Indian Mutual Fund Industry Outlook 2015 KPMG

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.


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


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.


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).


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.


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.


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.


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.


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


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.


Page 9


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


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.


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.


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.


24 India Post25 India Post

Page 14


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


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.



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.



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


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


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


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.


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


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


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


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


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


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


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


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


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


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


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


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.


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.


Confederation of Indian Industry (CII)


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

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Indian Mutual Fund Industry Outlook 2015 KPMG

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