Risks
These systematic risks are inherent and cannot be avoided. They include changes in regulations, geopolitical events, and other factors that can impact the financial markets.
Credit Risk
Credit risk involves the possibility that the issuer of a bond will not be able to make principal and interest payments. This risk is more relevant for debt mutual funds.
Management Risk
This risk arises from the decisions made by the fund managers. Poor management decisions can lead to underperformance compared to other funds with similar investment mandates.
Unpredictable Risks
Unpredictable risks include those arising from the management team or changes in dividend and fee policies.
Challenges in Sachetization
Achieving sachetization requires more than just lowering investment thresholds; it necessitates robust investor education and awareness initiatives to ensure that individuals make informed decisions about their investments.
It’s important for investors to be aware of these risks and to manage them smartly. Diversification, understanding the investment horizon, and staying informed about market conditions and fund management policies can help mitigate some of these risks. For a detailed understanding of these risks, you can refer to the comprehensive guides provided by Samco and Investopedia.
Some real-world examples of sachetization success stories
Sachetization has been a game-changer in various industries, particularly in emerging markets where affordability and accessibility are crucial. Here are some real-world examples of successful sachetization:
FMCG Sector
– Shampoo Sachets: Companies like Unilever and Procter & Gamble introduced shampoo sachets, making it affordable for consumers to buy high-quality shampoo without committing to a full-sized bottle. This not only increased sales but also introduced these products to a new customer base.
Telecommunications
– Prepaid Mobile Services: Telecom companies in many countries offer prepaid services in small denominations, allowing users to buy airtime and data in small, affordable amounts. This has significantly increased mobile phone usage among lower-income consumers.
Finance
– Microfinance: Institutions like Grameen Bank have implemented the sachet model by providing small loans to the poor, enabling them to start small businesses and improve their economic status.
Healthcare
– Medicine Sachets: Pharmaceutical companies have made medications more accessible by selling them in single-use sachets or strips, which are more affordable than buying a full course of medication.
Food Industry
– Single-Serve Packets: Food companies have adopted sachetization by offering single-serving packets of condiments, instant coffee, and other consumables, catering to the needs of individuals and small families.
These examples illustrate how sachetization has successfully expanded market reach and made products and services more accessible to a broader audience. The strategy has proven effective in various sectors by catering to the needs of consumers who prefer or require smaller quantities due to financial constraints or lifestyle choices.