One size doesn’t fit all

Defined contribution (DC) systems

The penetration level of mutual funds among US households is one of the highest globally. What are the reasons for this?

ICI Global just conducted research on this issue. Typically, countries with large domestic fund industries are those with higher per capita income and deeper and more liquid stock markets.

Defined contribution (DC) pension systems that allow for investment in funds are also a key factor in fostering larger fund industries. India has a deep and liquid stock market, which bodes well for its future. And as India’s per-capita income rises, its middle class grows, and as  its population ages, more people will save for retirement and other long-term financial goals. This also should spur domestic fund industry growth.

What has helped US mutual fund industry grow so rapidly, in spite of the recession?

American fund investors tend to have a long-term outlook and this is a great strength of the system. It comes from the fact that investors are using funds to save for retirement and other significant expenses, like buying a house or sending a child to college, that have a long time horizon. For this reason, even during the global financial crisis most savers using 401(k) plans -(the most common DC plans)- kept contributing to their retirement accounts. That decision has rebounded to their benefit.

Much of the growth in assets since 2009 can be attributed to making contributions to retirement accounts, a growing trend towards international equity exposure and the global recovery in equity prices.

The penetration of mutual funds among Indian households is still in single digit despite the fact that a vast majority of Indian equity funds outperform the markets.

Each country has its own circumstances but the United States are strong believers in the tremendous advantages that funds offer for long-term savings.

The system of defined contribution plans empowers individuals by helping them build savings over their working lives. Defined Contribution retirement plans allow workers to own their own assets and control investment decisions. These plans are transparent. They accrue value throughout a participant’s working life.

Indian policy makers may wish to study and consider whether development and expansion of a DC pension system in India might benefit savers and the country’s capital markets.

How are American fund houses carrying out investor awareness programs? How do you measure the effectiveness of investor awareness activities? What needs to be done to make such programs robust?

Investor education and engagement are valuable and important because investors are to be educated and equipped to make sound decisions about their financial needs. US mutual fund companies have a long, proud history of working to inform and teach investors through a variety of creative and research-based approaches. Many of these draw upon the Internet, social media, and other digital communications tools. There’s a lot of innovation afoot. And so it’s no accident that surveys show eight in ten US fund investors feel confident that saving through funds will help them meet their savings goals.

Education and engagement make a difference.

There are  a few fundamentals.

First, investor education cannot fully replace financial advice in supporting investors to make sound decisions. Financial advisors play an important role. Second, investor education should strive to equip potential investors to make choices that best fit their needs and circumstances.

One size doesn’t fit all.

Ultimately, investor education programs that successfully encourage average savers to build more long-term wealth.

They help  themselves and their families through the use of funds by setting up a brighter future .The country in which they live is also benefitted.