Penetration of mutual funds in Asia ex-Japan continues to decline post-crisis, despite overall growth in assets under management – market participants point to this as a worrying indicator of a lack of understanding of these products.

Mutual fund AUM grew by 17.8% to $1,288 billion from the end of 2007 to June 2014, according to research firm Cerulli Associates, but fell as a percentage of household financial assets to 6.5% as of end-2013 from 9.1% at the end of 2009.

The decline was across the board, including in mature markets such as Singapore, said Ng Sze Yoon, Asia research director at Cerulli, speaking at the 2014 Global Fund Distribution conference in Hong Kong last week.

One reason for the decline is that non-mutual fund investors do not believe they understand what mutual funds are, she said. As for mutual fund investors, they are either still hurting from previous experiences or they will look to cash in returns as and when markets hit a new high, noted Ng.

According to findings from a Cerulli survey of 4,000 retail investors in July this year across China, Hong Kong, Singapore and Taiwan, half of the respondents said they weren’t invested in mutual funds because they didn’t understand the product. The full results will be revealed in an upcoming Cerulli report.

“Most investors’ key source of information is not financial advisers, but family members and friends who may not be financially literate,” said Ng. “That is worrying and explains the exodus from mutual funds.”

Stewart Aldcroft, Hong Kong-based chairman at CitiTrust, speaking at the same event, pointed to a survey 20 years ago that produced similar results. “That’s worrying, because the industry hasn’t moved forward," he said.

"Most financial advisers have to explain what a mutual fund is to investors in Asia, and this doesn’t happen in the Western world,” noted Aldcroft, adding that Asia has a long way to go to catch up with other regions.

Because of the declining mutual fund penetration rate, governments in the region have exerted efforts on multiple fronts to boost demand. “We see efforts on multiple fronts, from expanding the variety of distribution channels to ensuring investor protection on the product front,” said Ng.

Funds Online Korea is one example, which was set up to open up more distribution channels and lower fees.

Cerulli forecasts that mutual fund AUM growth will accelerate, to grow by a third to $1.8 trillion from June 2014 to 2018, with regulatory changes and pension industry growth among the key drivers.

In January this year, for example, China allowed insurers to offer public mutual funds to retail and institutional investors, while Taiwan permitted offshore units of banks in Taiwan to sell wealth management products, including mutual funds, through their offshore client accounts.

Cerulli also expects mutual funds to benefit from a renewed focus on pension or retirement funds in Asia. “Mutual funds are viewed as long-term saving vehicles, so we expect them to be a go-to vehicle as members’ choice becomes more prevalent and the concept of saving for retirement becomes more ingrained,” said Ng.

Based on historical data, she said there’s been a strong and sustainable growth in the retirement segment. Investable pension assets in Asia ex-Japan have almost doubled from $1.2 trillion in 2009 to $2.3 trillion in 2013, recording a CAGR of 16.9%.

“Retirement assets will be the key long-term growth driver,” Ng added. “This will come from a combination of state, occupational and individual pension savings.”