-
Indian Mutual Fund Industry The Future in a Dynamic EnvironmentOutlook for 2015
JUNE 2009
-
Table of Contents
1. Executive Summary 01
2. The Indian Mutual Fund Industry - Current State 03
3. Challenges and Issues 10
4. Voice of the Customer 15
5. Future Outlook in a Dynamic Environment 20
6. Action Plan for Achieving Transformational Growth 26
7. Summary 32
-
2009 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swisscooperative. All rights reserved.
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
opportune 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.
This report summarises the current state of the Indian mutual fund
industry highlighting the key challenges and issues. We have also
presented the Voice of Customers to understand their needs and
priorities as the industry defines the future roadmap for 2015. The report
outlines an action plan for key stakeholders so as to surpass expectations
of industry growth and profitability.
KPMG acknowledges the inputs received from AMCs, distributors,
customers and service providers for this report.
KPMG is privileged to be associated with the CII Mutual Fund Summit
2009 as Knowledge Partner on the theme Indian Mutual Fund Industry
The Future in a Dynamic Environment.
Abizer DiwanjiHead E Financial ServicesKPMG in India
Preface
-
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 collaborative effort across all stakeholders, to achieve sustained
profitable growth.
We hope you will find this report interesting and useful.
2009 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swisscooperative. All rights reserved.
U K SinhaChairman E CII National Committee on Mutual FundsChairman Managing Director, UTI Asset Management Company Limited
Foreword
-
Current StateIndia has been amongst the fastest growing markets for mutual funds since 2004, witnessing a CAGR of 29percent in the five-year period from 2004 to 2008 as against the global average of 4 percent. The increase inrevenue 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 thehousehold financial savings and the climbing growth rates in the last few years that are amongst the highest inthe world, all point to the future potential of the Indian mutual fund industry.
Challenges and IssuesLow customer awareness levels and financial literacy pose the biggest challenge to channelising householdsavings into mutual funds. Further, fund houses have shown limited focus on increasing retail penetration andbuilding retail AUM. Most AMCs and distributors have a limited focus beyond the top 20 cities that ismanifested in limited distribution channels and investor servicing. The Indian mutual fund industry has largelybeen product-led and not sufficiently customer focused with limited focus being accorded by players toinnovation and new product development. Further there is limited flexibility in fees and pricing structurescurrently.
Distributors and the mutual fund houses have exhibited limited interest in continuously engaging withcustomers post closure of sale as the commissions and incentives have been largely in the form of upfrontfees from product sales. Limited focus of the public sector network including public sector banks, India Postetc on distribution of mutual funds has also impeded the growth of the industry. Further multiple regulatoryframeworks govern different verticals within the financial services sector, such as differential policies pertainingto the PAN card requirement, mode of payment (cash vs cheque), funds management by insurance companiesand commission structures, among others.
oice of the CustomerCII-KPMG conducted a Voice of the Customer survey to help understand the buying behaviour of existing andpotential investors in mutual funds, and to obtain feedback on their wish-list from various stakeholders includingfund houses, distributors, service providers and the regulator.
Factors that are impediments to mutual fund investing are availability of a large number of mutual fundsschemes that makes investment decision complex and difficult, complicated KYC norms that restrict potential
2009 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swisscooperative. All rights reserved.
1. Executive Summary
Page 1
-
investors, and quality of advice provided. After sales service and ongoing follow up have been identified bycustomers as the key differentiators in assessing the capabilities of distributors.
Drivers for purchase of mutual funds include tax benefits of mutual fund investments, consistency in fundperformance and brand equity. Simplification of processes such as the application and redemption processcould potentially increase the quantum of investments in mutual funds.
Future Outlook in a Dynamic EnvironmentKPMG in India is of the view that the industry AUM is likely to continue to grow in the range of 15 to 25percent from the period 2010 to 2015 based on the pace of economic growth. In the event of a quick economicrevival and positive reinforcement of growth drivers identified, KPMG in India is of the view that the Indianmutual fund industry may grow at the rate of 22 to 25 percent in the period from 2010 to 2015, resulting inAUM of INR 16,000 to 18,000 billion in 2015. In the event of a relatively slower economic revival resulting in theidentified growth drivers not reaching their full potential, KPMG in India is of the view that the Indian mutualfund industry may grow in the range of 15 to 18 percent in the period from 2010 to 2015, resulting in AUM ofINR 15,000 to 17,000 billion in 2015.
Industry profitability may reduce further as revenues shrink and operating costs escalate. Product innovation isexpected to be limited. Market deepening and widening is expected with the objective of increased retailpenetration and participation in mutual funds. The regulatory and compliance framework for mutual funds islikely to get aligned with the other frameworks across the financial services sector.
Action Plan for AchievingTransformational GrowthThere is a need for a collaborative effort across all key stakeholders to harness the future growth potential andreach out to the customer.
Given that customer awareness is the pre-requisite for the achievement of the industry growth potential, thereis a need for planning, financing and executing initiatives aimed at increasing financial literacy and enhancinginvestor education across the country through a sustained collaborative effort across all stakeholders, that isexpected to result in a massive increase in mutual fund penetration. AMCs should focus on product innovationand introduction of flexibility in pricing.
Public sector thrust into mutual funds distribution and focus on strengthening presence beyond Tier 2 cities willentail training of the public sector employee base through the Train the Trainer approach, so that they may beinducted as trainers to support customer awareness campaigns to be facilitated by CII, NISM and AMFI.
Opening up of the public sector branch network in Tier 3 and Tier 4 towns will include India Post, NationalisedBanks, Regional Rural Banks and Cooperative Banks. This will also require a boost to be provided to InvestorService Centres (ISCs) through R&T Agents should be given a thrust.
Focus on increasing customer engagement pre and post completion of the investment will be beneficial. CIIand AMFI should help to steer the industry vision. The recognition of the Association of Distributors by SEBIwould also be beneficial for the long term wellbeing of the industry.
It is proposed that harmonisation of policies across multiple regulatory frameworks in the financial servicessector must be taken up on high priority through constitution of a Steering Committee under the aegis of theMinistry of Finance, comprising the Financial Services Regulators for mutual funds and capital markets,pension, insurance, banking and other verticals along with representation from the CBDT.
Given that the industry needs to collectively work towards riding over the dynamic and relatively less favourableeconomic environment at present, the next phase for the industry is likely to be characterised by a strongerfocus on customer centricity, cost management and robust governance and regulatory framework - all aimed atenabling the industry to achieve sustained, profitable growth, going forward.
2009 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swisscooperative. All rights reserved.
Page 2
-
The Indian mutual fund industry has evolved from a
single player monopoly in 1964 to a fast growing,
competitive market on the back of a strong regulatory
framework.
AUM GrowthThe 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 20091. Over the 10-year period from 1999 to
2009 encompassing varied economic cycles, the
industry grew at 22 percent CAGR2. 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).
2009 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swisscooperative. All rights reserved.
2. The Indian Mutual Fund Industry The Current State
Note: As of 31 March for each yearSource: AMFI data
Growth in AUM in the Indian Mutual Fund Industry(Average AUM in INR Billion)
1 AMFI data2 AMFI data
Page 3
-
AUM Base and Growth Relative To the GlobalIndustryIndia 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 20084.
AUM to GDP RatioThe ratio of AUM to Indias 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 GDP5.
Share of Mutual Funds in Household FinancialSavingsInvestment 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 20086.
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 bonds7.
2009 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swisscooperative. All rights reserved.
Source: ICI Factbook 2009, AMFI dataNote: Based on AUM as of 31 December
AUM Growth Rate in Select Countries(CAGR for 2004-2008)
Source: AMFI data, CSONote: Based on AUM as of 31 December of each year
AUM to GDP Ratio for India
Source: RBI dataNote: As of 31 March for every year
Share of Mutual Funds in Households Gross FinancialSavings in India
3 ICI data4 I CI and AMFI data5 AMFI and CSO data
6 RBI data7 Datamonitor Report, December 2008
Page 4
Source: RBI data
Composition of Households Gross Financial Savings inIndia in FY 2008
-
ProfitabilityThe 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 20088.
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 segment9.
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 margins10.
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.
The Indian Mutual Fund Industry KeyCharacteristics
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 200811, significantly lower
than the retail participation in the US at 82 percent of
AUM as at December 200812.
2009 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swisscooperative. All rights reserved.
Source: KPMG Analysis based on published financials of AMCs
Industry Profitability as a percentage of AUM
Source: SEBI data
Indian Mutual Fund Industry Industry Investor Mix
8 KPMG Analysis of published financial statements of AMCs with AUM datafrom AMFI9 KPMG Analysis
10 KPMG Analysis11 SEBI12 ICI
Page 5
-
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)13. 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 200915, 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 respectively16.
2009 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swisscooperative. All rights reserved.
Source: AMFI data
Growth Rate (Five year CAGR) across Fund Categories
13 SEBI14 ICI, CIA15 SEBI16 ICI Factbook 2009
Page 6
-
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
200817.
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 in 2005 to
approximately 80 percent currently18.
Distribution Channels
As of March 2009, the mutual fund industry had 92,499
registered distributors as compared to approximately
2.5 million insurance agents19. 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 broker-
dealers) 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.
2009 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swisscooperative. All rights reserved.
Source: AMFI dataNote: Data as of 31 March for every year except for December 2002
Number of Distributors by Category Registered Annually byAMFI
Source: CII Mutual Fund Summit 2008 quoted from Cerulli Associates
Distribution Channel Mix
Source: AMFI data
Growth in the Number of AMCs in India
17 AMFI data, I CI Factbook 200918 Industry discussions19 AMFI and IRDA data
20 CII Mutual Fund Summit 2008 quoted from Cerulli Associates21 AMFI data
Page 7
-
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 200122.
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.23
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
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
2009 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swisscooperative. All rights reserved.
Source: AMFI data
Market Share of Players as of March 2009
Source: KPMG analysis based on AMFI data
Market Share Trend of the Top 5 andTop 10 players in India
Source: KPMG analysis based on public financials of AMCs
Administrative & Other Expenses as a percentage of AUM
22 AMFI data23 AMFI data
Page 8
-
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 a sa 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
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.
2009 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swisscooperative. All rights reserved.
Page 9
-
2009 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swisscooperative. All rights reserved.
Context SettingWhile the Indian mutual fund industry has grown at an impressive rate in
the last few years, the recent developments of the past few months
triggered by the global financial crisis have impacted the fortunes of the
industry resulting in AUM decline, adversely impacting the revenue and
profitability.
KPMG, through discussions with the industry participants, has attempted
to identify and highlight some of the key issues and challenges being
faced by the industry participants that are preventing the industry from
harnessing its true growth potential.
. Challenges and Issues
Mutual funds are still sold,not bought.- A large national distributor
Page 10
-
Low Levels of Customer AwarenessLow 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 PenetrationThe 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.
Large ticket size, tax arbitrage available to corporates on investing in
money market mutual funds, easy accessibility to institutional cutomers
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 CitiesThe 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
2009 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swisscooperative. All rights reserved.
Perhaps most frustrating hasbeen the reality that mutualfunds have made relatively littleimpact in attracting newhousehold financial savings.- A leading mutual fund in India
Investor education andawareness has made limitedinroads in increasing customerinvestments in mutual fundsEfforts across AMCs anddistributors have largelyremained disjointed.- A mid-sized mutual fund in India
Most AMCs have focused ongrowing AUMs primarily throughinstitutional clients which ismuch easier than penetrating theretail base.- A large national distributor
Investor education by AMCs isprimarily on focused on metros.- A large IFA
AMCs must focus on investoreducation so that they canchallenge distributors.- A large AMC
We need to focus beyond theTop 20 cities to increase retailpenetration.- A leading national distributor
Page 11
-
building their branch presence and strengthening distribution reach
through non-branch channels.
Limited Innovation in Product OfferingsThe 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
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 StructuresThe 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 EngagementMutual fund distributors have been facing questions on their
competence, degree of engagement with customer and the value
provided to the customer.
2009 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swisscooperative. All rights reserved.
Fees should only be on trailbasis so that advisors arecompensated based on ongoingadvice and service provided.- A large IFA
There is a tendency to pushselect products during specificeconomic cycles. Debt productsare seldom sold during a stockmarket boom.- A large regional distributor
AMCs must focus on investoreducation so that they canchallenge distributors.- A large AMC
Source: ICI
Fee structures in the US Mutual FundMarket - A case study
In the US mutual fund market, financialadvisors are professionals who helpinvestors define their investment goals,select suitable funds based on riskappetite, and provide ongoing advice andservice. These financial advisors arecompensated for their services, in part,through a specific fee, known as a 12b-1fee, which is included in a fundsexpense ratio. In addition, no-load fundsare sold directly to investors or are soldto investors through financial advisorswho charge investors separately for theinvestment advice and service provided,thereby providing flexibility to theinvestor, based on the level of adviceand service sought.
Advisors are compensated for providingthese services through a combination offront-end or back-end loads and
12b-1 fees. Investors who opt not to usea financial advisor or those who pay thefinancial advisor directly for servicesrendered, purchase no-load funds, whichhave neither front - nor back-end loadsand have either low or no 12b-1 fees.
Page 12
-
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 MutualFundsPublic 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 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 SectorVerticalsThe 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 customers
wallet. The mutual fund industry lacks a level playing field in comparison
with other verticals within the financial services sector.
2009 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swisscooperative. All rights reserved.
AMFI must focus on definingthe industry vision and long-termstrategic direction.- A mid-sized AMC
Valuations in the Indian mutualfund industry should be based onEBITDA multiples and not on thebasis of AUM alone.- A large AMC
PAN card being mademandatory is a deterrent toindustry growth.- A large national distributor
AMCs do not contribute totraining costs for distributors.- A mid-sized national distributor
Manufacturers need toincrease the level of engagementwith customers and play a muchlarger role beyond sales.- A small AMC
Page 13
-
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.
2009 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swisscooperative. All rights reserved.
24 India Post25 India Post
Page 14
-
2009 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swisscooperative. All rights reserved.
The endeavour of mutual fund investments is to leverage professional
and prudent fund management techniques and thereby maximise returns
for the investors while minimising risk. While mutual funds are often the
preferred avenue for investment over direct investments into the capital
markets by risk averse investors, customers have had widely varying
experiences with purchase of mutual funds. Thus, it is critical for the
industry to understand the perspectives of Indian investors so as to use
their inputs to further enhance the customer experience with mutual
funds.
MethodologyTo understand the voice of the Indian investors, CII-KPMG conducted an
investor survey across the Top 10 cities in India in May 2009. As part of
this survey, CII-KPMG facilitated interviews with a large representative
sample of population from diverse backgrounds (education, age,
occupation and gender) to understand their preferences and perspective
on investment in mutual funds.
4. Voice of the Customer
Page 15
-
The survey revealed several interesting observationsand resulted in a long customers wish-list pointing tothe expectations from the AMCs, distributors, serviceproviders and regulators. While a significant portion ofcustomers are aware of and also invest in mutualfunds, there was a diverse set of views obtained, bothnegative and positive. This warrants a need toimmediately tackle some of the negative perceptionsand capitalise on the positive ones.
Impediments to Mutual Fund InvestingCustomers believe that the mutual fund industry fallsshort of expectations in meeting their needs at time ofeconomic uncertainty and market volatility.
The survey has highlighted several reasons thatrespondents have cited for not buying mutual funds.Some of the prominent challenges highlighted by therespondents have been listed below.
Availability of a large number of mutual funds
schemes makes investment decision complex and
difficult
The Indian investor witnessed significant rise in NewFund Offers (NFOs) over the last two to three yearsfrom AMCs seeking to augment AUM and diversifyproduct basket. India has over 979 mutual fundschemes resulting in a total AUM of INR 4,173 billionas on 31 March 200926. The ratio of the assets perscheme is one of the highest in the world. Given thatthere is a plethora of options with limited differentiationacross mutual fund schemes, the respondents perceivea difficulty in investing in mutual funds in the absenceof quality advice.
Hence, AMCs need to design simple products that thetarget segment can easily understand and also realigntheir product portfolio to merge/ close schemes withoverlapping objectives.
Complicated KYC norms restrict potential investors
In addition to the PAN card requirement, for aninvestment amount of INR 50,000 and above in mutualfunds, the customers are required to procure KYCacknowledgement. This requires submission of severaldocuments and extensive paper-work. The respondentsto the survey expressed difficulty in understanding the
2009 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swisscooperative. All rights reserved.
Source: CII-KPMG Survey in May 2009
Reasons provided by Survey Respondents for NotInvesting in Mutual Funds
26 AMFI data
I want to invest in mutual funds, but I donot have a PAN card, can I invest withoutit?- Salaried personTier 1 cityNot an investor in mutual funds
Page 16
-
complex terminology and the paperwork involved inmutual fund investing.
Further, this regulatory directive is viewed negatively bypotential customers as investments in insuranceproducts can be undertaken without the requirementfor a PAN card. Hence, there is urgent need for theGovernment to facilitate harmonisation of policies andprocesses across different verticals in the financialservices sector and to simplify documentation thatcould thereby ease the process of mutual fundinvestments 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 investingin mutual funds. Customers expressed confidence inbanks given the long standing relationship and the trustbuilt with the banks over the years. Similarly, thecustomers have become accustomed to dealing withIFAs to seek independent advice on a wide range ofinvestment and financial planning issues. This comfortis expected to play a key role in according priority tothe growth of the IFA channel. IFAs have demonstratedflexibility in providing customised offerings to thecustomers at the household level.
It is important to note that an overwhelming majority ofthe customers have not been satisfied with the qualityof advice being provided to them by the advisors.Some customers are of the view that the IFAs are lessqualified and do not adopt a holistic approach tofinancial planning. In some cases, customers havereported instances of mis-selling that has affected theperformance of their portfolios significantly. Hence, it isimperative for distributors to re-look at their strategy forfinancial planning and dispensing advice to customers.After sales service and ongoing follow up have beenidentified by customers as a key differentiator inassessing the capabilities of distributors.
Drivers for Investment in Mutual FundsThe factors that can incentivise potential customers tocommence and gradually increase their investment inmutual funds are discussed below.
2009 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swisscooperative. All rights reserved.
Source: CII-KPMG Survey in May 2009
Channels Preferred by Survey Respondents for Investing inMutual Funds
Preferred Channels for Investment
Last time I wanted to invest somemoney in MF, the fund house asked mefor so many documents that I got totallyconfused and wondered why I shouldshare so much with them?- BusinessmanTier 1 cityNot an investor in mutual funds
I had some money in PPF and wanted toinvest in something which gives goodreturns with balanced risk, so I chose MF,it is working for me- Salaried PersonTier 1 CityInvestor in Mutual Funds
Page 17
-
Investment in Mutual Funds is attractive to
customers owing to tax benefits
The tax benefits associated with investment in mutualfunds is the key drivers for customers. Customersconsider mutual funds as a medium of ensuringfinancial independence and security. Since most mutualfund schemes carry easy liquidity options, customersbelieve that mutual funds are a avenue of savingsthereby eliminating the need for borrowing money incase of financial exigencies. Liquidity for the future isdeemed to be of utmost importance in making anyinvestment decision.
Consistency in fund performance and brand equity
influence customers to make relevant selection of
mutual fund schemes
Customers believe that fund performance is necessarybut is not a sufficient condition to drive their selectionof mutual fund products. Selection of mutual funds by acustomer is a function of both the fund performanceand brand equity of the fund house. Customers are ofthe view that the key differentiator at the time ofselection of a fund is the positive outlook onperformance even if the numbers do not reveal aspectacular historic performance. The brand equity of amutual fund includes factors like perception of thebrand capability drawn from its performance in othersectors.
Simplification of Processes to Increase the
Quantum of Investments
Customers obtain the requisite confidence in theirinvestment process when distributors explain theconcepts and the meaning of key terms used in mutualfund application forms in simple terms. Further, thisreinforces confidence in the distributors capabilitiesand quality of advice provided that facilitate thedecision process for investment in a mutual fundscheme. Customers also expressed the view that asingle common application form could be used for allmutual fund investments across multiple mutual fundhouses. Simplifying the process for redemption offunds was also identified as a means for furtherincreasing investments in mutual funds.
2009 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swisscooperative. All rights reserved.
Source: CII-KPMG Survey in May 2009
Reasons provided by Survey Respondents on Selection ofMutual Funds for Investment Purposes
Reasons for selection of Mutual Funds
I find it really difficult to understanddifferent forms of different fund houses,can I have a single form which can becentrally used for all fund houses.- Salaried PersonTier 1 CityInvestor in Mutual Funds
My investment in mutual fund providesme tax benefit as well as a regularsource of attractive returns- Salaried PersonTier 1 CityInvestor in Mutual Funds
Page 18
-
2009 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swisscooperative. All rights reserved.
Mutual Fund Products
I want protective products with guaranteed income and good absolute returns.
As a retired person, I want more debt funds options with a safe mechanism of regular saving along with the variedpension options.
I want assured returns schemes that are a mix of risk-free and high-risk portfolio where I can invest small sums ofmoney.
I want a clear and easy explanation of various schemes.
Funds Management
I want to listen to fund managers views on outlook for various sectors, industry performance, fund performance, etc.but have never been invited by any fund house for this.
AMCs should not depend on the Fund Manager but its process for the success of their products.
Investor Servicing
I want easy access to the Fund House for direct subscription since I do not want to pay entry load.
I want better service from the fund house in terms of NAV updates through weekly SMS alerts so that I know thevalue of my investments.
I want all the services at my door step - right from getting help in filling in the application form to depositing a chequefor my investments.
We want to interact with more knowledgeable people at the call centers to attend to our complaints from a technicalperspective, and not just to handle routine operational level problems.
AMCs should send a report to me on my investment status and performance on a timely and regular basis
I believe agents commission should be linked to investor satisfaction and attractiveness of the fund suggested, whichshould be payable in phases, depending upon the success of the advice provided
Please reduce and simplify the documentation required and the processes involved and help me to understand thepurpose for which this will be used.
Investment Advice
Since I make my own investment decisions without relying on anyones advice, I want a single platform for transactingand performance monitoring, to track my mutual fund investments across various AMCs.
I want objective advice thats best suited to my needs and which is not driven by commissions received by my advisor.
As long as the fund house pays the commission to the advisor, there is always a conflict. How can anyone provideunbiased advice if they are paid by the fund house for advising me? This ensures that the advisor is acting in the favorof the fund house and is not driven by my interests and needs.
Regulator Intervention
Can SEBI provide me with Certification of Fund managers, to assure me of high quality management of my funds?
I want SEBI to provide me with a list of registered distributors on their website since I do not know if my advisor iscertified and qualified to advise me.
Can SEBI put in place a mechanism through which we can rely upon the advice provided by the Mutual Fund agent?
My advisor has given me incorrect advice owing to which I have lost money. How do I ensure that he gets penalisedfor the loss caused with his incorrect advice?
Tax Benefits
Why am I required to pay Securities Transaction Tax?
Why should I be required to pay long-term capital gain tax on my debt funds when I am not required to pay this onequity funds?
The Government must provide a favourable tax regime for Fund of Funds that implies extending tax benefits toinvestors and also to the funds.
The Government must provide tax sops to encourage investment in equity (including overseas equity) as a long termsaving and to encourage investments in the infrastructure sector (debt as well as equity); tax sops should also beextended to schemes investing in these areas as well.
Customers Wish-list from Mutual Funds, Distributors, Regulator and Government - In the Words of Customers27
27 CII-KPMG Survey on Mutual Funds, May 2009
Page 19
-
2009 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swisscooperative. All rights reserved.
This section contains a summary of the expected drivers for future
growth, expected industry growth projections and overall future outlook
across various dimensions customers, markets, products, distribution
channels and regulatory frameworks.
Growth DriversAlthough several macroeconomic and demographic factors affect the
growth of the industry, the key underlying driver for all the categories of
funds is the key economic indicator the GDP growth rate.
The growth drivers for customer segments have been listed in the table
below along with the expected impact of each on the AUM.
5. Future Outlook in a Dynamic Environment
Page 20
-
In the event of a quick economic revival and positivereinforcement of growth drivers identified, KPMG inIndia is of the view that the Indian mutual fund industrymay grow at the rate of 22-25 percent in the periodfrom 2010 to 2015, resulting in AUM of INR 16,000 to18,000 billion in 2015.
Key growth drivers for this scenario include:
Increased retail investor participation with apreference for mutual funds over other assetclasses perceived to be more risky. This could resultin the fulfilment of growing financial aspirations,enabled by rising disposable incomes and increasedfinancial savings
Innovations in distribution driven by increase in thenumber of certified IFAs and banks selling mutualfunds focusing on Tier 2 and Tier 3 towns
2009 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swisscooperative. All rights reserved.
Customer Segment Key Growth Drivers Expected Impact
Retail Segment Rising disposable incomes andsavings
Favourable demographics suchas increasing proportion ofworking population (20-59years) and increasingurbanisation resulting inincreased levels of financialsavviness
Innovations in distribution
Increased awareness levels
Quality financial planning
Increase in disposable incomes and household financialsavings may result in households seeking alternateavenues for investments to yield higher returns withreasonable risk
Favourable demographics like urbanisation and a relativelyyoung population having an increased risk appetite, arelikely to save more and seek to invest a higher proportionof those savings in market-linked instruments such asmutual funds
Distribution innovations are expected to increased mutualfund penetration specifically in Tier 2 and Tier 3 townsthereby expanding the mutual fund customer base
Improved awareness levels and enhanced financial literacyis expected to aid the understanding of mutual fundproducts
Appropriate asset allocation and potential for wealthcreation
InstitutionalSegment
Rising corporate earnings
Maturing capital markets
Interest rate cycle
Call money market rates
Corporate debt andcommercial papers
Increased demand for sophisticated treasury managementproducts
A better economic situation in the country is likely toensure a steady fall in the interest rates
Our Point of View on the Future Outlook28
Industry AUM is likely to continue to grow in the range of 15 to 25 percent from the period 2010 to 2015
Source: KPMG analysis
Projected AUM Growth from 2010 to 2015Scenario 1: Favourable growth scenario with quickeconomic revival
This section on the Point of view on the Future Outlook is based onour discussions with key stakeholders and expected trends in the Indianmutual fund industry, based on the global experiences.
28 Discussions with key industry stakeholders and customers
Page 21
-
Increase in institutional participation triggered byrising corporate revenues with increased economicactivity.
In the event of a relatively slower economic revivalresulting in the identified growth drivers not reachingtheir full potential, KPMG in India is of the view thatthe Indian mutual fund industry may grow in the rangeof 15-18 percent in the period from 2010 to 2015,resulting in AUM of INR 15,000 to 17,000 billion in2015.
Key factors driving the growth inspite of the slowrevival of the economy include:
Incremental increase in retail investor participationowing to limited focus beyond Tier 2 towns andlimited efforts to draw risk averse customers oftraditional products under the fold of mutual funds
Tightening of liquidity leading to better yields oninstruments liquid funds invest in, thereby drivinginvestments from the institutional investors.
2009 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swisscooperative. All rights reserved.
Industry profitability is expected to gradually reduce asrevenues of AMCs shrink due to focus on low marginproducts to attract risk averse investors, and also asoperating costs escalate due to the focus onpenetrating retail population beyond Tier 2 cities.
Decline in investment management fees is expectedas risk averse customers prefer investments in debtproducts
Increase in distribution costs as players attempt toset up their own branch presence in smaller towns
Existing players are likely to review businessstrategy and explore exit/ mergers in case of nosignificant competitive advantage, thereby resultingin industry consolidation
Competition is expected to intensify further with theentry of global players who are facing stagnantgrowth in global markets. This is expected to resultin a fall in market shares of the Top 10 players andresult in a further squeeze on margins
Co-existence of large players with diversifiedportfolios and some niche plays expected.
Industry profitability may reduce further as
revenues shrink and operating costs escalate
Source: KPMG analysis
Scenario 2: Relatively lower growth scenario with sloweconomic revival
Page 22
-
2009 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swisscooperative. All rights reserved.
Retail Segment
Increased focus on growing investor awareness and increasingfinancial literacy is expected, resulting in an increase in thecontribution of the retail segment to the industry AUM in the range of46-48 percent by 2015, from 36 percent as of 2008 as mentionedearlier
Domestic players expected to tap the overseas markets to grow theirAUM 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 ofinvestments in mutual funds likely to remain unchanged.
Institutional Segment
Institutional segment likely to witness the emergence of a newcategory 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 retailinvestors from smaller cities, towns and rural areas join the mutualfund fold.
Market deepening and widening is expected with the objective of
increased retail penetration and participation in mutual funds
High margin products such as equity and select debt products likely to
continue to contribute a significant share of industry AUM
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.
Product innovation is expected to be limited
Page 23
-
2009 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swisscooperative. All rights reserved.
Banks
The public sector network of nationalised banks and post offices likelyto increase their focus on the distribution of mutual funds
Entry of public sector banks as mutual fund manufacturers expectedto increase their focus on mutual fund distribution
Private banks providing financial advice to HNIs expected to marginallyincrease their market share.
IFAs
IFAs expected to emerge as a dominant channel in a scenario ofrobust stock market growth, focusing on increasing penetration, andwill therefore have to focus on initiatives to develop and support thischannel (for example, recruitment and training support).
Other channels
India likely to witness the entry of global fund super-markets enabledby regulatory changes
Cooperative sector, though beset with internal administrative issues,likely to emerge as another channel which should be tapped byMutual Funds
Tapping the large network of NGOs, recognised by local authorities tointeract and reach out to the lower middle class and poorer segmentsof population to increase mutual fund penetration
Distributors likely to explore the possibility of innovations such as acommon online platform and the usage of debit and credit cards fortransactions.
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
Massive expansion is expected in the mutual fund distribution
network
Page 24
-
2009 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swisscooperative. All rights reserved.
Regulators across Financial services spectrum viz. mutual funds and
capital markets, pension, insurance and banking expected to work
towards harmonisation of policies, with support from industry bodies
like the CII and the respective industry associations
Thrust of the regulatory and compliance framework expected to be on
enhancing resilience and sustainability, investor protection and good
governance going forward.
The regulatory and compliance framework for mutual funds is likely to
get aligned with the frameworks across the financial services spectrum
In summary, the Indian mutual fund industry is expected towitness rapid growth in AUM over the next few years. Theindustry, however, faces the challenge of achieving sustainedprofitable growth while increasing retail penetration andexpanding the reach of mutual funds into rural areas.
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.
Page 25
-
2009 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swisscooperative. All rights reserved.
Based on discussions with key industry stakeholders,
KPMG in India is of the view that opportunities exist for
surpassing the growth potential of the Indian mutual
fund industry and making the industry more profitable
through a collaborative effort across all the key
stakeholders to reach out to the customer, viz. AMCs,
distribution channel partners, service providers such as
R&T Agents, custodians and fund accountants, CII,
AMFI, the regulator SEBI and the media, among others.
This section seeks to identify and prioritise key
initiatives that are required to be undertaken for the
Indian mutual fund industry to grow and effectively
compete in a dynamic environment.
. Action Plan for Achieving Transformational Growth
CII
Key stakeholders of the mutual fund industry
Source: CII-KPMG analysis
Page 26
-
2009 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swisscooperative. All rights reserved.
Massive Increase in Mutual Fund Penetration Through Customer Awareness Campaigns
Given that customer awareness is the pre-requisite for the achievement of the industry growth potential,
there is a need for planning, financing and executing initiatives aimed at increasing financial literacy and
enhancing investor education across the entire country through a sustained collaborative effort across all
stakeholders.
Financing a Sustainable Nationwide Customer Awareness Program
Creation of the Mutual Fund Education Fund a common corpus of funds from AMCs and distributors
through mandatory levy on the investment management fee earned by AMCs and on the commissions
earned by distributors from mutual fund sales
This Fund should be suitably ring-fenced and managed/ administered by the industry association.
Conducting a Nationwide Customer Awareness Program
NISM along with the industry association to design the content for promoting customer awareness
programs on mutual funds
AMCs with support from CII, AMFI and NISM should rollout customer awareness campaigns and provide
infrastructure, content and speakers for running the campaigns on a pan-India basis over a sustained
period of five years
Social marketing firms and media companies to design effective and meaningful mass media campaigns
in multiple languages using television, hoardings, flyers, street plays and other mechanisms to reach the
masses.
Promoting Financial Planning Awareness in Educational Institutions
NISM to take the lead in developing and finalising a Financial Planning course within the next three
months. The course should encompass modules on mutual funds, and other financial products along with
concepts like risk management, asset allocation and portfolio diversification to meet multiple needs. This
course should be incorporated in the curriculum across all schools and colleges, as a mandatory course
starting from Class 8 upto the graduation level, followed by an examination. This will require a directive
from the Ministry of HRD, Government of India, and will need to be facilitated by the education boards
and the universities
NISM should be the nodal agency and should work in a collaborative manner with AMCs, CII and AMFI
by adopting the train the trainer concept to train teaching faculty in schools and colleges across India
The India Post and public sector banks could also be used to promote customer awareness by using their
infrastructure for conducting awareness programs and campaigns
Investor associations, self help groups and other affinity groups should be identified to facilitate investor
workshops in cities and towns across the country.
Page 27
-
2009 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swisscooperative. All rights reserved.
New Products and Pricing to Attract Risk Averse Customers
The objective of product innovation by AMCs should be driven by the need to introduce simple products to
attract and retain risk averse and first time investors to start investing in mutual funds.
Introduction of Customer-Friendly Products and Product Features
AMCs through AMFI should conduct a nationwide survey of customer needs across liquidity, risk,
frequency and quantum of contribution to determine product variants and features that meet customer
needs
Allow investible surplus of investors to be invested at any time in ongoing schemes with a flexible SIP
option
Introduce simple products that have features of capital protection with returns that are higher than
traditional products and limit market risk
Focus on design of products around women and children related needs, given the growing dominance of
women in influencing investment decisions in households across the country. Further commodity related,
crop related and agriculture oriented fund products may be conceptualised and developed by cater to
segment specific needs
Focus on product appeal for the low income group by keeping ease of investment and minimum
thresholds within affordable limits
Encourage the introduction of customised ETFs for retail and institutional customers
Regulatory framework to allow niche players to co-exist with players having a diversified product portfolio
without raising requirements for minimum networth. These requirements are common at the industry
level, irrespective of product portfolio mix
Enable mutual fund investments through mobile telephony.
Pricing Flexibility
Pricing innovations should focus on distributor compensation and administration
Enable flexibility in regulations to allow customers to pay for the advice and service rendered by the
distributors through varying arrangements based on the method of purchase, degree of service provided
and the timeframe for payment. Some options include exploring the possibility of introducing a multiple
share class structure with pricing options for front-end load, back-end load and fixed annual fee as a
percentage of all investments.
Page 28
-
2009 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swisscooperative. All rights reserved.
Public Sector Thrust into Mutual Funds Distribution and Focus on Strengthening Presence Beyond Tier 2 Cities
Training of the Public Sector Employee Base
Training of employees in the public sector network including India Post, Nationalised Banks, Regional
Rural Banks and Cooperative Banks, on sale of mutual funds and basic financial planning concepts
through the Train the Trainer approach, so that they may be inducted as trainers to support customer
awareness campaigns run by NISM and AMFI.
Opening Up of the Public Sector Branch Network inTier 3 andTier 4Towns
Commence sale of mutual funds through the branch network of India Post, Nationalised Banks, Regional
Rural Banks and Cooperative Banks by focusing on Tier 2 and Tier 3 towns initially
India Post to sell mutual fund products of all SEBI registered AMCs instead of limiting the customer to
five AMCs only as is currently prevalent
Boost the presence of Investor Service Centres (ISCs) through R&T Agents in Tier 2 and Tier 3 towns and
utilise their presence to promote customer awareness of mutual funds.
Focus on Increasing Customer Engagement Pre and Post Completion of the Investment
AMCs to focus on growing the IFA channel and encourage them to reach out to and engage with
customers on their mutual fund needs on an ongoing basis pre and post completion of their investment
AMCs to focus on enhancing the marketing and advisory capabilities of all distributors so that they win
the trust and confidence of customers
AMCs and distributors to focus on establishing base level financial planning capabilities to facilitate the
transition from distribution to advice.
Page 29
-
2009 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swisscooperative. All rights reserved.
Strengthening of Associations
Strengthening of AMFI
AMFI to play an active role in bringing all the stakeholders together and evolving a strong vision for the
mutual fund industry across all dimensions aspirational AUM growth and profitability, retail penetration,
products and pricing, distribution channels, operations and customer service, enabled by a supporting
regulatory framework
Augment the employee base of AMFI so as to support NISM in conducting nation-wide customer
awareness campaigns.
Development of a Common Online Platform
AMFI to coordinate the roll out of a common online platform for AMCs which will result in increasing
reach, reducing distribution costs and making transactions free from operational issues.
Facilitating Distributor Education and Mandatory Certification
CII and AMFI to support NISM in the promotion of distributor awareness programs
AMFI to include additional financial planning modules in the distributor certification and make certification
valid for a two-year period, thereby necessitating a bi-annual renewal
AMFI to facilitate annual updation of the course curriculum in line with the latest products being adopted
by the industry
AMFI to facilitate issue of identity card with distributor certification which should be mandated to be
provided to the customer at the time of closing the mutual fund sale.
Building an Industry Data Repository
AMFI to build a data warehouse which tracks the financial performance of all AMCs in India across key
parameters such as revenue and profitability, and performance of all mutual funds schemes in addition to
tracking AUM growth and composition
AMFI to publish data on the financial health of all AMCs in a consolidated manner through the AMFI
website
Provide a listing on the AMFI website of all certified distributors who have received AMFI certification and
update the list based on certification renewals.
Creation of an Association of Distributors
Creation of a SEBI recognised association of distributors of mutual fund products with a clearly defined
charter and role.
Page 30
-
2009 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swisscooperative. All rights reserved.
Harmonisation of Policies across Multiple Regulatory Frameworks in the Financial Services Sector
Constitution of a Steering Committee of Financial Services Regulators under the Ministry of Finance
It is proposed that the Government of India should constitute a Steering Committee under the aegis of
the Ministry of Finance comprising the Financial Services Regulators for mutual funds and capital
markets, pension, insurance, banking and other verticals along with representation from CBDT. The
Committees objective should be defined as achieving harmonisation in policies and procedures across
multiple regulatory frameworks in the Financial Services Sector.
Areas Requiring Harmonisation
Outsourcing of funds management by insurance companies to AMCs independent of the assets under
management, by removing the threshold of INR 80 billion which exists currently
Allow PSUs to invest larger surpluses in mutual funds and open up investment in private sector and
foreign mutual funds.
Acceptance and Rollout of the Unique Identification Card
Implementation of the Unique Identification Card as a valid document for KYC. The Government has
announced that a Unique Identification Card would be issues to all Citizens (President's speech at the
Joint Session of Parliament on 4th June 2009). This should be implemented and the card should be a
valid document for KYC.
This will entail undertaking public awareness campaign to make holding of the Unique Identification Card
mandatory for all Indian citizens and build the supporting institutional infrastructure to issue these cards at a
nominal rate through the public sector network.
The Government of India could facilitate issuance of the Unique Identification Card free of cost to all Indian
citizens below a specified income threshold which could be in line with the minimum taxation slab limit.
Page 31
-
2009 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swisscooperative. All rights reserved.
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.
7. Summary
Page 32
-
2009 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swisscooperative. All rights reserved.
ist of Abbreviations
AMC Asset Management Company
AMFI Association of Mutual Funds in India
AML Anti Money Laundering
AUM Assets Under Management
bps Basis Points
CAGR Compounded Annual Growth Rate
CBDT Central Board of Direct Taxes
CFT Combating Financing of Terrorism
CII Confederation of Indian Industry
CSO Central Statistical Organisation
ETF Exchange Traded Fund
FY Financial Year
GDP Gross Domestic Product
HNI High Networth Individual
HRD Human Resource Development
ICI Investment Company Institute
IFA Independent Financial Advisor
IIMS Invest India Market Solutions
INR Indian Rupee
ISC Investor Service Center
KYC Know Your Customer
MF Mutual Fund
NAV Net Asset Value
NFO New Fund Offer
NGO Non-Governmental Organisation
NISM National Institute of Securities Markets
NPS New Pension Scheme
PMLA Prevention of Money Laundering
PSU Public Sector Undertaking
PAN Permanent Account Number
PBT Profit Before Tax
R&T Registrar & Transfer Agent
RBI Reserve Bank of India
REMF Real Estate Mutual Fund
SEBI Securities & Exchange Board of India
SIP Systematic Investment Plan
SMS Short Messaging Service
UK United Kingdom
ULIP Unit Linked Insurance Plan
USA United States of America
UTI Unit Trust of India
-
KPMG International is a global network of professional services firms
with over 135,000 people working together to deliver value in more than
140 countries. KPMG in India draws on our firms' deep industry
experience to provide Audit, Tax & Advisory services. The independent
member firms of the KPMG network are affiliated with KPMG
International, a Swiss cooperative. Each KPMG firm is a legally distinct
and separate entity and describes itself as such.
The Indian member firms affiliated with KPMG International were
established in September 1993. As members of a cohesive business unit
they respond to a client service environment by leveraging the resources
of a global network of firms, providing detailed knowledge of local laws,
regulations, markets and competition. We provide services to over 5,000
international and national clients, in India. KPMG has offices in India in
Mumbai, Delhi, Bangalore, Chennai, Hyderabad, Kolkata and Pune. The
firms in India have access to more than 3000 Indian and expatriate
professionals, many of whom are internationally trained. We strive to
provide rapid, performance-based, industry-focused and technology-
enabled services, which reflect a shared knowledge of global and local
industries and our experience of the Indian business environment.
2009 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swisscooperative. All rights reserved.
KPMG in India
-
The Confederation of Indian Industry (CII) works to create and sustain an
environment conducive to the growth of industry in India, partnering
industry and government alike through advisory and consultative
processes.
CII is a non-government, not-for-profit, industry led and industry managed
organisation, playing a proactive role in Indias development process.
Founded over 114 years ago, it is Indias premier business association,
with a direct membership of over 7800 organisations from the private as
well as public sectors, including SMEs and MNCs, and an indirect
membership of over 90,000 companies from around 385 national and
regional sectoral associations.
CII catalyses change by working closely with government on policy
issues, enhancing efficiency, competitiveness and expanding business
opportunities for industry through a range of specialised services and
global linkages. It also provides a platform for sectoral consensus building
and networking. Major emphasis is laid on projecting a positive image of
business, assisting industry to identify and execute corporate citizenship
programmes. Partnerships with over 120 NGOs across the country carry
forward our initiatives in integrated and inclusive development, which
include health, education, livelihood, diversity management, skill
development and water, to name a few.
Complementing this vision, CIIs theme for 2009-10 is India@75:
Economy, Infrastructure and Governance. Within the overarching agenda
to facilitate Indias transformation into an economically vital,
technologically innovative, socially and ethically vibrant global leader by
year 2022, CIIs focus this year is on revival of the Economy, fast tracking
Infrastructure and improved Governance.
With 64 offices in India, 9 overseas in Australia, Austria, China, France,
Germany, Japan, Singapore, UK, and USA, and institutional partnerships
with 213 counterpart organisations in 88 countries, CII serves as a
reference point for Indian industry and the international business
community.
2009 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swisscooperative. All rights reserved.
Confederation of Indian Industry (CII)
-
2009 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swisscooperative. All rights reserved.
Acknowledgements(e express our sincere gratitude to Mr U K Sinha, Chairman E CII National Committee on Mutual Funds and Chairman ManagingDirector, UTI Asset Management Company Limited for his guidance in preparation of this report.
(e are also grateful to Mr A P Kurian, Chairman, AMFI for sharing his perspective and supporting us with data as required.
(e would sincerely like to acknowledge and thank the following industry leaders for providing their valuable views for this report inalphabetical order:
D Mr Achal Kumar Gupta, Managing Director, SBI Funds Management Private Limited
D Ms Ashu Suyash, Managing Director and Country Head, Fidelity Fund Management
D Mr Harshendu Bindal, President, Franklin Templeton Asset Management India Private Limited
D Mr ohn Mathews, Senior Vice President and Head - Client Servicing, HDFC Asset Management Company Limited
D Mr Navin Suri, Chief Executive Officer, ING Investment Management India Private Limited
D Mr Nilesh Shah, Deputy Managing Director, ICICI Prudential Asset Management Company Limited
D Mr Nitin ain, Director E Personal Financial Services, Religare Finvest Limited
D Mr N P Ghanekar, Managing Director and Chief Executive Officer, M Financial Asset Management Private Limited
D Mr Paul Armstrong, Advisor, ING Investment Management India Private Limited