Z Funds: Selling mutual funds to Bharat

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Manish Kothari and Vidhi Tuteja, co-founders of Z Funds

The assets under management (AUM) of the Rs 37 lakh crore Indian mutual funds (MF) industry has grown by 19 per cent on a compounded basis in the last seven years. Monthly inflows into MFs through systematic investment plans (SIPs) have risen by 25 percent in the last six years.

There’s just one little problem. A significant part of the industry’s investors is in bigger towns and cities.

According to data of the Association of Mutual Funds of India (AMFI), the MF industry’s trade body, nearly 83 percent of assets come from the Top 30 towns, known as T30 in MF industry’s lingo, as on June 2022. Just 17 percent comes Beyond the Top 30 or B30 towns of India.

Now, Gurugram-based MF distributor, Z Funds wants to change that.

Launched in 2020 by Manish Kothari and Vidhi Tuteja, Z Funds wants to get investors from some of India’s smallest towns. Kothari is not new to the Indian MF industry. After having worked at wealth management firms like Stanchart, Citibank and IIFL, he set up the mutual funds vertical at Paisabazaar.com. Tuteja, too, had worked in Paisabazaar.com, earlier.

Big on technology, small on relations

But while Paisabazaar.com is an online portal where investors can come and directly buy and sell schemes, Kothari saw a gap.

He says that many investors who buy MFs from online portals tend to sell their holdings quickly, “within 6-12 months”. He attributes this behavior to the way many such apps disseminate information; rank and display schemes in apps as per their past returns. High-risk sector and thematic funds often, get showcased on the top based on their recent performances, but these might not be suitable for everyone. “There is no financial advisor to guide them,” he adds.

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Here’s where Kothari says, insurance beats mutual funds in the smaller town. “People from smaller towns don’t mind investing Rs 1-2 lakh every year in Life Insurance Corporation of India policies, because agents personally visit them, convince them. The same investor would think many times over before starting a Rs 500 to Rs 1,000 MF SIP,” says Kothari.

How to bring in investors by the bus loads?

To ensure that investors stick around for longer periods of time, Kothari and Tuteja came up with an idea to bring about a human touch to technology. They felt it’s better to recruit and an army of distributors. And then, train them to reach households and encourage people to invest in MFs.

Also listen | Former managing director of Mahindra Manulife AMC, Ashutosh Bishnoi explains what is holding back mutual funds’ penetration in rural towns

“Investors need someone who they can trust, someone who can hold their hand during volatile markets,” says Kothari. According to Z Funds’ analysis, of a total of 750 districts in India, mutual funds are present only in about 180 districts. “There are many districts with population of up to 40 lakh, and where there is just one registered AMFI distributor,” says Kothari.

Z Funds aims to tap potential distributors from the bottom-most 500 districts of the country. This begs the question: why not just go after the bigger towns and recruit existing MF distributors? The bottom-most towns wouldn’t have as many existing distributors given the low MF penetration. Kothari says that the larger towns have a heavy concentration of distributors, individual distributors, banks and national distributors. “Competition is tough. We cannot afford to hire them,” says Kothari.

Instead, it looks for the next best lot; those who are familiar with money and finance, in smaller untapped towns. LIC agents, direct selling agents, collection agents, retired bankers, and chartered accountants are some of the target segments that Z Funds wants to build its army with. Kothari observed that 70 percent of its distribution force consists of LIC agents.

Can the mutual funds not do the same? For an asset management company (AMC) to set up shop in a town, it needs to have assets worth at least Rs 200-300 crore to make it worthwhile. In a small to mid-sized town, a branch would typically entail a rental cost of Rs 1.5 lakh a month, salaries worth around Rs 6-7 lakh a month. At an annual outgo of around Rs 90 lakh — and assuming an asset management fee that a fund house retains at 0.30 percent, it would need roughly Rs 300 crore to make it worthwhile. That, too, equity assets that come with sticky money. That’s why fund houses need an army of distributors to help penetrate smaller towns.

Using technology; keeping costs low

Z Funds attracts potential distributors through its YouTube channel. It uploads educational videos in local languages, especially Hindi. The content is simple. No discussion on MF ratios, for instance, says Kothari. The team behind Z Funds regularly produces and uploads 5-minute videos.

Launched in 2020 by Manish Kothari and Vidhi Tuteja, Z Funds wants to get investors from some of India’s smallest towns

Aside from YouTube, the other weapon in its arsenal is WhatsApp. At the end of every video, there is a number. If a potential distributor wishes to enroll, he calls up the number and registers. Z Funds then make arrangements to share the AMFI test course material, nudges them to watch more such educational videos on its YouTube channel in the days leading up to the AMFI exam. Even a mere ‘hello’ message sent to Z Funds and the distributor gets a call back to start the enrolling process.

Commissions that Z Funds earn out of every MF investment that the distributor brings in, gets split between Z Funds and the distributor. That’s like any broker-sub broker model run by some of Z Funds’ larger and more experienced competitors like NJ and Prudent Corporate.

Similarly, Z Funds uses WhatsApp to get investors to invest in MFs. Nearly 80% of its customers don’t use internet banking, says Kothari. They do, however, require a bank account, as per MF regulations. Z Funds has enabled SIP registration also over WhatsApp.

The story so far

It has been two years since Z Funds started recruiting distributors. At present, it has 3,500 distributors, of whom 70 percent are new to mutual funds. It aims to get one lakh distributors in the next five years.

At present, it has around 20,000 customers across 475 districts. It has managed to bring in investors from towns where there were hardly any MF distributors or investors. Kothari says that in districts like Tinsukia (Assam), Ghazipur (Uttar Pradesh), Ballia (Uttar Pradesh), it is the largest distribution network present. In Tinsukia and Ghazipur, it has the largest SIP inflows among all other existing distributors.

Its success will largely depend on the sort of MF schemes that its distribution army of distributors sell to investors; the right fit instead of yesterday’s winner. This, says Kothari confidently, is being taken care of by way of its internal research that Kothari claims, picks funds after passing them through a rigorous risk-return testing. And secondly, by way of fixing incentives to ensure the right fund gets pushed and rewarded.

“It is an interesting but a tough model. We can see that they are penetrating tier-2 and 3 towns,” says Radhika Gupta, Chief Executive Officer, Edelweiss Mutual Fund.

“Z Funds is doing well, given the growth they’ve achieved over the last two years. They are building lot of retail distributors in smaller towns,” says Kalpen Parekh, Managing Director and Chief Executive Officer, DSP Mutual Fund.

Its closest and biggest competitors NJ India Invest (also India’s largest mutual fund distributor) has around 27,000 distributors (active) in its wings and Prudent Corporate has 25,000 distributors. Both NJ India Invest and Prudent Corporate follow a similar business model; recruit distributors and then train them to reach investors.

Z Funds has made a start. But it has a long way to go.

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