Why in the News?

SEBI is collaborating with the mutual fund industry to find ways to make monthly SIPs of just Rs 250 possible, aiming to encourage more people from lower-income groups to invest in mutual funds.

What are the significances of Sachetisation?

• Affordable Financial Products: Just as small sachets of consumer goods made them accessible to lower-income groups, small-ticket SIPs in mutual funds can make investment opportunities available to a larger section of the population, particularly those who may not have the financial capacity to invest larger amounts.
• Promoting Financial Empowerment: By lowering the entry barrier for mutual fund investments, sachetisation can help empower underserved communities and individuals by enabling them to participate in the growing financial markets and benefit from the potential returns.
• Expanding Reach: This approach would encourage mutual fund companies to expand their reach to remote locations, helping them penetrate rural and low-income markets, and promote a wider culture of saving and investing.
• Financial Inclusion for the Bottom of the Pyramid: The primary target of sachetisation in mutual funds is low-income groups that have limited access to traditional investment products. By offering small, regular investments, SEBI aims to promote financial inclusion at the grassroots level.

How does it work?

• SEBI has proposed introducing small ticket SIPs at Rs 250 per month, which would allow new investors from low-income groups to participate in mutual funds without the burden of higher minimum investment requirements. This contrasts with existing schemes that often require a minimum SIP of Rs 500 or more.
• Investors can commit to a small ticket SIP for a duration of five years (60 installments), although they have the flexibility to withdraw or stop their investments without restrictions if needed. This structure encourages consistent investment while providing an exit option for investors.
• To facilitate the success of small ticket SIPs, SEBI plans to implement discounted rates for intermediaries and reimburse certain costs from the Investor Education and Awareness Fund. This will help asset management companies (AMCs) break even more quickly on their investments in these small ticket offerings.
• The sachetised SIPs will be available under specific mutual fund schemes, excluding high-risk options like small-cap and mid-cap equity schemes, which are deemed unsuitable for new investors from lower-income backgrounds. This targeted approach aims to safeguard these investors while still encouraging their entry into the market.
• To further promote financial inclusion, SEBI proposes incentives for distributors who successfully guide investors through 24 instalments of the small ticket SIP, thereby enhancing participation and support for new investors in mutual funds.

Conclusion: The strategy could result in a significant increase in domestic investor participation, contributing to the resilience of India’s equity market and fostering long-term financial stability.

Mains PYQ:

Q Comment on the important changes introduced in respect of the Long term Capital Gains Tax (LCGT) and Dividend Distribution Tax (DDT) in the Union Budget for 2018-2019. (UPSC IAS/2018)

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