St.

Francis Institute of Management & Research

Prepared By:

Yatin Kamath

MMS 1 Div. A

Roll No. 60

Project report on : The Mutual Fund sector of India

Presented to: Prof. Natika Jain

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 ACKNOWLEDGEMENT

I take this opportunity to express my deep sense of gratitude to all those

who have contributed significantly by sharing the knowledge and
experience in completion of the project report.

I owe my sincere gratitude to Birla Sun Life Insurance, for providing me

the opportunity to undergo two months summer training on the project
titled “ A study of Mutual Fund Sector of India”. It was a great learning
experience in its corporate environment.

I am highly indebted to my project guide, Mr. Nikesh Ruparel, who gave us

an insight in to the various aspects of Insurance and his continuous
guidance throughout the project.

I would like to extend my gratitude to my project guide Prof. Natika Jain,

St. Francis Institute of Management & Research for his help during the
completion of the project.

Special Thanks to Dr. Thomas Mathew, Director of St. Francis Institute of

Management & Research.

The successful completion of this training wouldn’t have been possible

without the cooperation and the coordination of many people who not
only helped me whenever I got hindered in between but also kept my
morale high. Such kind of cooperation extended by all has lead to fruitful
completion of the training period.

It is my proud privilege to express my deep sense of appreciation &

gratitude to my parents & friends for their support & co-operation in the
course of the project.

Date:

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 Executive Summary
The Indian mutual fund industry has witnessed significant growth in the
past few years driven by several favourable economic and demographic
factors such as rising income levels and the increasing reach of Asset
Management Companies (AMCs) and distributors. However, after several
years of relentless growth, the industry witnessed a fall of 8 percent in the
assets under management in the financial year 2008-09 that has
impacted revenues and profitability.

Recent developments triggered by the global economic crisis have served

to highlight the vulnerability of the Indian mutual fund industry to global
economic turbulence and exposed our increased dependence on
corporate customers and the retail distribution system. It is therefore an
opportunity time for the industry to dwell on the experiences and develop
a roadmap through a collaborative effort across all stakeholders, to
achieve sustained profitable growth and strengthen investor faith and
confidence in the health of the industry. Innovative strategies of AMCs and
distributors, enabling support from the regulator SEBI, and pro-active
initiatives from the industry bodies CII and AMFI are likely to be the key
components in defining the future shape of the industry.

Mutual funds have long been considered a viable investment option by a

considerable number of investors. The AUM has increased by 35%
between 31 March 2005 to 31 March 2009.

Internationally the Indian sector grew by 29% against the global average
of just 4%. China still leads in terms of AUM growth with 63%.

Mutual funds share in gross financial savings of a average Indian

household stands at 7.7% as on 31 March 2008.

The mutual fund sector faces competition from ULIP’s and Fixed Deposits
alike. However considering certain aspects of these investments viz. ROI,
tax benefits (case specific for all investments), sustainability of an
investor, etc; mutual fund investments are still considered viable.

3
Research Topic:

A comparative study of Mutual Funds against other investment options viz fixed
deposits & ULIP’s.

Research Objective:

• To analyze the mutual fund sector of India w.r.t various mutual funds
available.

• To analyze drawbacks / shortcomings of mutual fund offering.

• Comparing Mutual Funds with other financial instruments viz. ULIP’s, Fixed
deposits.

• Comparing the Mutual Fund structure of India with other nations viz. UK
and USA along with the returns and other associated risks.

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Company Profile:

The Aditya Birla Group is a multinational conglomerate corporation

headquartered in Mumbai, India with operations in 25 countries including
Thailand, Dubai, Singapore, Myanmar, Laos, Indonesia, Philippines, Egypt,
Canada, Australia, China, USA, UK, Germany, Hungary, Brazil, Italy,
France, Luxembourg, Switzerland, Bangladesh, Malaysia, Vietnam and
Korea.
The Aditya Birla group is US$ 29 billion conglomerate which gets most of
its revenues from outside India. The group is a major player in all the
industry sectors it operates in. The Aditya Birla Group has been adjudged
the best employer in India and among the top 20 in Asia by the Hewitt-
Economic Times and Wall Street Journal Study 2007. The origins of the
group lie in the conglomerate once held by one of India's foremost
industrialists Mr. Ghanshyam Das Birla.

Line of Businesses :
Aluminium, Copper, Cement, Fertilizer, Textile, Fibre, fertilizers, chemicals,
insulators, financial services, telecom, BPO and IT services.

Aditya Birla Money Mart Limited (formerly Birla Sun Life Distribution Company
Limited) is a wholly-owned subsidiary of Aditya Birla Nuvo Ltd. (Nuvo). Earlier it
was established as a joint venture between Aditya Birla Nuvo and Sun Life
Financial. In March 2009, Nuvo purchased the remaining 50.001 per cent stake
from its joint venture partner. In February 2010, the company has been renamed
as Aditya Birla Money Mart Limited (ABMML), reflecting the ownership of the
parent group.

ABMML offers wealth management, financial planning and investment

solutions, mainly through a range of products like mutual funds,
insurance, PE funds, alternate investments, select fixed deposits and IPOs
and structured products, under the brand name Aditya Birla Money. The
company provides life insurance products of Birla Sun Life Insurance,
sourced through its wholly-owned subsidiary Aditya Birla Money Insurance
Advisory and Broking Services Ltd. (ABMIAS), licensed to act as a
corporate agent of Birla Sun Life Insurance Company Limited.
The corporate amd institutional section caters to banks, financial
institutions and other companies; wealth management service focuses on
HNIs; while the retail section offers solutions through channel partners
and branches. With a direct presence through its own branches (47) and
5
additional reach through its network of business associates (over 5,000)
across 35 cities, ABMML has a trusted investor base of over 3.25 lakh and
an AUM (Assets Under Management) of Rs.18,000 crore.

Aditya Birla Money Mart Departmental Structure:

Board of directors

Mr. Kumar Mangalam Birla, Chairman

Mrs. Rajashree Birla

Mr. B. L. Shah
Mr. P. Murari (independent)

Mr. B. R. Gupta (independent)

Ms.Tarjani Vakil (independent)

Mr. S. C. Bhargava (independent)

Mr. G. P. Gupta (independent)

Dr. Rakesh Jain, Managing Director

Mr. Pranab Barua, Whole Time Director

Mr. K. K. Maheshwari, Whole Time Director

Managing director

Dr. Rakesh Jain

Chief financial officer

Mr. Sushil Agarwal

Business heads
Dr. Rakesh Jain (fertilisers, insulators, BPO & IT)

Mr. Ajay Srinivasan (financial services)

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 Mr. Pranab Barua (garments, textiles)
Dr. Santrupt Misra (carbon black)

Mr. Sanjeev Aga (telecom)

Mr. Lalit Naik (viscose filament yarn)

Birla Sun Life Wealth Management Company offers its Mutual Fund across
the following categories :

Retail Products
Institutional Clients
Offshore Clients

Summary of objectives:

• To know about the mutual funds industry and understand the

behavior of Indian investors regarding the same.
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 • To understand the trend for Mutual Fund investments.

• The study of risks and returns from Mutual Fund sector.

• Understanding the challenges faced by the sector.

• Analysing the future prospects of the sector.

Development plan:

• Introduction to Mutual Fund- as tool of investment.

• History of Mutual Fund investments in India.

• Advantages of Mutual Fund investments.

• Disadvantages of Mutual Fund investments.

• Market drivers of Mutual Fund investments.

Research Methodology: Exploratory Research

Data Collection Method: Secondary Data

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Secondary Data sources: Business journals & Business websites

The Mutual Fund Industry in India

The origin of mutual fund industry in India is with the introduction of the
concept of mutual fund by UTI in the year 1963. Though the growth was
slow, but it accelerated from the year 1987 when non-UTI players entered
the industry.

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In the past decade, Indian mutual fund industry had seen a dramatic
imporvements, both qualitywise as well as quantitywise. Before, the
monopoly of the market had seen an ending phase, the Assets Under
Management (AUM) was Rs. 67bn. The private sector entry to the fund
family rose the AUM to Rs. 470 bn in March 1993 and till April 2004, it
reached the height of 1,540 bn.

Putting the AUM of the Indian Mutual Funds Industry into comparison, the
total of it is less than the deposits of SBI alone, constitute less than 11%
of the total deposits held by the Indian banking industry.

The main reason of its poor growth is that the mutual fund industry in
India is new in the country. Large sections of Indian investors are yet to be
intellectuated with the concept. Hence, it is the prime responsibility of all
mutual fund companies, to market the product correctly abreast of selling.

The mutual fund industry can be broadly put into four phases according to
the development of the sector. Each phase is briefly described as under.

First Phase - 1964-87

Unit Trust of India (UTI) was established on 1963 by an Act of Parliament.

It was set up by the Reserve Bank of India and functioned under the
Regulatory and administrative control of the Reserve Bank of India. In
1978 UTI was de-linked from the RBI and the Industrial Development Bank
of India (IDBI) took over the regulatory and administrative control in place
of RBI. The first scheme launched by UTI was Unit Scheme 1964. At the
end of 1988 UTI had Rs.6,700 crores of assets under management.

Second Phase - 1987-1993 (Entry of Public Sector Funds)

Entry of non-UTI mutual funds. SBI Mutual Fund was the first followed by
Canbank Mutual Fund (Dec 87), Punjab National Bank Mutual Fund (Aug
89), Indian Bank Mutual Fund (Nov 89), Bank of India (Jun 90), Bank of
Baroda Mutual Fund (Oct 92). LIC in 1989 and GIC in 1990. The end of
1993 marked Rs.47,004 as assets under management.

Third Phase - 1993-2003 (Entry of Private Sector Funds)

With the entry of private sector funds in 1993, a new era started in the
Indian mutual fund industry, giving the Indian investors a wider choice of
fund families. Also, 1993 was the year in which the first Mutual Fund
Regulations came into being, under which all mutual funds, except UTI

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were to be registered and governed. The erstwhile Kothari Pioneer (now
merged with Franklin Templeton) was the first private sector mutual fund
registered in July 1993.

The 1993 SEBI (Mutual Fund) Regulations were substituted by a more

comprehensive and revised Mutual Fund Regulations in 1996. The industry
now functions under the SEBI (Mutual Fund) Regulations 1996.

The number of mutual fund houses went on increasing, with many foreign
mutual funds setting up funds in India and also the industry has witnessed
several mergers and acquisitions. As at the end of January 2003, there
were 33 mutual funds with total assets of Rs. 1,21,805 crores. The Unit
Trust of India with Rs.44,541 crores of assets under management was way
ahead of other mutual funds.

Fourth Phase - since February 2003

This phase had bitter experience for UTI. It was bifurcated into two
separate entities. One is the Specified Undertaking of the Unit Trust of
India with AUM of Rs.29,835 crores (as on January 2003). The Specified
Undertaking of Unit Trust of India, functioning under an administrator and
under the rules framed by Government of India and does not come under
the purview of the Mutual Fund Regulations.

The second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB, BOB and
LIC. It is registered with SEBI and functions under the Mutual Fund
Regulations. With the bifurcation of the erstwhile UTI which had in March
2000 more than Rs.76,000 crores of AUM and with the setting up of a UTI
Mutual Fund, conforming to the SEBI Mutual Fund Regulations, and with
recent mergers taking place among different private sector funds, the
mutual fund industry has entered its current phase of consolidation and
growth. As at the end of September, 2004, there were 29 funds, which
manage assets of Rs.153108 crores under 421 schemes.

The major players in the Indian Mutual Fund Industry are:

GROWTH IN ASSETS UNDER MANAGEMENT

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Performance of Mutual Funds in India

Let us start the discussion of the performance of mutual funds in India

from the day the concept of mutual fund took birth in India. The year was
1963. Unit Trust of India invited investors or rather to those who believed
in savings, to park their money in UTI Mutual Fund.

For 30 years it goaled without a single second player. Though the 1988
year saw some new mutual fund companies, but UTI remained in a
monopoly position.

The performance of mutual funds in India in the initial phase was not even
closer to satisfactory level. People rarely understood, and of course
investing was out of question. But yes, some 24 million shareholders was
accustomed with guaranteed high returns by the begining of liberalization
of the industry in 1992. This good record of UTI became marketing tool for
new entrants. The expectations of investors touched the sky in
profitability factor. However, people were miles away from the
praparedness of risks factor after the liberalization.

The Assets Under Management of UTI was Rs. 67bn. by the end of 1987.
Let me concentrate about the performance of mutual funds in India
through figures. From Rs. 67bn. the Assets Under Management rose to Rs.
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470 bn. in March 1993 and the figure had a three times higher
performance by April 2004. It rose as high as Rs. 1,540bn.

The net asset value (NAV) of mutual funds in India declined when stock
prices started falling in the year 1992. Those days, the market regulations
did not allow portfolio shifts into alternative investments. There were
rather no choice apart from holding the cash or to further continue
investing in shares. One more thing to be noted, since only closed-end
funds were floated in the market, the investors disinvested by selling at a
loss in the secondary market.

The performance of mutual funds in India suffered qualitatively. The 1992

stock market scandal, the losses by disinvestments and of course the lack
of transparent rules in the whereabout rocked confidence among the
investors. Partly owing to a relatively weak stock market performance,
mutual funds have not yet recovered, with funds trading at an average
discount of 1020 percent of their net asset value.

The supervisory authority adopted a set of measures to create a

transparent and competitve environment in mutual funds. Some of them
were like relaxing investment restrictions into the market, introduction of
open-ended funds, and paving the gateway for mutual funds to launch
pension schemes.

The measure was taken to make mutual funds the key instrument for
long-term saving. The more the variety offered, the quantitative will be
investors.

At last to mention, as long as mutual fund companies are performing with

lower risks and higher profitability within a short span of time, more and
more people will be inclined to invest until and unless they are fully
educated with the dos and donts of mutual funds.

Mutual Fund Companies in India

The concept of mutual funds in India dates back to the year 1963. The era
between 1963 and 1987 marked the existence of only one mutual fund

13
company in India with Rs. 67bn assets under management (AUM), by the
end of its monopoly era, the Unit Trust of India (UTI). By the end of the 80s
decade, few other mutual fund companies in India took their position in
mutual fund market.

The new entries of mutual fund companies in India were SBI Mutual Fund,
Canbank Mutual Fund, Punjab National Bank Mutual Fund, Indian Bank
Mutual Fund, Bank of India Mutual Fund.

The succeeding decade showed a new horizon in indian mutual fund

industry. By the end of 1993, the total AUM of the industry was Rs. 470.04
bn. The private sector funds started penetrating the fund families. In the
same year the first Mutual Fund Regulations came into existance with re-
registering all mutual funds except UTI. The regulations were further given
a revised shape in 1996.

Kothari Pioneer was the first private sector mutual fund company in India
which has now merged with Franklin Templeton. Just after ten years with
private sector players penetration, the total assets rose up to Rs. 1218.05
bn. Today there are 33 mutual fund companies in India.

Major Mutual Fund Companies in India

ABN AMRO Mutual Fund

ABN AMRO Mutual Fund was setup on April 15, 2004 with ABN AMRO
Trustee (India) Pvt. Ltd. as the Trustee Company. The AMC, ABN AMRO
Asset Management (India) Ltd. was incorporated on November 4, 2003.
Deutsche Bank A G is the custodian of ABN AMRO Mutual Fund.

Birla Sun Life Mutual Fund

Birla Sun Life Mutual Fund is the joint venture of Aditya Birla Group and
Sun Life Financial. Sun Life Financial is a golbal organisation evolved in
1871 and is being represented in Canada, the US, the Philippines, Japan,
Indonesia and Bermuda apart from India. Birla Sun Life Mutual Fund
follows a conservative long-term approach to investment. Recently it
crossed AUM of Rs. 10,000 crores.

Bank of Baroda Mutual Fund (BOB Mutual Fund)

Bank of Baroda Mutual Fund or BOB Mutual Fund was setup on October 30,
1992 under the sponsorship of Bank of Baroda. BOB Asset Management

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Company Limited is the AMC of BOB Mutual Fund and was incorporated on
November 5, 1992. Deutsche Bank AG is the custodian.

HDFC Mutual Fund

HDFC Mutual Fund was setup on June 30, 2000 with two sponsorers
nemely Housing Development Finance Corporation Limited and Standard
Life Investments Limited.

HSBC Mutual Fund

HSBC Mutual Fund was setup on May 27, 2002 with HSBC Securities and
Capital Markets (India) Private Limited as the sponsor. Board of Trustees,
HSBC Mutual Fund acts as the Trustee Company of HSBC Mutual Fund.

ING Vysya Mutual Fund

ING Vysya Mutual Fund was setup on February 11, 1999 with the same
named Trustee Company. It is a joint venture of Vysya and ING. The AMC,
ING Investment Management (India) Pvt. Ltd. was incorporated on April 6,
1998.

Prudential ICICI Mutual Fund

The mutual fund of ICICI is a joint venture with Prudential Plc. of America,
one of the largest life insurance companies in the US of A. Prudential ICICI
Mutual Fund was setup on 13th of October, 1993 with two sponsorers,
Prudential Plc. and ICICI Ltd. The Trustee Company formed is Prudential
ICICI Trust Ltd. and the AMC is Prudential ICICI Asset Management
Company Limited incorporated on 22nd of June, 1993.

Sahara Mutual Fund

Sahara Mutual Fund was set up on July 18, 1996 with Sahara India
Financial Corporation Ltd. as the sponsor. Sahara Asset Management
Company Private Limited incorporated on August 31, 1995 works as the
AMC of Sahara Mutual Fund. The paid-up capital of the AMC stands at Rs
25.8 crore.

State Bank of India Mutual Fund

State Bank of India Mutual Fund is the first Bank sponsored Mutual Fund to
launch offshor fund, the India Magnum Fund with a corpus of Rs. 225 cr.

15
approximately. Today it is the largest Bank sponsored Mutual Fund in India.
They have already launched 35 Schemes out of which 15 have already
yielded handsome returns to investors. State Bank of India Mutual Fund
has more than Rs. 5,500 Crores as AUM. Now it has an investor base of
over 8 Lakhs spread over 18 schemes.

Tata Mutual Fund

Tata Mutual Fund (TMF) is a Trust under the Indian Trust Act, 1882. The
sponsorers for Tata Mutual Fund are Tata Sons Ltd., and Tata Investment
Corporation Ltd. The investment manager is Tata Asset Management
Limited and its Tata Trustee Company Pvt. Limited. Tata Asset
Management Limited's is one of the fastest in the country with more than
Rs. 7,703 crores (as on April 30, 2005) of AUM.

Kotak Mahindra Mutual Fund

Kotak Mahindra Asset Management Company (KMAMC) is a subsidiary of

KMBL. It is presently having more than 1,99,818 investors in its various
schemes. KMAMC started its operations in December 1998. Kotak
Mahindra Mutual Fund offers schemes catering to investors with varying
risk - return profiles. It was the first company to launch dedicated gilt
scheme investing only in government securities.

Unit Trust of India Mutual Fund

UTI Asset Management Company Private Limited, established in Jan 14,

2003, manages the UTI Mutual Fund with the support of UTI Trustee
Company Privete Limited. UTI Asset Management Company presently
manages a corpus of over Rs.20000 Crore. The sponsorers of UTI Mutual
Fund are Bank of Baroda (BOB), Punjab National Bank (PNB), State Bank of
India (SBI), and Life Insurance Corporation of India (LIC). The schemes of
UTI Mutual Fund are Liquid Funds, Income Funds, Asset Management
Funds, Index Funds, Equity Funds and Balance Funds.

Reliance Mutual Fund

Reliance Mutual Fund (RMF) was established as trust under Indian Trusts
Act, 1882. The sponsor of RMF is Reliance Capital Limited and Reliance
Capital Trustee Co. Limited is the Trustee. It was registered on June 30,
1995 as Reliance Capital Mutual Fund which was changed on March 11,
2004. Reliance Mutual Fund was formed for launching of various schemes
under which units are issued to the Public with a view to contribute to the

16
capital market and to provide investors the opportunities to make
investments in diversified securities.

Standard Chartered Mutual Fund

Standard Chartered Mutual Fund was set up on March 13, 2000 sponsored
by Standard Chartered Bank. The Trustee is Standard Chartered Trustee
Company Pvt. Ltd. Standard Chartered Asset Management Company Pvt.
Ltd. is the AMC which was incorporated with SEBI on December 20,1999.

Franklin Templeton India Mutual Fund

The group, Frnaklin Templeton Investments is a California (USA) based

company with a global AUM of US$ 409.2 bn. (as of April 30, 2005). It is
one of the largest financial services groups in the world. Investors can buy
or sell the Mutual Fund through their financial advisor or through mail or
through their website. They have Open end Diversified Equity schemes,
Open end Sector Equity schemes, Open end Hybrid schemes, Open end
Tax Saving schemes, Open end Income and Liquid schemes, Closed end
Income schemes and Open end Fund of Funds schemes to offer.

Morgan Stanley Mutual Fund India

Morgan Stanley is a worldwide financial services company and its leading

in the market in securities, investmenty management and credit services.
Morgan Stanley Investment Management (MISM) was established in the
year 1975. It provides customized asset management services and
products to governments, corporations, pension funds and non-profit
organisations. Its services are also extended to high net worth individuals
and retail investors. In India it is known as Morgan Stanley Investment
Management Private Limited (MSIM India) and its AMC is Morgan Stanley
Mutual Fund (MSMF). This is the first close end diversified equity scheme
serving the needs of Indian retail investors focussing on a long-term
capital appreciation.

Escorts Mutual Fund

Escorts Mutual Fund was setup on April 15, 1996 with Excorts Finance
Limited as its sponsor. The Trustee Company is Escorts Investment Trust
Limited. Its AMC was incorporated on December 1, 1995 with the name
Escorts Asset Management Limited.

Alliance Capital Mutual Fund

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Alliance Capital Mutual Fund was setup on December 30, 1994 with
Alliance Capital Management Corp. of Delaware (USA) as sponsorer. The
Trustee is ACAM Trust Company Pvt. Ltd. and AMC, the Alliance Capital
Asset Management India (Pvt) Ltd. with the corporate office in Mumbai.

Benchmark Mutual Fund

Benchmark Mutual Fund was setup on June 12, 2001 with Niche Financial
Services Pvt. Ltd. as the sponsorer and Benchmark Trustee Company Pvt.
Ltd. as the Trustee Company. Incorporated on October 16, 2000 and
headquartered in Mumbai, Benchmark Asset Management Company Pvt.
Ltd. is the AMC.

Canbank Mutual Fund

Canbank Mutual Fund was setup on December 19, 1987 with Canara Bank
acting as the sponsor. Canbank Investment Management Services Ltd.
incorporated on March 2, 1993 is the AMC. The Corporate Office of the
AMC is in Mumbai.

Chola Mutual Fund

Chola Mutual Fund under the sponsorship of Cholamandalam Investment

& Finance Company Ltd. was setup on January 3, 1997. Cholamandalam
Trustee Co. Ltd. is the Trustee Company and AMC is Cholamandalam AMC
Limited.

LIC Mutual Fund

Life Insurance Corporation of India set up LIC Mutual Fund on 19th June
1989. It contributed Rs. 2 Crores towards the corpus of the Fund. LIC
Mutual Fund was constituted as a Trust in accordance with the provisions
of the Indian Trust Act, 1882. . The Company started its business on 29th
April 1994. The Trustees of LIC Mutual Fund have appointed Jeevan Bima
Sahayog Asset Management Company Ltd as the Investment Managers for
LIC Mutual Fund.

GIC Mutual Fund

GIC Mutual Fund, sponsored by General Insurance Corporation of India

(GIC), a Government of India undertaking and the four Public Sector
General Insurance Companies, viz. National Insurance Co. Ltd (NIC), The

18
New India Assurance Co. Ltd. (NIA), The Oriental Insurance Co. Ltd (OIC)
and United India Insurance Co. Ltd. (UII) and is constituted as a Trust in
accordance with the provisions of the Indian Trusts Act, 1882.

Future of Mutual Funds in India

By December 2004, Indian mutual fund industry reached Rs 1,50,537
crore. It is estimated that by 2010 March-end, the total assets of all
scheduled commercial banks should be Rs 40,90,000 crore.

The annual composite rate of growth is expected 13.4% during the rest of
the decade. In the last 5 years we have seen annual growth rate of 9%.
According to the current growth rate, by year 2010, mutual fund assets
will be double.

Let us discuss with the following table:

Aggregate
deposits of
Scheduled Com
Banks in India
(Rs.Crore)

4-
Mar Mar Mar Mar- Mar- Mar Sep-
Month/Year Dec-
-98 -00 -01 02 03 -04 04
04

605 851 989 1131 1280 1567 1622

Deposits -
410 593 141 188 853 251 579

Change in % over
15 14 13 12 - 18 3
last yr

Source - RBI

Mutual Fund
AUM’s Growth

4-
Mar Mar Mar Mar Mar Mar Sep
Month/Year Dec-
-98 -00 -01 -02 -03 -04 -04
04

689 937 831 940 753 137 151 1493

MF AUM's
84 17 31 17 06 626 141 00

19
Change in % over
26 13 12 25 45 9 1
last yr

Source - AMFI

Some facts for the growth of mutual funds in India

• 100% growth in the last 6 years.

• Number of foreign AMC's are in the que to enter the Indian

markets like Fidelity Investments, US based, with over
US$1trillion assets under management worldwide.

• Our saving rate is over 23%, highest in the world. Only

channelizing these savings in mutual funds sector is required.

• We have approximately 29 mutual funds which is much less than

US having more than 800. There is a big scope for expansion.

• 'B' and 'C' class cities are growing rapidly. Today most of the
mutual funds are concentrating on the 'A' class cities. Soon they
will find scope in the growing cities.

• Mutual fund can penetrate rurals like the Indian insurance

industry with simple and limited products.

• SEBI allowing the MF's to launch commodity mutual funds.

• Emphasis on better corporate governance.

• Trying to curb the late trading practices.

• Introduction of Financial Planners who can provide need based

advice.

Types of Mutual Funds Scheme in India

Wide variety of Mutual Fund Schemes exist to cater to the needs such as
financial position, risk tolerance and return expectations etc. The table
below gives an overview into the existing types of schemes in the
Industry.

By Structure

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 Open - Ended Schemes
Close - Ended Schemes
Interval Schemes

By Investment Objective
Growth Schemes
Income Schemes
Balanced Schemes
Money Market Schemes

Other Schemes
Tax Saving Schemes
Special Schemes
Index Schemes
Sector Specfic Schemes

Organisation of Mutual Funds in India

There are many entities involved and the diagram below illustrates the
organisational set up of a mutual fund:

Association of Mutual Funds in India (AMFI)

With the increase in mutual fund players in India, a need for mutual fund
association in India was generated to function as a non-profit organisation.
Association of Mutual Funds in India (AMFI) was incorporated on 22nd
August, 1995.

AMFI is an apex body of all Asset Management Companies (AMC) which

has been registered with SEBI. Till date all the AMCs are that have
21
launched mutual fund schemes are its members. It functions under the
supervision and guidelines of its Board of Directors.

Association of Mutual Funds India has brought down the Indian Mutual
Fund Industry to a professional and healthy market with ethical lines
enhancing and maintaining standards. It follows the principle of both
protecting and promoting the interests of mutual funds as well as their
unit holders.

The objectives of Association of Mutual Funds in India

The Association of Mutual Funds of India works with 30 registered AMCs of

the country. It has certain defined objectives which juxtaposes the
guidelines of its Board of Directors. The objectives are as follows:

• This mutual fund association of India maintains a high

professional and ethical standards in all areas of operation of the
industry.

• It also recommends and promotes the top class business

practices and code of conduct which is followed by members and
related people engaged in the activities of mutual fund and asset
management. The agencies who are by any means connected or
involved in the field of capital markets and financial services also
involved in this code of conduct of the association.

• AMFI interacts with SEBI and works according to SEBIs guidelines

in the mutual fund industry.

• Association of Mutual Fund of India do represent the Government

of India, the Reserve Bank of India and other related bodies on
matters relating to the Mutual Fund Industry.

• It develops a team of well qualified and trained Agent

distributors. It implements a programme of training and
certification for all intermediaries and other engaged in the
mutual fund industry.

• AMFI undertakes all India awarness programme for investors

inorder to promote proper understanding of the concept and
working of mutual funds.

• At last but not the least association of mutual fund of India also
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 disseminate informations on Mutual Fund Industry and
undertakes studies and research either directly or in association
with other bodies.

The sponsorers of Association of Mutual Funds in India

Bank Sponsored

SBI Fund Management Ltd.

BOB Asset Management Co. Ltd.
Canbank Investment Management Services Ltd.
UTI Asset Management Company Pvt. Ltd.

Institutions

GIC Asset Management Co. Ltd.

Jeevan Bima Sahayog Asset Management Co. Ltd.

Private Sector

Indian:

BenchMark Asset Management Co. Pvt. Ltd.

Cholamandalam Asset Management Co. Ltd.
Credit Capital Asset Management Co. Ltd.
Escorts Asset Management Ltd.
JM Financial Mutual Fund
Kotak Mahindra Asset Management Co. Ltd.
Reliance Capital Asset Management Ltd.
Sahara Asset Management Co. Pvt. Ltd
Sundaram Asset Management Company Ltd.
Tata Asset Management Private Ltd.

Predominantly India Joint Ventures:

Birla Sun Life Asset Management Co. Ltd.

DSP Merrill Lynch Fund Managers Limited
HDFC Asset Management Company Ltd.

Predominantly Foreign Joint Ventures:

ABN AMRO Asset Management (I) Ltd.

Alliance Capital Asset Management (India) Pvt. Ltd.
23
 Deutsche Asset Management (India) Pvt. Ltd.
Fidelity Fund Management Private Limited
Franklin Templeton Asset Mgmt. (India) Pvt. Ltd.
HSBC Asset Management (India) Private Ltd.
ING Investment Management (India) Pvt. Ltd.
Morgan Stanley Investment Management Pvt. Ltd.
Principal Asset Management Co. Pvt. Ltd.
Prudential ICICI Asset Management Co. Ltd.
Standard Chartered Asset Mgmt Co. Pvt. Ltd.

Association of Mutual Funds in India Publications

AMFI publices mainly two types of bulletin. One is on the monthly basis
and the other is quarterly. These publications are of great support for the
investors to get intimation of the knowhow of their parked money.

Advantages of Mutual Funds

The advantages of investing in a Mutual Fund are:

• Diversification: The best mutual funds design their portfolios so

individual investments will react differently to the same economic
conditions. For example, economic conditions like a rise in
interest rates may cause certain securities in a diversified
portfolio to decrease in value. Other securities in the portfolio will
respond to the same economic conditions by increasing in value.
When a portfolio is balanced in this way, the value of the overall
portfolio should gradually increase over time, even if some
securities lose value.

• Professional Management:Most mutual funds pay topflight

professionals to manage their investments. These managers
decide what securities the fund will buy and sell.

• Regulatory oversight: Mutual funds are subject to many

government regulations that protect investors from fraud.

• Liquidity: It's easy to get your money out of a mutual fund. Write
a check, make a call, and you've got the cash.

• Convenience: You can usually buy mutual fund shares by mail,

24
 phone, or over the Internet.

• Low cost: Mutual fund expenses are often no more than 1.5
percent of your investment. Expenses for Index Funds are less
than that, because index funds are not actively managed.
Instead, they automatically buy stock in companies that are
listed on a specific index

• Transparency

• Flexibility

• Choice of schemes

• Tax benefits

• Well regulated

Drawbacks of Mutual Funds

Mutual funds have their drawbacks and may not be for everyone:

• No Guarantees: No investment is risk free. If the entire stock market

declines in value, the value of mutual fund shares will go down as
well, no matter how balanced the portfolio. Investors encounter
fewer risks when they invest in mutual funds than when they buy
and sell stocks on their own. However, anyone who invests through
a mutual fund runs the risk of losing money.

• Fees and commissions: All funds charge administrative fees to cover

their day-to-day expenses. Some funds also charge sales
commissions or "loads" to compensate brokers, financial
consultants, or financial planners. Even if you don't use a broker or
other financial adviser, you will pay a sales commission if you buy
shares in a Load Fund.

• Taxes: During a typical year, most actively managed mutual funds

sell anywhere from 20 to 70 percent of the securities in their
portfolios. If your fund makes a profit on its sales, you will pay taxes
on the income you receive, even if you reinvest the money you
made.

• Management risk: When you invest in a mutual fund, you depend on

the fund's manager to make the right decisions regarding the fund's
portfolio. If the manager does not perform as well as you had hoped,
you might not make as much money on your investment as you
25
 expected. Of course, if you invest in Index Funds, you forego
management risk, because these funds do not employ managers.

Why to invest in Mutual Funds?

Investing in the equity market directly is exciting and glamorous. You are
in the thick of things and are able to take responsibility for yourself.
Though the volatility and the information overload makes it a daunting
task. The present subprime quagmire makes it even more daunting.

How about investing through Mutual finds? Doesn't it have its own loading
and administrative charges and the fund managers making merry on your
hard earned money? And can't we see the best performing mutual funds
and follow their portfolio? The performance of a scheme is reflected in its
net asset value (NAV) which is disclosed on daily basis in case of open-
ended schemes and on weekly basis in case of close-ended schemes. NAV
of mutual funds are required to be published in newspapers.

Here are some points to ponder:

• We should allocate our time to investment decisions in proportion

to our income generation goals.
• Convenience and hassle free investing should be a major factor.
• Fund managers are into it full time. If we able to identify fund
managers who have consistently performed over last 3-5 years,
nothing like it.
• The fund manager also has the muscle power of crores of Rupees
and is able to take entry and exit decisions impartially.
• MFs continuosly churn their portfolio. When MFs buy and sell
stocks, they don't have to pay capital gains as you do when you
churn.
• We are likely to panic over market crashes. MFs can take
advantage of a crash!
• With Systematic Investment plans (SIP), you can start investing
with as low as Rs 500 per month.
•
The NAVs are also available on the web sites of mutual funds. All mutual
funds are also required to put their NAVs on the web site of Association of
Mutual Funds in India (AMFI) and thus the investors can access NAVs of all
mutual funds at one place.
The mutual funds are also required to publish their performance in the

26
form of half-yearly results which also include their returns/yields over a
period of time i.e. last six months, 1 year, 3 years, 5 years and since
inception of schemes.
Investors can also look into other details like percentage of expenses of
total assets as these have an affect on the yield and other useful
information in the same half-yearly format. The mutual funds are also
required to send annual report or abridged annual report to the
unitholders at the end of the year.
Various studies on mutual fund schemes including yields of different
schemes are being published by the financial newspapers on a weekly
basis.
Apart from these, many research agencies also publish research reports
on performance of mutual funds including the ranking of various schemes
in terms of their performance. Investors should study these reports and
keep themselves informed about the performance of various schemes of
different mutual funds.
Investors can compare the performance of their schemes with those of
other mutual funds under the same category. They can also compare the
performance of equity oriented schemes with the benchmarks like BSE
Sensitive Index, S&P CNX Nifty, etc. On the basis of performance of the
mutual funds, the investors should decide when to enter or exit from a
mutual fund scheme.

MUTUAL FUND V/S ULIPS.

Even as ULIPs are selling like hot cakes, one common doubt in most
people’s mind is why they cannot buy a mutual fund and top it up with a
term insurance policy instead of buying a ULIP? There are a number of
matters to consider here – the cost of life insurance, the reason for
investment, the investment horizon and so on.

• Cost of life insurance

In a ULIP, your premium is divided into your risk cover and your
investment. That means, out of the total premium that you pay, a certain
percentage will be deducted as risk cover to provide for your insurance
and the balance will be invested in a fund. Your risk cover charge will
increase every year with your age. As a result the investment allocation
will reduce.

Suppose that you buy a ULIP when you are 30 years old. The sum assured
is Rs 5 lakh and the term is 20 years. The premium that you will pay over
27
a period of 20 years will work out to around Rs 25,000 to Rs 30,000
depending on the company you choose.

In a term policy, your premium will remain fixed throughout the term of
the policy. So that means, if you opt to invest in a mutual fund and buy a
term policy, the amount of investment and cost of insurance will not
change over a period of time. For a similar example as above, if the 30
year old were to take a term insurance policy for Rs 5 lakh, he would end
up paying anywhere between Rs 40,000 to Rs 50,000 as insurance
premium.

This vast difference in cost of insurance is mainly because of cost of

distribution and administration as also the margins of the insurer. In a
ULIP, costs and margins are recovered commonly between the investment
portion and the insurance portion. However, if you were to buy a term
policy and a mutual fund, the insurance company will recover its costs of
distribution and administration as well as margins. The mutual fund would
again recover the same costs from your investment portion.

• Flexibility

A ULIP will give you flexibility of increasing your life cover, while
maintaining the same premium. This is done by simply reducing your
investment allocation. So suppose you have a risk cover of Rs 5 lakh and
would like to increase it to Rs 6 lakh, you can still continue to pay the
same amount of premium. The only difference would be that the amount
deducted towards the risk cover would be more and therefore, the amount
invested would be less.

If you have a term policy and would like to increase your life cover, your
only option would be to buy another term policy. This would mean paying
administration charges all over again.

There’s more to the flexibility. With a ULIP you don’t have fear that your
policy will lapse if you were unable to pay your premium. The cost of
insurance will be taken out of your existing investment to keep the policy
going. But if you fail to pay premium on your term policy, it will lapse.

28
 • Expenses

If you were to look at the expenses of a ULIP as compared with the

expenses of a mutual fund, there is a difference. In a ULIP charges are
front loaded, which means, most of the charges are recovered within the
first few years. That is why it does not make sense to invest in a ULIP if
you are looking at a short term. Look at a mutual fund if you are looking at
a time horizon of 3-5 years. In the long term, charges of a ULIP even out
and compare well with a mutual fund.

So if you are looking for a long-term investment avenue with an insurance

cover that goes with it, then ULIP is the product for you and if you are
looking at a product that helps you focus purely on investment and
returns over a medium term, then go for a mutual fund. Experts say the
two products are different and ideally you should have both in your
portfolio.

• Tax benefits

ULIP investments qualify for deductions under Section 80C of the Income
Tax Act. This holds good, irrespective of the nature of the plan chosen by
the investor. On the other hand in the mutual funds domain, only
investments in tax-saving funds (also referred to as equity-linked savings
schemes) are eligible for Section 80C benefits.

Maturity proceeds from ULIPs are tax free. In case of equity-oriented funds
(for example diversified equity funds, balanced funds), if the investments
are held for a period over 12 months, the gains are tax free; conversely
investments sold within a 12-month period attract short-term capital gains
tax @ 10%.

Similarly, debt-oriented funds attract a long-term capital gains tax @ 10%,

while a short-term capital gain is taxed at the investor's marginal tax rate.

Despite the seemingly similar structures evidently both mutual funds and
ULIPs have their unique set of advantages to offer. As always, it is vital for
investors to be aware of the nuances in both offerings and make informed
decisions.

• Flexibility in altering the asset allocation

As was stated earlier, offerings in both the mutual funds segment and
ULIPs segment are largely comparable. For example plans that invest their
entire corpus in equities (diversified equity funds), a 60:40 allotment in
equity and debt instruments (balanced funds) and those investing only in
29
debt instruments (debt funds) can be found in both ULIPs and mutual
funds.

If a mutual fund investor in a diversified equity fund wishes to shift his

corpus into a debt from the same fund house, he could have to bear an
exit load and/or entry load.

On the other hand most insurance companies permit their ULIP inventors
to shift investments across various plans/asset classes either at a nominal
or no cost (usually, a couple of switches are allowed free of charge every
year and a cost has to be borne for additional switches).

Effectively the ULIP investor is given the option to invest across asset
classes as per his convenience in a cost-effective manner.

This can prove to be very useful for investors, for example in a bull market
when the ULIP investor's equity component has appreciated, he can book
profits by simply transferring the requisite amount to a debt-oriented plan.

• Portfolio disclosure

Mutual fund houses are required to statutorily declare their portfolios on a

quarterly basis, albeit most fund houses do so on a monthly basis.
Investors get the opportunity to see where their monies are being
invested and how they have been managed by studying the portfolio.

There is lack of consensus on whether ULIPs are required to disclose their

portfolios. During our interactions with leading insurers we came across
divergent views on this issue.

While one school of thought believes that disclosing portfolios on a

quarterly basis is mandatory, the other believes that there is no legal
obligation to do so and that insurers are required to disclose their
portfolios only on demand.

Some insurance companies do declare their portfolios on a

monthly/quarterly basis. However the lack of transparency in ULIP
investments could be a cause for concern considering that the amount
invested in insurance policies is essentially meant to provide for
contingencies and for long-term needs like retirement; regular portfolio
disclosures on the other hand can enable investors to make timely
investment decisions.

Advantages About MF :

01. Short Term to Medium Term Investment.

02. Fund Management Expenses will be less.

30
03. Equity Mutual Funds has some income tax benefits (In india Equity
Mutual Funds are exempted from Income Tax)

04. Varieties of Mutual funds / Sectoral Funds are available.

05. Incase of open end mutual funds, having easy liquidity.

06. Growth oriented investment.

07. Investor can Easy to understand 08. Investor who can view only
Investment can go for Mutual Fund.

Advantage About ULIP’s :

01. Medium Term to Long Term Investments.

02. Fund Management Expenses will be High.

03. Insurance Maturity Amouts are Tax Free in the hands of the investor (In
india)

04. Not much of varieties are available.

05. In General ULIP Products has min of 3 years lock in period.

06. Value based investment.

07. Need to explain the benefits of the investor and make them
understand about hidden charges and benefits involved.

08. Investor who would like to protect his life / health and also make some
money, can invest in ULIP.

Insurance is NOT an investment. Hence ULIP’s are not that attractive.

Also, ULIPs are being mis-sold (mis-sold being a polite way of saying con
job) like no financial product has ever been mis-sold in this country. In
India, ULIPs are a product which have been cynically designed to
maximise profits to insurance agents and insurance companies while
hiding the true numbers from investors. Nominally, a ULIP is a product
that combines insurance and investment characteristics. In reality, they
combine an extraordinarily high cost structure (meant primarily to feed
agent commissions) with a non-standardised revelation of expense so that
any meaningful comparison of investment performance between different
ULIPs or between ULIPs and mutual funds is impossible. In other
investment products, either there are no agent commissions (as in bank
31
FDs) or agent commissions range from 0.25 per cent to 2 or 3 per cent (as
in case of Mutual Fund Advisors). In ULIPs however, commissions range
from 15 per cent to (hold your breath) around 70 per cent and are
typically 25 per cent. And for some bizarre reason, this is considered
acceptable by everyone concerned

Basically, ULIPs are expensive and opaque mutual funds disguised as

insurance. This permits insurance companies to circumvent the strict
transparency, expense, and commission-related laws that govern mutual
funds. It also enables them to escape the scrutiny of SEBI, which has
historically been a tougher regulator than IRDA.
Insurance is a great idea and most of us need it. But we need real
insurance, which is to say term insurance. Here's what you should do.
Make a liberal estimate of how much money your family will need if you
die suddenly. Shop around and buy the cheapest term insurance you can
find. You'll be stunned at how cheap term insurance is and also at how
difficult it is to buy (The quickest way to get rid of an insurance agent is to
say that you're interested only in term insurance). You probably won't be
able to think logically about insurance as long as you don't realise that it's
an expense. It's a necessary expense, like buying a helmet or going to a
doctor, but it's not an investment. You need both insurance and
investment.

All in all, mutual funds pegged against ULIP’s; the clear viable investment
option is mutual funds. ULIP’s ROI is still a fraction of what is offered by its
counterpart. Furthermore, the lock in period of ULIP’s is more where the
investor tends to loose his money incase of a premature withdrawal. Also
the cost associated with ULIP investments is substantially more pegged
against mutual funds.

32
MUTUAL FUNDS V/S FIXED DEPOSITS

FIXED DEPOSITS MUTUAL FUNDS

1. RISK APPETITE Where, mutual funds providing

option to an investor to select
FD is a pure debt instrument with funds depends on their risk taking
enough guarantees to the capital. capacity. Money market, debt and
This is a suitable investment liquid funds are good for low risk
instruments for those who have profile investors to park their
very risk profile and always money and sleep well and equity,
worrying about any kind of lose of diversified and balanced fund
their money. options are there for investors
who are ready to take risk as well
as get good returns compare with
the previous options.

2. RETURNS Mutual fund returns to an investor

is upon his fund selection and
While in the place an FD can performance of that funds. Good
provide maximum 8-10% returns diversified Mutual funds are able
to the customer. to deliver 8% to100% returns to
investor. Debt mutual funds are
better than FD returns because
they can go till 15% if the fund is
a good one.

33
3. CALCULATION OF INTREST Return from the mutual fund
RATE investment calculating in the
FD returns are in flat rate. compounded basis

4. INFLATION Mutual fund investments are very

good to beat inflation because of
FD's are clear loser against its large potential returns in the
inflation because of its fixed future.
return.

5. AGE GROUP Equity MF is highly recommended

FD recommended for those who for those in the age group of 20-
are near to pension age because 40.
he required guaranteed money
after pension.

6. TAX BENEFIT ELSS MF only providing tax

benefit with 3 years lock in
FD providing Tax benefit if it is for period.
more than 3 years term

7. SECURITY  In general, mutual fund

investments require a risk taking
 Where FD is fully secured and capacity compared with FD's.
no need to worry about the return Even though, there are funds in
after the term. mutual funds that is designed for
low risk profit investors. Debt,
liquid and Fixed maturity Term
plans are secure funds and
provide capital protection

8. MARKET VOLATALITY  Mutual fund can be invested

using SIP (systematic investment
 FD's with recognized financial plan) which will make an investor
institutions backed by Govt. and very disciplined and allow him
are not at all connected to stock reasonable protection from
market so the return will be fixed volatility and stock market
and sure. fluctuations. This means, the
mutual fund directly associated to
stock market.

34
ULIPs v/s Mutual Funds v/s Fixed Deposits

ULIPs Mutual Funds Fixed Deposits

Determined by the Minimum investment Determined by the investor and
Investment investor and can be amounts are determined can be modified as well.
amounts modified as well by the fund house

No upper limits, Upper limits for expenses Charges passed on to the

expenses determined chargeable to investors investors are usually only the
by the insurance have been set by the interest rate offered.
Expenses company regulator

Portfolio Quarterly disclosures are

disclosure Not mandatory mandatory NA

Generally permitted for

Modifying asset free or at a nominal Entry/exit loads have to be
allocation cost borne by the investor NA

Section 80C benefits are No tax benefits are offered to

Section 80C benefits available only on these investors.
are available on all investments in tax-saving
Tax benefits ULIP investments funds

It is a pure debt instrument,

Mutual funds are again
hence it is safe.
Exposure to risk is safe except for certain
Risk Appetite usually less. types viz. Sector funds.

FD’s cannot beat the prevailing

ULIP’s can break MF’s can easily beat the
inflation rate.
inflation once they inflation due to large
Inflation break even. potential returns.

35
 FD’s are not connected to stock
ULIP’s performance is MF’s performance is
market, hence they bear fixed
dependent on the stock dependent on the stock
returns.
Market Volatility market. market.

IMPACT OF DTC ON MUTUAL FUNDS

In August 2009, the finance minister released for public comments, a draft
of the new Direct Taxes Code (DTC), which is slated to replace the present
direct tax laws. In response, various industry associations, trade bodies
and consulting firms made representations regarding the concern areas,
ambiguities, etc. A revised draft addressing certain identified core areas of
concern is likely to be released soon for further public consultation. One of
the DTC proposals that has been most debated is Exempt-Exempt-Tax
(EET) regime for taxation of insurance products and other savings
instruments. The EET method allows exemption at the first two stages, but
provides for a tax on withdrawals at the personal marginal rate. The
concept of EET is primarily prominent in developed countries, which have
comprehensive social security schemes, but in India, in the absence such
schemes, EET, if implemented, would come as a big blow to the individual
tax payer. Many representations were received regarding these provisions.
This article discusses the key provisions proposed in the current draft of
the DTC regarding the taxation of insurance products and mutual fund
products.

Insurance — Impact on holders

36
Contribution stage

Currently, a deduction from the total income up to a maximum of Rs

100,000 is available in the hands of individuals in respect of premium paid
for self, spouse and children. Under DTC, this limit is sought to be raised
to Rs 300,000 (in respect of premium for self) and the premium paid for
spouse and children may not be deductible in the hands of the payer.

Accrual stage

As envisaged in the draft DTC, the policyholders would be exempt from

tax at the accrual/accumulation stage as per the provisions of the current
income tax law. Further, under DTC, life insurance companies are sought
to be treated as ‘pass-thru entities’. Accordingly, the surplus in
‘policyholders account’ of the insurance companies is sought to be
exempt from tax. ((Under the current law, the same is taxable at 12.5%,)
(plus surcharge and education cess) as part of actuarial surplus in the
hands of the life insurance companies.)) While the DTC seeks to exempt
the policyholders’ surplus, the Minimum Alternate Tax (MAT) of 2% on
gross assets proposed in the DTC could erode the policyholders’ surplus
unless policyholders’ surplus is exempted specifically from the MAT
provisions.

Withdrawal/ Maturity stage

Currently, any sum (including bonus) received under a life insurance

policy, except policies where the premium paid for any of the years
exceeds 20% of the capital sum assured, is exempt from tax. In case
where the premium paid in any of the years exceeds 20% of the capital
sum assured, an exemption is available only if the sum is received on the
death of the insured. Under the DTC, the entire proceeds from a life
insurance policy are proposed to be made taxable. The proceeds are not
taxable only if it is in respect of a policy, wherein the premium paid in any
of the years does not exceed 5% of the actual capital sum assured and
where the sum is received on completion of original contract period or
upon the death of the insured. Thus, various insurance products, including
unit-linked products, may not enjoy the exemption at the withdrawal
stage. Further, the death benefits of only qualified policies (i.e., those
policies where the premium paid in any of the years does not exceed 5%
37
of the capital sum assured) would be exempt from tax.

MFs — Impact on unit holders

Currently, the entire income of Sebi-registered mutual funds is exempt

from tax. All mutual funds (except equity-oriented funds) are liable to pay
tax on income distributed to the unit holders at the prescribed rates
(13.84% for individuals for debt funds and 27.68% for liquid/money
market funds), i.e. income distribution tax (IDT). The income received by
the unit holders in respect of the units of a mutual fund, is exempt from
tax in their hands. Under the DTC, it is proposed that the income of mutual
funds would continue to be exempt from tax. Further, the mutual funds
are also sought to be exempt from the payment of IDT, irrespective of the
nature of their schemes. Also, the unit holders are also to be exempt from
tax in respect of the income from units of a mutual fund. The treatment
proposed under DTC is inconsistent with the treatment discussed in the
discussion paper on DTC and also the EET mechanism, according to which
investors should be liable to tax on any income which accrues to them
from any pass-thru entities (including mutual funds). This would result in
complete non-taxation of income (other than gains on transfer of units),
which does not appear to be the intent. The DTC does not contain any
comparable provision as exists in current tax laws, for deduction of up to
Rs 100,000 in respect of subscription made to any mutual fund framed in
accordance with equity-linked savings scheme, 2005. Further, in respect
of capital gains earned by individual investors on the sale of unit of mutual
fund, there are differences in tax rates as per the current law and as
proposed by DTC, as indicated in the table. The provisions of DTC, as
envisaged, for taxation of the insurance and mutual fund products would
provide a competitive advantage to mutual fund products against
insurance products. It is hoped that the tax advantage would be
neutralised in the revised draft of DTC.

Normal Tax rates on Capital Gain

Under the proposed DTC(Direct tax code), any gains arising from
investment assets were liable to be taxed as capital gains at the rate of
30% in case of non-residents and at the applicable marginal rates in case
of residents. In the RDP(revised discussion paper on DTC), the capital
gains would be taxable at normal rates applicable to the taxpayer,
including non-residents.

38
STT(securities transaction tax ) stays

The proposal of abolition of Securities Transaction Tax (STT) by the DTC

has been withdrawn. STT would now be payable on specified transactions,
which would be determined, based on the taxation regime of capital gains
and flow of funds to the capital market.

These are proposal for new direct tax code and revised discussion paper
has recently issued on DTC ,further application of direct tax code is
proposed from FY 11-12 but it is not certain.

The revised Direct Tax Code will give a big edge to retirement
products over equity and equity-linked mutual funds, which are
slated to be burdened by long-term capital gains tax after a long
time.

Strong winds of change are set to blow over the financial landscape in
India. The government has proposed a new tax bonanza for long-term
savings schemes under the new Direct Tax Code (DTC) while bringing
long-term gains from equities and equity-linked mutual funds under the
tax hammer. This dual move could potentially give a leg-up to savings
schemes like the New Pension Scheme (NPS) and Public Provident Fund
(PPF) over equities and equity-linked products.

Under the existing system, savings schemes fall under the EET (exempt-
exempt-taxed) regime, wherein contributions and accumulations are
exempt from tax but withdrawals are taxable at applicable marginal rate
of tax. However, the government received numerous representations for
doing away with the EET system, as this method of taxation of permitted
savings was considered harsh in the absence of a universal social security
system as in the US. Earlier, the Pension Fund Regulatory and
Development Authority (PFRDA), which administers the NPS, had called
upon the finance ministry to bring about a change in the tax structure. It
appears now that the government has heeded the call and proposed to
bring long-term savings schemes like the NPS under the EEE (exempt-
exempt-exempt) regime.

Interestingly, at the same time, the government has sought to levy tax on
capital gains arising from sale of investment assets such as equity shares
of a listed company or units of an equity-oriented fund, which are held for
more than one year. This tax is proposed to be computed after allowing a
deduction at a specified percentage of capital gains without any

39
indexation. Currently, gains arising out of transfer of equity instruments
are taxed (at 15%) only if sold within a year of investment. Capital gains
arising out of investment held for more than a year are not taxed.

These new provisions under DTC are expected to have far-reaching

implications on the investment scenario in India. Until now, equities and
equity-linked mutual funds were considered good bets from the tax point
of view, as there was no incidence of long-term capital gains tax. India
was among the very few nations that allowed capital appreciation over a
period of one year or more to be tax-free. This may no longer be the case.
Could this move bring about an exodus from equity instruments to long-
term savings schemes?

HOW TO-HOW MUCH-WHERE TO- INVEST IN MUTUAL

FUNDS

 Identify your investment needs.

Your financial goals will vary, based on your age,lifestyle, financial
independence, family commitments, level of income and expenses

40
 among many other factors. Therefore, the first step is to assess your
needs. Begin by asking yourself these questions:

1. What are my investment objectives and needs?

Probable Answers: I need regular income or need to buy a home or

finance a wedding or educatemy children or a combination of all
these needs.
2.How much risk am I willing to take?

Probable Answers: I can only take a minimum amount of risk or I am

willing to accept the fact that my investment value may fluctuate or
that there may be a short term loss in order to achieve a long term
potential gain.
3.What aremy cash flow requirements?

Probable Answers: I need a regular cash flow or I need a lump sum

amount to meet a specific need after a certain period or I don’t
require a current cash flow but I want to build my assets for the
future.
By going through such an exercise, you will know what you want out of
your investment and can set the foundation for a sound Mutual Fund

 Choose the right Mutual Fund.

Consider the following :


 The track record of performance over the last few years
in relation to the appropriate yardstick and similar funds
in the same category.
 How well the Mutual Fund is organised to provide
efficient, prompt and personalised service.
 Degree of transparency as reflected in frequency and
quality of their communications.

41
 Select the ideal mix of Schemes.

Investing in just one Mutual Fund scheme may not meet all your
investment needs. You may consider investing in a combination of
schemes to achieve your specific goals. There is no thumb rule how
much you should invest in equity scheme or in Debt Funds .But 100-
Your age can be tried .Means if your age is 30 the you should invest
(100-30) 70 % in the equities through mutual funds or otherwise
.This rule is Just a Guide but there are many other factors which
effects the decision of a person.


PLAN-1 AGGRESSIVE PLAN
This plan may suit:

Investors in their prime earning years and willing to take more risk.
Investors in their prime earning years and willing to take more risk.


PLAN-2 MODERATE PLAN
This plan may suit:

Investors seeking income and moderate growth.

Investors looking for growth and stability with moderate risk.


PLAN -3 CONSERVATIVE
This plan may suit: Retired and other investors who need to
preserve capital and earn regular income.

42
 Invest regularly

For most of us, the approach that works best is to invest a fixed
amount at specific intervals, say every month. By investing a fixed
sum each month, you get fewer units when the price is high and
more units when the price is low, thus bringing down your average
cost per unit. This is called rupee cost averaging and is a disciplined
investment strategy followed by investors all over the world. With
many open-ended schemes offering systematic investment plans,
this regular investing habit is made easy for you.

 Keep your taxes in mind

As per the current tax laws, Dividend/Income Distribution made by

mutual funds is exempt from Income Tax in the hands of
investor.However, in case of debt schemes Dividend/Income
Distribution is subject to Dividend Distribution Tax. Long Term capital
gain on Equity Mutual Funds is exempted under section 10(38)

43
  Start early

It is desirable to start investing early and stick to a regular

investment plan. If you start now, you will make more than if you
wait and invest later. The power of compounding lets you earn
income on income and your money multiplies at a compounded
rate of return.

 The final step

All you need to do now is to get in touch with a Mutual Fund or your
advisor and start investing.Reap the rewards in the years to come.
Mutual Funds are suitable for every kind of investor whether
starting a career or retiring, conservative or risk taking, growth
oriented or income seeking.

The Indian Mutual Fund Sector- Financials

The Indian mutual fund industry has witnessed significant growth in the
past few years driven by several favourable economic and demographic
44
factors such as rising income levels and the increasing reach of Asset
Management Companies (AMCs) and distributors. However, after several

years of relentless growth, the industry witnessed a fall of 8 percent in the

assets under management in the financial year 2008-09 that has
impacted revenues and profitability.

Recent developments triggered by the global economic crisis have served

to highlight the vulnerability of the Indian mutual fund industry to global
economic turbulence and exposed our increased dependence on
corporate customers and the retail distribution system. It is therefore an
Opportunity time for the industry to dwell on the experiences and develop
a roadmap through a collaborative effort across all stakeholders, to
achieve sustained profitable growth and strengthen investor faith and
confidence in the health of the industry. Innovative strategies of AMCs and
distributors, enabling support from the regulator SEBI, and pro-active
initiatives from the industry bodies CII and AMFI are likely to be the key
components in defining the future shape of the industry.

Relatively low penetration levels combined with rapid growth in the assets
under management in recent years point to the high growth potential of
the Indian mutual fund industry. The recent developments of the past few
months, triggered by the global economic crisis, have shown that the
Indian mutual fund industry is not decoupled from global developments.
The financial turmoil has served to highlight the benefits of investing in
mutual funds, in particular, in comparison with directly investing in stocks.

Going forward, the Indian mutual fund industry is expected to secure

growth by catering to the evolving aspirations of retail customers. The
industry seeks to target an increased share of the customer wallet through
product innovation combined with deeper retail penetration by expanding
reach into Tier 2 and Tier 3 towns. The industry will need to incorporate
capital safety features in product design, build strong brands that are
hallmarks of financial integrity, service orientation and sustained fund
performance. Building investors’ trust and increased customer awareness
through initiatives aimed at promoting financial literacy will be critical
factors towards building greater retail participation. It is therefore an
opportune time for the industry to introspect on the learnings and
experiences of the past decade and develop a roadmap through a
45
collaborative effort across all stakeholders, to achieve sustained profitable
growth.

Current State

India has been amongst the fastest growing markets for mutual funds
since 2004, witnessing a CAGR of 29 percent in the five-year period from
2004 to 2008 as against the global average of 4 percent. The increase in
revenue and profitability, however, has not been commensurate with the
AUM growth in the last five years.

Low share of global assets under management, low penetration levels,

limited share of mutual funds in the household financial savings and the
climbing growth rates in the last few years that are amongst the highest
in the world, all point to the future potential of the Indian mutual fund
industry.

AUM Growth

The Assets under Management (AUM) have grown at a rapid pace over the
past few years, at a CAGR of 35 percent for the five-year period from 31
March 2005 to 31 March 2009. Over the 10-year period from 1999 to 2009
encompassing varied economic cycles, the industry grew at 22 percent
CAGR. This growth was despite two falls in the AUM - the first being after
the year 2001 due to the dotcom bubble burst, and the second in 2008
consequent to the global economic crisis (the first fall in AUM in March
2003 arising from the UTI split).

Challenges and Issues

46
Low customer awareness levels and financial literacy pose the biggest
challenge to channelizing household savings into mutual funds. Further,
fund houses have shown limited focus on increasing retail penetration and
building retail AUM. Most AMCs and distributors have a limited focus
beyond the top 20 cities that is manifested in limited distribution channels
and investor servicing. The Indian mutual fund industry has largely been
product-led and not sufficiently customer focused with limited focus being
accorded by players to innovation and new product development. Further
there is limited flexibility in fees and pricing structures currently.

Distributors and the mutual fund houses have exhibited limited interest in
continuously engaging with

customers post closure of sale as the commissions and incentives have

been largely in the form of upfront fees from product sales. Limited focus
of the public sector network including public sector banks, India Post, etc
on distribution of mutual funds has also impeded the growth of the
industry. Further multiple regulatory frameworks govern different verticals
within the financial services sector, such as differential policies pertaining
to the PAN card requirement, mode of payment (cash vs cheque), funds
management by insurance companies and commission structures, among
others.

AUM Base and Growth Relative To the Global Industry

India has been amongst the fastest growing markets for mutual funds
since 2004; in the five-year period from 2004 to 2008 (as of December)
the Indian mutual fund industry grew at 29 percent CAGR as against the
global average of 4 percent3. Over this period, the mutual fund industry in
mature markets like the US and France grew at 4 percent, while some of
the emerging markets viz. China and Brazil exceeded the growth
witnessed in the Indian market. However, despite clocking growth rates
that are amongst the highest in the world, the Indian mutual fund industry
continues to be a very small market; comprising 0.32 percent share of the
global AUM of USD 18.97 trillion as of December 2008.

47
AUM to GDP Ratio

The ratio of AUM to India’s GDP, gradually increased from 6 percent in

2005 to 11 percent in 2009. Despite this however, this continues to be
significantly lower than the ratio in developed countries, where the AUM
accounts for 20-70 percent of the GDP.

Share of Mutual Funds in Household Financial Savings

Investment in mutual funds in India comprised 7.7 percent of the gross

household financial savings in FY 2008, a significant increase from 1.2
percent in FY 2004. The households in India continue to hold 55 percent of
their savings in fixed deposits with banks, 18 percent in insurance and 10
percent in currency as of FY 2008.

48
In 2008, the UK had more than thrice the investments into mutual funds
as a factor of total household savings (26 percent), than India had in the
same time period. As of December 2008, UK households held 61 percent
of the total savings in bank deposits, 11.6 percent in equities and 1
percent in bonds.

Profitability

The increase in revenue and profitability in the Indian mutual fund

industry has not been commensurate with the AUM growth in the last 5
years. The AUM grew at 35 percent CAGR in the period from March 2005
to 2009, while the profitability of AMCs - which is defined as PBT as a
percentage of the AUM - declined from 24 bps in FY 2004 to 14 bps in FY
2008.

49
During FY 2004 and FY 2008, the investment management fee as a
percent of average AUM was in the range of 55 to 58 bps (small increase
to 64 bps in FY 2006) due to the industry focus on the underlying asset
mix comprising relatively low margin products being targeted at the
institutional segment.

The operating expenses, as a percentage of AUM, rose from 41 bps in FY

2004 to 113 bps in FY 2008 largely due to the increased spend on
marketing, distribution and administrative expenses impacting AMC
margins.

Rising cost pressures and decline in profitability have impacted the entry
plans of global players eyeing an Indian presence.

The growth in AUM accompanied by a decline in profitability necessitates

an analysis of the underlying characteristics that have a bearing on the
growth and profitability of the Indian mutual fund industry.

50
The Indian Mutual Fund Industry – Key Characteristics

Customers

The Indian mutual fund industry has significantly high ownership from the
institutional investors. Retail investors comprising 96.86 percent in
number terms held approximately 37 percent of the total industry AUM as
at the end of March 2008, significantly lower than the retail participation
in the US at 82 percent of AUM as at December 2008.

51
Out of a total population of 1.15 billion, the total number of mutual fund
investor accounts in India as of 31 March 2008 was 42 million (the actual
number of investors is estimated to be lower as investors hold multiple
folios). In the US, an estimated 92 million individual investors owned
mutual funds out of a total population of 305 million14 in 2008.

As per the Invest India Incomes and Savings Survey 2007 of individual
wage earners in the age group 18 to 59 years conducted by IIMS
Dataworks, only 1.6 percent invested in mutual funds. Ninety percent of
the savers interviewed were not aware of mutual funds or of investing in
mutual funds through a Systematic Investment Plan (SIP). The mutual
fund penetration among the paid Indian workforce with annual household
income less than INR 90,000 was 0.1 percent.

In the last few years, the retail investor participation, in particular, in Tier
2 and Tier 3 towns, has been on the rise aided by the buoyant equity
markets.

Products

The Indian mutual fund industry is in a relatively nascent stage in terms of

its product offerings, and tends to compete with products offered by the
Government providing fixed guaranteed returns. As of December 2008,
the total number of mutual fund schemes was 1,002 in comparison to
10,349 funds in the US. Debt products dominate the product mix and
comprised 49 percent of the total industry AUM as of FY 2009, while the
equity and liquid funds comprised 26 percent and 22 percent respectively.
Open-ended funds comprised 99 percent of the total industry AUM as of
March 2009.

As of December 2008, the US mutual fund market comprised money

market funds, equity funds, debt/ bond funds and hybrid funds at 40, 39,
16 and 5 percent of the total AUM respectively. While traditional vanilla
products dominate in India, new product categories viz. Exchange Traded
Funds (ETFs), Gold ETFs, Capital Protection and Overseas Funds have
gradually been gaining popularity. As of March 2009, India had a total of
16 ETFs (0.3 percent of total AUM) while the US had a total of 728 ETFs as
of December 2008.

Markets

While the mutual fund industry in India continues to be metro and urban
centric, the mutual funds are beginning to tap Tier 2 and Tier 3 towns as a
vital component of their growth strategy. The contribution of the Top 10
cities to total AUM has gradually declined from approximately 92 percent
52
in 2005 to approximately 80 percent currently.

Distribution Channels

As of March 2009, the mutual fund industry had 92,499 registered

distributors as compared to approximately 2.5 million insurance agents.
The Independent Financial Advisors (IFAs) or Individual distributors,
corporate employees and corporates comprised 73, 21 and 6 percent
respectively of the total distributor base.

Banks in general, foreign banks and the leading new private sector banks
in particular, dominate the mutual fund distribution with over 30 percent
AUM share. National and Regional Distributors (including brokerdealers)
together with IFAs comprised 57 percent of the total AUM as of 2007. The
public sector banks are gradually enhancing focus on mutual fund
distribution to boost their fee income20.

Industry Structure

The Indian mutual fund industry currently consists of 38 players that have
been given regulatory approval by SEBI. The industry has witnessed a
shift has changed drastically in favour of private sector players, as the
number of public sector players reduced from 11 in 2001 to 5 in 2009.
The public sector has gradually ceded market share to the private sector.
Public sector mutual funds comprised 21 percent of the AUM in 2009 as
against 72 percent AUM share in 2001.

The industry concentration has been stagnant in the four-year period from
2005 to 2008; the top 5 players comprising 50-52 percent of industry
AUM. However, as of March 2009, the share of Top 5 players increased to
58 percent, as against 38 percent in the US. The AUM share of the Top 10
players has consistently been in the vicinity of 75 percent.

The mutual fund houses based on product portfolio and distribution

strategy, the key elements of competitive strategy, can be segmented
into three categories:

• The market leaders having presence across all product segments

• Players having dominant focus on a single product segment - debt or

equity

53
• Players having niche focus on an emerging product category or
distribution channels. The market leaders have focused across product
categories for a more diversified AUM base with an equitable product mix
that helps maintain a consistent AUM size.

Although the Indian market has relatively low entry barriers given the low
minimum networth required to venture into mutual fund business,
existence of a strong local brand and a wide and deep distribution
footprint are the key differentiators.

Operations

The Indian mutual fund industry while on a high growth path needs to
address efficiency and customer centricity. AMCs have successfully been
using outsourced service providers such as custodians, Registrar and
Transfer Agents (R&T) and more recently, fund accountants, so that
mutual funds can focus on core aspects of their business such as product
development and distribution. Functions that have been outsourced are
custody services, fund services, registrar and transfer services aimed at
investor servicing and cash management. Managing costs and ensuring
investor satisfaction continue to be the key goals for all mutual funds
today. However, there is likely to be scope for optimising operations costs
given the trend of rising administrative and associated costs as a
percentage of AUM.

Regulatory Framework

The Indian mutual fund industry in terms of regulatory framework is

believed to match up to the most developed markets globally. The
regulator, Securities and Exchange Board of India (SEBI), has consistently
introduced several regulatory measures and amendments aimed at
protecting the interests of the small investor that augurs well for the long
term growth of the industry.

The implementation of Prevention of Money Laundering (PMLA) Rules, the

latest guidelines issued in December 2008, as part of the risk
management practices and procedures is expected to gain further
momentum. The current Anti Money Laundering (AML) and Combating
Financing of Terrorism (CFT) measures cover two main aspects of Know
Your Customer (KYC) and ‘suspicious transaction monitoring and
reporting’.

The regulatory and compliance ambit seeks to dwell on a range of issues

including the financial capability of the players to ensure resilience and
sustainability through increase in minimum networth and capital
54
adequacy, investor protection and education through disclosure norms for
more information to investors, distribution related regulations aimed at
introducing more transparency in the distribution system by reducing the
information gap between investors and distributors, and by improving the
mechanism for distributor remuneration.

The success of the relatively nascent mutual fund industry in India, in its
march forward, will be contingent on further evolving a robust regulatory
and compliance framework that in supporting the growth needs of the
industry ensures that only the fittest and the most prudent players
survive.

MUTUAL FUND ISSUES

 Low Levels of Customer Awareness

Low customer awareness levels and financial literacy pose the biggest
challenge to channelising household savings into mutual funds. IIMS
Dataworks data released in 2007 establishes that low awareness levels
among retail investors has a direct bearing on the low mutual fund offtake
in the retail segment.

The general lack of understanding of mutual fund products amongst

Indian investors is pervasive in metros and Tier 2 cities alike and majority
of them draw little distinction in their approach to investing in mutual
funds and direct stock market investments. A large majority of retail
investors lack an understanding of risk-return, asset allocation and
portfolio diversification concepts.

Low awareness of SIPs in India has resulted in a majority of the customers

investing in a lump sum manner.

 Limited Focus on Increasing Retail Penetration

The Indian mutual fund industry had limited focus on building retail AUM
and has only recently stepped up efforts to augment branch presence in
Tier 2 and Tier 3 towns. Players have historically garnered AUM by
targeting the institutional segment that comprises 63 percent AUM share
as at March 2008.

55
Large ticket size, tax arbitrage available to corporates on investing in
money market mutual funds, easy accessibility to institutional customers
concentrated in Tier 1 cities are the factors instrumental in mutual fund
houses focussing on the institutional segment. Building retail AUM
requires significant distribution capability and a wide footprint to be able
to penetrate into Tier 2 and Tier 3 towns, which AMCs have recently
started focusing on. Institutional AUM, however, makes the industry
vulnerable to the possibility of sudden redemption pressures that impact
the fund performance.

 Limited Focus Beyond the Top 20 Cities

The mutual fund industry has continues to have limited penetration

beyond the top 20 cities. Cities beyond Top 20 only comprise
approximately 10 percent of the industry AUM as per industry
practitioners. The retail population residing in Tier 2 and Tier 3 towns,
even if aware and willing, are unable to invest in mutual funds owing to
limited access to suitable distribution channels and investor servicing.

The distribution network of most mutual fund houses is largely focused on

the Top 20 cities given the high cost associated with deeper penetration
into Tier 2 and Tier 3 towns. However, some of the mutual fund houses
have begun focussing on cities beyond the Top 20 by building their branch
presence and strengthening distribution reach through non-branch
channels.

 Limited Innovation in Product Offerings

The Indian mutual fund industry has largely been product-led and not
sufficiently customer focused. The popularity of NFOs triggered a
proliferation of schemes with a large number of non-differentiated
products. The industry has had a limited focus on innovation and new
product development, thereby catering to the limited needs of the
customer. Products that cater specifically to customer life stage needs
such as education, marriage, and housing are yet to find their way in the
Indian market.

Despite the regulations for Real Estate Mutual Funds (REMF) being
introduced in 2008, the market is still awaiting the first REMF launch.
Further, relatively nascent product categories viz. multi-manager funds
that are among the most popular hybrid funds globally have not grown in
India owing to the prevailing taxation structure.

The Indian mutual fund industry offers limited investment options viz.
capital guarantee products for the Indian investors, a large majority of
56
whom are risk averse. The Indian market is still to witness the launch of
green funds, socially responsible investments, fund of hedge funds,
enhanced money market funds, renewable and energy/ climate change
funds.

 Limited Flexibility in Fees and Pricing Structures

The fee structure in the Indian mutual fund industry enjoys little flexibility
unlike developed markets where the level of management fees depend on
a variety of factors such as the investment objective of the fund, fund
assets, fund performance, the nature and number of services that a fund
offers. While the expenses have continuously risen, the management fee
levels have remained stagnant. Distributors are compensated for their
services through a fixed charge in the form of entry load and additional
fees as considered appropriate by the AMC. Regardless of the quality of
advice and service provided, the commission payable by the mutual fund
customer to the distributors is fixed.

 Limited Customer Engagement

Mutual fund distributors have been facing questions on their competence,

degree of engagement with customer and the value provided to the
customer. In the absence of a framework to regulate distributors, both the
distributors and the mutual fund houses have exhibited limited interest in
continuously engaging with customers post closure of sale as the
commissions and incentives had been largely in the form of upfront fees
from product sales (although trail commissions have also been paid in
limited instances regardless of the service rendered). As a result of the
limited engagement, there have been rising instances of mis-selling to
customers.

 Limited Focus of the Public Sector Network on Distribution

of Mutual Funds

Public sector banks with a large captive customer base, significant reach
beyond the Top 20 cities in semi-urban and rural areas, and the potential
to build the retail investor base, have so far played a very limited role in
mutual funds distribution. The India Post network operating the largest
postal network in the world majority of which is in rural areas, is stated to
have 250 post offices selling mutual funds of five AMCs only; further most
of the post offices selling mutual funds are located in Tier 1 and Tier 2
cities which are already been catered to, by national level and other
distributors24. India Post with its customer base of 170 million account
57
holders and branch network of over 154,000 branches, doubling the size
of all bank branches put together is a formidable channel which has been
under utilised to date for mutual fund distribution25. The postal network
also serves as a means to facilitate inclusive and equitable growth to all
regions and social groups by providing them with access to financial
products such as mutual funds.

Further the credibility enjoyed by the Nationalised Banks, Regional Rural

Banks and Cooperative Banks in the rural hinterland has not been fully
leveraged to target the retail segment.

 Multiple Regulatory Frameworks Governing Financial

Services Sector Verticals

The regulatory and compliance requirements vary across verticals within

the financial services sector specifically mutual funds, insurance and
pension funds each of which are governed by an independent regulatory
framework and are competing for the same share of the customer’s
wallet. The mutual fund industry lacks a level playing field in comparison
with other verticals within the financial services sector. The mandatory
PAN card requirement for investing in mutual funds is perceived to restrict
significant potential of the mutual fund industry in being able to tap small
ticket investors from investing in mutual funds.

On the other hand, ULIPs which are deemed to be competing products do

not have the mandatory PAN requirement. While the payment for
investment into mutual funds can be made only through banking facilities,
the purchase of ULIPs can be undertaken through cash.

The recently introduced NPS regulations requiring the AMCs to create a

separate legal entity for pension funds management has created an
additional cost structure for the mutual fund players.

Outsourcing funds management in excess of INR 80 billion by insurance

companies is not permitted and thus restricts an additional revenue
opportunity for the mutual fund industry.

In summary, the challenges and issues faced by the Indian mutual fund
industry will need to be addressed at the earliest to ensure long term
sustained, profitable growth of the industry.

The Indian investor witnessed significant rise in New Fund Offers (NFOs)
over the last two to three years from AMCs seeking to augment AUM and
diversify product basket. India has over 979 mutual fund schemes
resulting in a total AUM of INR 4,173 billion as on 31 March 200926. The
58
ratio of the assets per scheme is one of the highest in the world. Given
that there is a plethora of options with limited differentiation across
mutual fund schemes, the respondents perceive a difficulty in investing in
mutual funds in the absence of quality advice.

Hence, AMCs need to design simple products that the target segment can
easily understand and also realign their product portfolio to merge/ close
schemes with overlapping objectives.

MUTUAL FUND CHALLENGES

 Complicated KYC norms restrict potential investors

In addition to the PAN card requirement, for an investment amount of INR

50,000 and above in mutual funds, the customers are required to procure
KYC acknowledgement. This requires submission of several documents
and extensive paper-work. The respondents to the survey expressed
difficulty in understanding the complex terminology and the paperwork
involved in mutual fund investing.

Further, this regulatory directive is viewed negatively by potential

customers as investments in insurance products can be undertaken
without the requirement for a PAN card. Hence, there is urgent need for
the
59
Government to facilitate harmonisation of policies and processes across
different verticals in the financial services sector and to simplify
documentation that could thereby ease the process of mutual fund
investments for retail customers.

 Banks and IFAs remain the preferred channel given that

investors trust them for their advice and after sales service.
However, the survey respondents were not satisfied with
the quality of advice.

Banks and IFAs are the preferred channel for investing in mutual funds.
Customers expressed confidence in banks given the long standing
relationship and the trust built with the banks over the years. Similarly,
the customers have become accustomed to dealing with IFAs to seek
independent advice on a wide range of investment and financial planning
issues. This comfort is expected to play a key role in according priority to
the growth of the IFA channel. IFAs have demonstrated flexibility in
providing customised offerings to the customers at the household level.

It is important to note that an overwhelming majority of the customers

have not been satisfied with the quality of advice being provided to them
by the advisors.

Some customers are of the view that the IFAs are less qualified and do not
adopt a holistic approach to financial planning. In some cases, customers
have reported instances of mis-selling that has affected the performance
of their portfolios significantly. Hence, it is imperative for distributors to re-
look at their strategy for financial planning and dispensing advice to
customers.

After sales service and ongoing follow up have been identified by

customers as a key differentiator in assessing the capabilities of distributors.

60
Drivers for Investment in Mutual Funds:

Some of these factors are discussed below :

 Investment in Mutual Funds is attractive to customers owing

to tax benefits.

The tax benefits associated with investment in mutual funds is the key
drivers for customers. Customers consider mutual funds as a medium of
ensuring financial independence and security. Since most mutual fund
schemes carry easy liquidity options, customers believe that mutual funds
are a avenue of savings thereby eliminating the need for borrowing
money in case of financial exigencies. Liquidity for the future is deemed to
be of utmost importance in making any investment decision.

 Consistency in fund performance and brand equity influence

customers to make relevant selection of mutual fund
schemes.

Customers believe that fund performance is necessary but is not a

sufficient condition to drive their selection of mutual fund products.
Selection of mutual funds by a customer is a function of both the fund
performance and brand equity of the fund house. Customers are of the
view that the key differentiator at the time of selection of a fund is the
positive outlook on performance even if the numbers do not reveal a
61
spectacular historic performance. The brand equity of a mutual fund
includes factors like perception of the brand capability drawn from its
performance in other sectors.

 Simplification of Processes to Increase the Quantum of

Investments.

Customers obtain the requisite confidence in their investment process

when distributors explain the concepts and the meaning of key terms
used in mutual fund application forms in simple terms. Further, this
reinforces confidence in the distributor’s capabilities and quality of advice
provided that facilitate the decision process for investment in a mutual
fund scheme. Customers also expressed the view that a single common
application form could be used for all mutual fund investments across
multiple mutual fund houses. Simplifying the process for redemption of
funds was also identified as a means for further increasing investments in
mutual funds.

62
FUTURE GROWTH ASPECTS OF THE MUTUAL FUND
SECTOR

 Industry AUM is likely to continue to grow in the range of 15

to 25 percent from the period 2010 to 2015

In the event of a quick economic revival and positive reinforcement of

growth drivers identified, KPMG in India is of the view that the Indian
mutual fund industry may grow at the rate of 22-25 percent in the period
from 2010 to 2015, resulting in AUM of INR 16,000 to 18,000 billion in
2015.

Key growth drivers for this scenario include:

• Increased retail investor participation with a preference for mutual funds
over other asset classes perceived to be more risky. This could result in
the fulfilment of growing financial aspirations, enabled by rising
disposable incomes and increased financial savings.

• Innovations in distribution driven by increase in the number of certified

IFAs and banks selling mutual funds focusing on Tier 2 and Tier 3 towns

63
Increase in institutional participation triggered by rising corporate
revenues with increased economic activity. In the event of a relatively
slower economic revival resulting in the identified growth drivers not
reaching their full potential, KPMG in India is of the view that the Indian
mutual fund industry may grow in the range of 15-18 percent in the period
from 2010 to 2015, resulting in AUM of INR 15,000 to 17,000 billion in
2015.

Key factors driving the growth inspite of the slow revival of the economy
include:
• Incremental increase in retail investor participation owing to limited
focus beyond Tier 2 towns and
limited efforts to draw risk averse customers of traditional products under
the fold of mutual funds.

• Tightening of liquidity leading to better yields on instruments liquid

funds invest in, thereby driving
investments from the institutional investors. Industry profitability is
expected to gradually reduce as
revenues of AMCs shrink due to focus on low margin products to attract
risk averse investors, and also as operating costs escalate due to the
focus on penetrating retail population beyond Tier 2 cities.

• Decline in investment management fees is expected as risk averse

customers prefer investments in debt products.

• Increase in distribution costs as players attempt to set up their own

branch presence in smaller towns.

64
• Existing players are likely to review business strategy and explore exit/
mergers in case of no significant competitive advantage, thereby resulting
in industry consolidation.

• Competition is expected to intensify further with the entry of global

players who are facing stagnant growth in global markets. This is
expected to result in a fall in market shares of the Top 10 players and
result in a further squeeze on margins.

• Co-existence of large players with diversified portfolios and some niche

plays expected.

 Product innovation is expected to be limited.

• Flexibility in product pricing by AMCs expected to be permitted based on

the type of services offered.

• Emerging product categories such as ETFs, Multi manager funds, REMFs,

outcome-oriented funds such as principal-protected, tax managed and
inflation-indexed funds, expected to have marginal share of AUM inspite of
rapid growth.

• Possibility of introducing mandatory rating for mutual fund products

through Rating agencies likely to increase investor confidence.

• Efforts expected to be undertaken for developing a well structured and

well managed regulated, debt market which should increase in depth.

 Market deepening and widening is expected with the

objective of
increased retail penetration and participation in mutual funds
Retail Segment.

• Increased focus on growing investor awareness and increasing financial

literacy is expected, resulting in an increase in the contribution of the
retail segment to the industry AUM in the range of
46-48 percent by 2015, from 36 percent as of 2008 as mentioned earlier.

• Domestic players expected to tap the overseas markets to grow their

AUM through alliances with global players.

• HNIs and Mass Affluent segments may dominate the retail segment.

• Average holding period for mutual funds and average ticket size of
investments in mutual funds likely to remain unchanged.

 Institutional Segment.

65
• Institutional segment likely to witness the emergence of a new category
of SMEs seeking advice on managing their funds.

 Market focus.

• Greater participation expected from Tier 2 cities and Tier 3 towns,

including rural centres.

• Share of top 10 cities in total AUM expected to decline as retail investors

from smaller cities, towns and rural areas join the mutual fund fold.

 Banks.

• The public sector network of nationalised banks and post offices likely to
increase their focus on the distribution of mutual funds.

• Entry of public sector banks as mutual fund manufacturers expected to

increase their focus on mutual fund distribution.

• Private banks providing financial advice to HNIs expected to marginally

increase their market share.

 IFAs
• IFAs expected to emerge as a dominant channel in a scenario of robust
stock market growth, focusing on increasing penetration, and will
therefore have to focus on initiatives to develop and support this channel
(for example, recruitment and training support).

 Other channels.

• India likely to witness the entry of global fund super-markets enabled by

regulatory changes.

• Cooperative sector, though beset with internal administrative issues,

likely to emerge as another channel which should be tapped by Mutual
Funds.

• Tapping the large network of NGOs, recognised by local authorities to

interact and reach out to the lower middle class and poorer segments of
population to increase mutual fund penetration.

• Distributors likely to explore the possibility of innovations such as a

common online platform and the usage of debit and credit cards for
transactions.

 Massive expansion is expected in the mutual fund

distribution network.

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• The public sector network of nationalised banks and post offices are
likely to increase their focus on the distribution of mutual funds.

• Entry of public sector banks as mutual fund manufacturers are expected

to increase their focus on mutual fund distribution.

• IFAs are expected to emerge as a dominant channel focused on

increasing penetration, and will therefore have to focus on initiatives to
develop and support this channel (for example, recruitment and training
support)

• IFA channels are expected to witness growth at a faster pace than

banks.

• Private banks providing financial advice to HNIs expected to marginally

increase their market share.
Distributors likely to explore the possibility of innovations such as a
common online platform and the usage of debit and credit cards for
transactions.

• AMCs are expected to invest in channel innovation such as Mobile and

Internet services. Mobile telephony enabling mobile transactions for the
purchase and sale of mutual funds and SMS-based services is expected to
revolutionise the industry.

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SUMMARY

There is a perceived need to review risk and performance analysis

capabilities and
governance structures, to meet fiduciary responsibilities and the
increasing demand for transparency.
AMCs therefore need to re-orient their business towards fulfilling customer
needs. As
customers seek trusted advisors, the manufacturer-distributor-customer
relationship is expected to be centered not on the sale of products, but for
collectively promoting the financial success of customers across all facets
of their professional and personal lives. This requires creating a
collaborative network of experts in funds management and financial
advice, innovative product offerings, efficient service delivery and
supporting technology. The mutual fund industry today needs to develop
products to fulfill customer needs and help customers understand how its
products cater to their needs.
Given that the industry needs to collectively work towards riding over the
dynamic and relatively less favourable economic environment at present,
the next phase for the industry is likely to be characterised by a stronger
focus on customer centricity. Other areas of focus are likely to be cost
management and enabling strong governance and regulatory framework –
all aimed at helping the industry achieve sustained, profitable growth,
going forward.

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