Many major funds say they are seeing the fastest growth in fund flows from areas beyond India's 15 largest cities, while growth from more-traditional investment centres such as Mumbai has slowed.
Fund executives see more room for such growth, given investors from smaller cities account for only Rs 1.9 trillion ($29.8 billion) in mutual funds, or 15 percent of total share assets in India.
The government has long believed that attracting investors from beyond big cities such as New Delhi is vital to direct more household savings into equities, reducing traditional investor preference for property and gold.
One such investor is Barun Mukherjee, 54, a senior operator at a steel plant in Jamshedpur, a city of about 1 million people in Jharkhand. Like many Indians, Mukherjee avoided stocks after the global financial crisis and subsequent stock slump wiped out the savings of many households.
But a month ago he decided to invest Rs 50,000 ($783) into a mutual fund. "Mutual funds are providing the best returns. The market is doing well. India's business scene is positive and the future seems to be good," he said.
Mukherjee is investing in stock markets that have surged 67 percent since August 2013 when the rupee hit a record low. The surge was largely driven by foreign investors' heavy buying. They now own nearly a third of the equity of companies in the Sensex.
Strong gains are now also starting to attract more retail investors in a country where fewer than 1.5 percent of households put money directly into shares, compared with around 10 percent in China and 20 percent in the United States.
Domestic net inflows into equity mutual funds reached $2 billion in June, the second-biggest month since January 2008. India does not have data breaking down investments by cities, but fund executives say investments from secondary centres are a major factor in the surge.
The surge is lucrative for fund houses, which can charge additional fees on funds that have at least 30 percent of new inflows coming from smaller cities, a measure adopted by regulators to help these fund management firms to offset the higher marketing costs involved.
Axis Mutual Fund, one of India's largest mutual funds, has been organising frequent roadshows and investor seminars, and today about 40 to 50 per cent of its equity inflows are from provincial centres, according to Axis chief executive Chandresh Nigam.
"Investment from smaller towns is rising steadily and has helped us especially since our funds are designed for investors who are risk averse and not very savvy," Nigam said.
(Additional reporting by Jatindra Dash in Bhubaneswar and Abhishek Vishnoi in Mumbai)
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