Will Jio MF Disrupt MF Business?

While Jio MF will undoubtedly grow in size, it will have to cross multiple hurdles even to emerge as the market leader, observes Debashis Basu.

Mukesh Ambani's newly demerged entity Jio Financial Services, about which hardly anything is known, is widely expected to disrupt the $540 billion Indian mutual fund business.

It has formed a 50:50 joint venture with giant US fund house BlackRock to 'transform India's asset management industry' and 'democratise access' to options for Indians by delivering 'affordable and innovative investment solutions'.

Analysts and commentators are excited by how Jio will exploit Reliance Retail's huge footprint of 18,500 stores and Reliance Jio's 448.5 million-strong phone subscriber base. Can Jio MF really disrupt the MF business?

The word 'disruption' comes to mind because we see a pattern even in a sample of one.

Hasn't Reliance disrupted the telecom business?

So, it will disrupt any consumer business it gets into.

But has Reliance Retail disrupted the retail business?

It is just one more retail chain.

Other online and offline businesses and even kirana stores are thriving.

Its last innovation to stitch together kirana stores through JioMart does not seem to have delivered the much-touted disruption.

Disruption, the much-abused word:

'Disruption' was coined by the late professor Clayton Christensen and means a very specific outcome of a very well-defined trend in a specific industry context.

It went like this. One, the industry is dominated by a few players when a small new player comes in with a low-tech product with low margins, but serving a new but narrow market segment.

Two, the dominant player is unconcerned because it is at the 'low end' of the business serving a fringe market.

Three, the challenger keeps growing fast because it is serving a new, unmet need which turns out to be large, making more and more cash profits, with which it ultimately challenges the core business of the dominator.

None of these conditions apply to the MF business of Jio.

Constraints of demand creation:

Forget about disruption, even fast growth is impossible in MFs because of three reasons that come in the way of higher demand.

One, MFs are highly regulated and cannot create much demand on their own.

MF cannot offer radically different products or make false promises (puffery) that consumer companies can.

They cannot launch marketing gimmicks or use celebrity endorsements.

Second, there is no natural demand pull for mutual funds, either.

Like insurance, MF are sold, not bought. MFs are always fighting investor inertia.

Three, MFs by definition are market-linked products and so their performance moves up and down with market cycles and, along with it, investors' interest in MF.

If the market is in a prolonged lull, there is nothing a fund company can do but wait for the cycle to turn.

In a country where fixed deposits are the number one investment choice, there is an instant disappointment when funds underperform bank deposit rates over a year or two.

Four, demand for MFs is generated by large mutual fund distributors (MFDs) such as banks, where bank-sponsored funds have the edge.

This is why the three biggest funds are bank-sponsored.

The incentives for MFDs are regulated; no one can throw money and buy loyalty.

Hence, the cross-selling opportunity of Jio (using Reliance's retail customer data and phone subscriber base), is over-rated, apart from the fact that Reliance customers will have a million different influences going into the decision to buy or not buy Jio funds.

The supply side:

No doubt Jio mutual fund will take off with a bang and gather a large amount of assets initially.

The total pie is expected to grow too as the financialisation of India picks up pace.

The ratio of mutual fund assets under management (AUM) to India's gross domestic product is 16 per cent, which is pretty low compared to the global average of 63 per cent.

But this pie has to be sliced among the existing 45 players and the three savvy new players coming in (Zerodha, Bajaj Finserv and Jio).

More big players will no doubt enter the space.

Any investing edge?

Jio MF will supposedly harness big data, machine learning (ML) and artificial intelligence (AI) and, of course, Aladdin, the tech platform of BlackRock.

All this sounds like so much mumbo-jumbo. The key issue to pull in money over the long term is investment performance.

While MFs are hard to sell, one of the positive aspects of the investment sphere is that performance is transparent and in black and white.

No technology, ML or AI is useful unless the fund performance is top-notch.

While the press release about the joint venture talks of BlackRock's 'deep expertise and talent in investment management, risk management, product excellence, access to technology...', BlackRock's funds are not decidedly the top performers in the US.

I am waiting to see how Jio Funds buck the market trends and deliver much higher risk-adjusted returns.

If they had known how to do this, it would have been proprietary and secret; super profits would not have been handed over to retail investors for a fee of just 1 per cent.

Passive vs active:

Of course, there is a lot of speculation that Jio, like Zerodha, will launch passive fund products (that follow an index) such as exchange traded funds (ETFs), but these are low-cost products and require massive volumes to break even.

In many other countries, passive products have become more popular than active funds, but not so in India because MFDs have little incentive to sell them.

In short, while Jio MF will undoubtedly grow in size, it will have to cross multiple hurdles even to emerge as the market leader, far from 'disrupting' the MF business.

Debashis Basu is editor of moneylife.in and a trustee of the Moneylife Foundation.

Feature Presentation: Aslam Hunani/Rediff.com