Indian Mutual Fund Industry – The Future in a Dynamic Environment

Outlook for 2015
JUNE 20 09

Table of Contents

1. Executive Summary 2. The Indian Mutual Fund Industry - Current State 3. Challenges and Issues 4. Voice of the Customer 5. Future Outlook in a Dynamic Environment 6. Action Plan for Achieving Transformational Growth 7. Summary

01 03 10 15 20 26 32

Preface

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 Diwanji Head – Financial Services KPMG in India

© 2009 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.

Foreword

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 Sinha Chairman – CII National Committee on Mutual Funds Chairman and Managing Director, UTI Asset Management Company Limited

© 2009 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.

and to obtain feedback on their wish-list from various stakeholders including fund houses. such as differential policies pertaining to the PAN card requirement. Further. complicated KYC norms that restrict potential © 2009 KPMG. Further multiple regulatory frameworks govern different verticals within the financial services sector. witnessing a CAGR of 29 percent in the five-year period from 2004 to 2008 as against the global average of 4 percent. All rights reserved. Challenges and Issues Low customer awareness levels and financial literacy pose the biggest challenge to channelising household savings into mutual funds. all point to the future potential of the Indian mutual fund industry. mode of payment (cash vs cheque). among others. Voice of the Customer CII-KPMG conducted a ‘Voice of the Customer’ survey to help understand the buying behaviour of existing and potential investors in mutual funds. Low share of global assets under management. an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International.Page 1 1. service providers and the regulator. low penetration levels. however. . The Indian mutual fund industry has largely been product-led and not sufficiently customer focused with limited focus being accorded by players to innovation and new product development. Distributors and the mutual fund houses have exhibited limited interest in continuously engaging with customers post closure of sale as the commissions and incentives have been largely in the form of upfront fees from product sales. limited share of mutual funds in the household financial savings and the climbing growth rates in the last few years that are amongst the highest in the world. Further there is limited flexibility in fees and pricing structures currently. a Swiss cooperative. India Post etc on distribution of mutual funds has also impeded the growth of the industry. Most AMCs and distributors have a limited focus beyond the top 20 cities that is manifested in limited distribution channels and investor servicing. Factors that are impediments to mutual fund investing are availability of a large number of mutual funds schemes that makes investment decision complex and difficult. funds management by insurance companies and commission structures. fund houses have shown limited focus on increasing retail penetration and building retail AUM. Limited focus of the public sector network including public sector banks. has not been commensurate with the AUM growth in the last five years. The increase in revenue and profitability. Executive Summary Current State India has been amongst the fastest growing markets for mutual funds since 2004. distributors.

In the event of a quick economic revival and positive reinforcement of growth drivers identified. Public sector thrust into mutual funds distribution and focus on strengthening presence beyond Tier 2 cities will entail training of the public sector employee base through the “Train the Trainer” approach. © 2009 KPMG. Future Outlook in a Dynamic Environment KPMG in India is of the view that the industry AUM is likely to continue to grow in the range of 15 to 25 percent from the period 2010 to 2015 based on the pace of economic growth. Product innovation is expected to be limited. and quality of advice provided. CII and AMFI should help to steer the industry vision. pension. NISM and AMFI. the next phase for the industry is likely to be characterised by a stronger focus on customer centricity. Industry profitability may reduce further as revenues shrink and operating costs escalate. . there is a need for planning. Drivers for purchase of mutual funds include tax benefits of mutual fund investments. Regional Rural Banks and Cooperative Banks. profitable growth. cost management and robust governance and regulatory framework . KPMG in India is of the view that the Indian mutual fund industry may grow in the range of 15 to 18 percent in the period from 2010 to 2015. All rights reserved. KPMG in India is of the view that the Indian mutual fund industry may grow at the rate of 22 to 25 percent in the period from 2010 to 2015.000 billion in 2015. Opening up of the public sector branch network in Tier 3 and Tier 4 towns will include India Post. AMCs should focus on product innovation and introduction of flexibility in pricing.Page 2 investors. Given that the industry needs to collectively work towards riding over the dynamic and relatively less favourable economic environment at present. Given that customer awareness is the pre-requisite for the achievement of the industry growth potential. that is expected to result in a massive increase in mutual fund penetration. Action Plan for Achieving Transformational Growth There is a need for a collaborative effort across all key stakeholders to harness the future growth potential and reach out to the customer. Market deepening and widening is expected with the objective of increased retail penetration and participation in mutual funds. In the event of a relatively slower economic revival resulting in the identified growth drivers not reaching their full potential. consistency in fund performance and brand equity. Nationalised Banks. Focus on increasing customer engagement pre and post completion of the investment will be beneficial. The recognition of the Association of Distributors by SEBI would also be beneficial for the long term wellbeing of the industry. going forward. banking and other verticals along with representation from the CBDT. an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International.000 to 18. This will also require a boost to be provided to Investor Service Centres (ISCs) through R&T Agents should be given a thrust. a Swiss cooperative. The regulatory and compliance framework for mutual funds is likely to get aligned with the other frameworks across the financial services sector. After sales service and ongoing follow up have been identified by customers as the key differentiators in assessing the capabilities of distributors. resulting in AUM of INR 15. so that they may be inducted as trainers to support customer awareness campaigns to be facilitated by CII. comprising the Financial Services Regulators for mutual funds and capital markets. insurance. resulting in AUM of INR 16. Simplification of processes such as the application and redemption process could potentially increase the quantum of investments in mutual funds.000 billion in 2015. financing and executing initiatives aimed at increasing financial literacy and enhancing investor education across the country through a sustained collaborative effort across all stakeholders.000 to 17 . It is proposed that harmonisation of policies across multiple regulatory frameworks in the financial services sector must be taken up on high priority through constitution of a Steering Committee under the aegis of the Ministry of Finance.all aimed at enabling the industry to achieve sustained.

Growth in AUM in the Indian Mutual Fund Industry (Average AUM in INR Billion) AUM Growth The Assets under Management (AUM) have grown at a rapid pace over the past few years. All rights reserved. and the second in 2008 consequent to the global economic crisis (the first fall in AUM in March 2003 arising from the UTI split). The Indian Mutual Fund Industry – The Current State The Indian mutual fund industry has evolved from a single player monopoly in 1964 to a fast growing. an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International. Over the 10-year period from 1999 to 2009 encompassing varied economic cycles.Page 3 2. a Swiss cooperative. .the first being after the year 2001 due to the dotcom bubble burst. the industry grew at 22 percent CAGR2. This growth was despite two falls in the AUM . Note: As of 31 March for each year Source: AMFI data 1 AMFI data 2 AMFI data © 2009 KPMG. competitive market on the back of a strong regulatory framework. at a CAGR of 35 percent for the five-year period from 31 March 2005 to 31 March 20091.

6 percent in equities and 1 percent in bonds7.32 percent share of the global AUM of USD 18.7 percent of the gross household financial savings in FY Source: RBI data Note: As of 31 March for every year 2008. Despite this however.97 trillion as of December 20084. this continues to be significantly lower than the ratio in developed countries. despite clocking growth rates that are amongst the highest in the world.2 percent in FY 2004. Share of Mutual Funds in Households’ Gross Financial Savings in India Share of Mutual Funds in Household Financial Savings Investment in mutual funds in India comprised 7 .Page 4 AUM Growth Rate in Select Countries (CAGR for 2004-2008) AUM Base and Growth Relative To the Global Industry India has been amongst the fastest growing markets for mutual funds since 2004. All rights reserved. than India had in the same time period. As of December 2008. while some of the emerging markets viz. the Indian mutual fund industry continues to be a very small market. 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. China and Brazil exceeded the growth witnessed in the Indian market. from 6 percent in 2005 to 11 percent in 2009. UK households held 61 percent of the total savings in bank deposits. 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. an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International. In 2008. where the AUM accounts for 20-70 percent of the GDP5. the mutual fund industry in mature markets like the US and France grew at 4 percent. Source: ICI Factbook 2009. comprising 0. December 2008 © 2009 KPMG. 11. AMFI data Note: Based on AUM as of 31 December AUM to GDP Ratio for India Source: AMFI data. However. Composition of Households’ Gross Financial Savings in India in FY 2008 Source: RBI data 3 ICI data 4 ICI and AMFI data 5 AMFI and CSO data 6 RBI data 7 Datamonitor Report. CSO Note: Based on AUM as of 31 December of each year AUM to GDP Ratio The ratio of AUM to India’s GDP gradually increased . Over this period. a Swiss cooperative. a significant increase from 1. . the UK had more than thrice the investments into mutual funds as a factor of total household savings (26 percent).

rose from 41 bps in FY 2004 to 113 bps in FY 2008 largely Source: KPMG Analysis based on published financials of AMCs due to the increased spend on marketing. The operating expenses. 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. Rising cost pressures and decline in profitability have impacted the entry plans of global players eyeing an Indian presence. .Page 5 Profitability The increase in revenue and profitability in the Indian mutual fund industry has not been commensurate with the AUM growth in the last 5 years. All rights reserved. a Swiss cooperative. 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. Industry Profitability as a percentage of AUM During FY 2004 and FY 2008. as a percentage of AUM. distribution and administrative expenses impacting AMC margins10. Source: SEBI data 8 KPMG Analysis of published financial statements of AMCs with AUM data from AMFI 9 KPMG Analysis 10 KPMG Analysis 11 SEBI 12 ICI © 2009 KPMG. The AUM grew at 35 percent CAGR in the period from March 2005 to 2009. Indian Mutual Fund Industry – Industry Investor Mix The Indian Mutual Fund Industry – Key Characteristics Customers The Indian mutual fund industry has significantly high ownership from the institutional investors.86 percent in number terms held approximately 37 percent of the total industry AUM as at the end of March 200811. an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International. significantly lower than the retail participation in the US at 82 percent of AUM as at December 200812. 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. Retail investors comprising 96.

in particular. in Tier 2 and Tier 3 towns. In the last few years. 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 retail investor participation. . As of December 2008.002 in comparison to 10. equity funds. the total number of mutual fund schemes was 1. 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. Growth Rate (Five year CAGR) across Fund Categories Products The Indian mutual fund industry is in a relatively nascent stage in terms of its product offerings. 16 and 5 percent of the total AUM respectively16. the US mutual fund market comprised money market funds. has been on the rise aided by the buoyant equity markets.Page 6 Out of a total population of 1. 39.000 was 0.6 percent invested in mutual funds. a Swiss cooperative. debt/ bond funds and hybrid funds at 40. The mutual fund penetration among the paid Indian workforce with annual household income less than INR 90.15 billion. All rights reserved. As of December 2008. 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. CIA SEBI ICI Factbook 2009 © 2009 KPMG. and tends to compete with products offered by the Government providing fixed guaranteed returns. Debt products dominate the product mix and Source: AMFI data comprised 49 percent of the total industry AUM as of FY 200915. 13 14 15 16 SEBI ICI. 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. In the US.1 percent.349 funds in the US. only 1. an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International.

corporate employees and corporates comprised 73. The contribution of the Top 10 cities to total AUM has gradually declined from approximately 92 percent in 2005 to approximately 80 percent currently18. the mutual fund industry had 92. Industry Structure The Indian mutual fund industry currently consists of 38 players that have been given regulatory approval by SEBI. All rights reserved. Distribution Channel Mix Distribution Channels As of March 2009. gradually enhancing focus on mutual fund distribution Source: CII Mutual Fund Summit 2008 quoted from Cerulli Associates Growth in the Number of AMCs in India to boost their fee income20.499 registered distributors as compared to approximately 2. dominate the mutual fund distribution with over 30 percent AUM share. Exchange Traded Funds (ETFs).3 percent of total AUM) Number of Distributors by Category Registered Annually by AMFI while the US had a total of 728 ETFs as of December 200817. 21 and 6 percent respectively of the total distributor base. The Independent Financial Advisors (IFAs) or Individual distributors. a Swiss cooperative. India had a total of 16 ETFs (0. .5 million insurance agents19. new product categories viz. as the number of public sector players reduced from 11 in 2001 to 5 in 2009. National and Regional Distributors (including brokerdealers) together with IFAs comprised 57 percent of the total AUM as of 2007 The public sector banks are . The industry has witnessed a shift has changed drastically in favour of private sector players. foreign banks and the leading new private sector banks in particular. the mutual funds are beginning to tap Tier 2 and Tier 3 towns as a vital Source: AMFI data Note: Data as of 31 March for every year except for December 2002 component of their growth strategy. Markets While the mutual fund industry in India continues to be metro and urban centric. Source: AMFI data 17 AMFI data. Banks in general. As of March 2009. an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International. ICI Factbook 2009 18 Industry discussions 19 AMFI and IRDA data 20 CII Mutual Fund Summit 2008 quoted from Cerulli Associates 21 AMFI data © 2009 KPMG. Capital Protection and Overseas Funds have gradually been gaining popularity.Page 7 While traditional vanilla products dominate in India. Gold ETFs.

. However. a Swiss cooperative. so that mutual funds can focus on Source: KPMG analysis based on public financials of AMCs 22 AMFI data 23 AMFI data © 2009 KPMG. existence of a strong local brand and a wide and deep distribution footprint are the key differentiators. The market leaders have focused across product categories for a more diversified AUM base with an Source: KPMG analysis based on AMFI data equitable product mix that helps maintain a consistent AUM size. All rights reserved. can be segmented into three categories: Market Share Trend of the Top 5 and Top 10 players in India • The market leaders having presence across all product segments • Players having dominant focus on a single product segment .Page 8 Market Share of Players as of March 2009 The public sector has gradually ceded market share to the private sector. Operations The Indian mutual fund industry while on a high growth path needs to address efficiency and customer centricity. fund accountants. the share of Top 5 players increased to 58 percent.debt or equity • Players having niche focus on an emerging product category or distribution channels. the top 5 players comprising 50-52 percent of industry AUM. The industry concentration has been stagnant in the four-year period from 2005 to 2008. The AUM share of the Top 10 players has consistently been in the vicinity of 75 percent. an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International. as against 38 percent in the US. Registrar and Transfer Agents (R&T) and more recently. Public sector mutual funds comprised 21 percent of the AUM in 2009 as against 72 percent AUM share in 200122. as of March 2009.23 The mutual fund houses based on product portfolio and Source: AMFI data distribution strategy. AMCs have successfully been using outsourced service providers such as custodians. Although the Indian market has relatively low entry barriers given the low minimum networth required to Administrative & Other Expenses as a percentage of AUM venture into mutual fund business. the key elements of competitive strategy.

© 2009 KPMG. The success of the relatively nascent mutual fund industry in India. However. Securities and Exchange Board of India (SEBI). registrar and transfer services aimed at investor servicing and cash management. and by improving the mechanism for distributor remuneration. 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. distribution related regulations aimed at introducing more transparency in the distribution system by reducing the information gap between investors and distributors. Functions that have been outsourced are custody services. the latest guidelines issued in December 2008. The implementation of Prevention of Money Laundering (PMLA) Rules. a Swiss cooperative. . The regulator. fund services. 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. in its march forward. as part of the risk management practices and procedures is expected to gain further momentum. an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International. Regulatory Framework The Indian mutual fund industry in terms of regulatory framework is believed to match up to the most developed markets globally. there is likely to be scope for optimising operations costs given the trend of rising administrative and associated costs as a percentage of AUM. investor protection and education through disclosure norms for more information to investors.Page 9 core aspects of their business such as product development and distribution. 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’. All rights reserved. Managing costs and ensuring investor satisfaction continue to be the key goals for all mutual funds today. 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.

through discussions with the industry participants. © 2009 KPMG. not bought. an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International.Page 10 3. 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. has attempted “Mutual funds are still sold. adversely impacting the revenue and profitability. a Swiss cooperative. . All rights reserved.A large national distributor 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. KPMG.” . Challenges and Issues Context Setting While the Indian mutual fund industry has grown at an impressive rate in the last few years.

The retail population residing in Tier 2 and Tier 3 towns.” .A large national distributor “Investor education by AMCs is primarily on focused on metros. which AMCs have recently started focusing on.A leading mutual fund in India Low Levels of Customer Awareness Low customer awareness levels and financial literacy pose the biggest challenge to channelising household savings into mutual funds. “AMCs must focus on investor education so that they can challenge distributors. 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. Low awareness of SIPs in India has resulted in a majority of the customers investing in a lump sum manner.Page 11 “Perhaps most frustrating has been the reality that mutual funds have made relatively little impact in attracting new household financial savings.” . . even if aware and willing.A large IFA to penetrate into Tier 2 and Tier 3 towns. A large majority of retail investors lack an understanding of risk-return. tax arbitrage available to corporates on investing in money market mutual funds. All rights reserved. easy accessibility to institutional cutomers concentrated in Tier 1 cities are the factors instrumental in mutual fund houses focussing on the institutional segment.” .” .” . Large ticket size. Limited Focus on Increasing Retail Penetration The Indian mutual fund industry had limited focus on building retail AUM and has only recently stepped up efforts to augment branch presence in Tier 2 and Tier 3 towns. However. however. “We need to focus beyond the Top 20 cities to increase retail penetration. The general lack of understanding of mutual fund products amongst Indian investors is pervasive in metros and Tier 2 cities alike and majority “Investor education and awareness has made limited inroads in increasing customer investments in mutual funds Efforts across AMCs and distributors have largely remained disjointed. Cities beyond Top 20 only comprise approximately 10 percent of the industry AUM as per industry practitioners. asset allocation and portfolio diversification concepts. are unable to invest in mutual funds owing to limited access to suitable distribution channels and investor servicing.” . Players have historically garnered AUM by targeting the institutional segment that comprises 63 percent AUM share as at March 2008. makes the industry vulnerable to the possibility of sudden redemption pressures that impact the fund performance.A mid-sized mutual fund in India of them draw little distinction in their approach to investing in mutual funds and direct stock market investments. Building retail AUM requires significant distribution capability and a wide footprint to be able “Most AMCs have focused on growing AUMs primarily through institutional clients which is much easier than penetrating the retail base. a Swiss cooperative. Institutional AUM. an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International.A large AMC Limited Focus Beyond the Top 20 Cities The mutual fund industry has continues to have limited penetration beyond the top 20 cities. some of the mutual fund houses have begun focussing on cities beyond the Top 20 by © 2009 KPMG.A leading national distributor 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.

the management fee levels have remained stagnant. Limited Flexibility in Fees and Pricing Structures The fee structure in the Indian mutual fund industry enjoys little flexibility unlike developed markets where the level of management fees depend on a variety of factors such as the investment objective of the fund. These financial advisors are compensated for their services. multi-manager funds that are among the most popular hybrid funds globally have not grown in India owing to the prevailing taxation structure.A large IFA building their branch presence and strengthening distribution reach through non-branch channels. enhanced money market funds.” . Further. fund performance. an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International. the market is still awaiting the first REMF launch. While the expenses have continuously risen. Debt products are seldom sold during a stock market boom. The Indian market is still to witness the launch of green funds. known as a 12b-1 fee. which have neither front . Source: ICI capital guarantee products for the Indian investors. through a specific fee. select suitable funds based on risk appetite. degree of engagement with customer and the value provided to the customer.” . In addition. a Swiss cooperative. Fee structures in the US Mutual Fund Market . The Indian mutual fund industry offers limited investment options viz. renewable and energy/ climate change funds. Investors who opt not to use a financial advisor or those who pay the financial advisor directly for services rendered. The industry has had a limited focus on innovation and new product development. Limited Customer Engagement Mutual fund distributors have been facing questions on their competence. Advisors are compensated for providing these services through a combination of front-end or back-end loads and 12b-1 fees. financial advisors are professionals who help investors define their investment goals. © 2009 KPMG.A case study In the US mutual fund market. no-load funds are sold directly to investors or are sold to investors through financial advisors who charge investors separately for the investment advice and service provided.nor back-end loads and have either low or no 12b-1 fees. All rights reserved. in part. Regardless of the quality of advice and service provided. socially responsible investments. marriage. fund assets. relatively nascent product categories viz. based on the level of advice and service sought. Despite the regulations for Real Estate Mutual Funds (REMF) being “There is a tendency to push select products during specific economic cycles.A large regional distributor “AMCs must focus on investor education so that they can challenge distributors. a large majority of whom are risk averse.” . Limited Innovation in Product Offerings The Indian mutual fund industry has largely been product-led and not sufficiently customer focused. The popularity of NFOs triggered a proliferation of schemes with a large number of non-differentiated products. thereby providing flexibility to the investor. and provide ongoing advice and service. thereby catering to the limited needs of the customer. and housing are yet to find their way in the Indian market. fund of hedge funds. which is included in a fund’s expense ratio. the nature and number of services that a fund offers.A large AMC introduced in 2008.Page 12 “Fees should only be on trail basis so that advisors are compensated based on ongoing advice and service provided. the commission payable by the mutual fund customer to the distributors is fixed. 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. purchase no-load funds. Products that cater specifically to customer life stage needs such as education. .

insurance and pension funds each of which are governed by an independent regulatory framework and are competing for the same share of the customer’s wallet. is stated to have 250 post offices “PAN card being made mandatory is a deterrent to industry growth. a Swiss cooperative. The India Post network operating the largest postal network in the world majority of which is in rural areas. by national level and other distributors24.” . have so far played a very limited role in mutual funds distribution. India Post with its customer base of 170 million account holders and branch network of over 154.A mid-sized national distributor “Manufacturers need to increase the level of engagement with customers and play a much larger role beyond sales. . an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International. All rights reserved.Page 13 In the absence of a framework to regulate distributors.A mid-sized AMC 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). and the potential to build the retail investor base. Regional Rural Banks and Cooperative Banks in the rural hinterland has not been fully leveraged to target the retail segment.A small AMC Multiple Regulatory Frameworks Governing Financial Services Sector Verticals The regulatory and compliance requirements vary across verticals within the financial services sector specifically mutual funds.” .” . “AMCs do not contribute to training costs for distributors. “Valuations in the Indian mutual fund industry should be based on EBITDA multiples and not on the basis of AUM alone.A large AMC Limited Focus of the Public Sector Network on Distribution of Mutual Funds Public sector banks with a large captive customer base. Further the credibility enjoyed by the Nationalised Banks. The mutual fund industry lacks a level playing field in comparison with other verticals within the financial services sector. As a result of the limited engagement.A large national distributor selling mutual funds of five AMCs only. 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. both the “AMFI must focus on defining the industry vision and long-term strategic direction.000 branches. further most of the post offices selling mutual funds are located in Tier 1 and Tier 2 cities which are already been catered to. doubling the size of all bank branches put together is a formidable channel which has been under utilised to date for mutual fund distribution25. © 2009 KPMG. significant reach beyond the Top 20 cities in semi-urban and rural areas.” .” . there have been rising instances of mis-selling to customers.

the challenges and issues faced by the Indian mutual fund industry will need to be addressed at the earliest to ensure long term sustained. a Swiss cooperative. profitable growth of the industry. In summary. 24 India Post 25 India Post © 2009 KPMG. ULIPs which are deemed to be competing products do not have the mandatory PAN requirement. On the other hand.Page 14 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. While the payment for investment into mutual funds can be made only through banking facilities. . the purchase of ULIPs can be undertaken through cash. All rights reserved. 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. 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. an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International.

occupation and gender) to understand their preferences and perspective on investment in mutual funds. customers have had widely varying experiences with purchase of mutual funds. an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International. Voice of the Customer 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. All rights reserved. Thus. a Swiss cooperative. CII-KPMG facilitated interviews with a large representative sample of population from diverse backgrounds (education. . 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. age. CII-KPMG conducted an investor survey across the Top 10 cities in India in May 2009. While mutual funds are often the preferred avenue for investment over direct investments into the capital markets by risk averse investors.Page 15 4. © 2009 KPMG. As part of this survey. Methodology To understand the voice of the Indian investors.

India has over 979 mutual fund schemes resulting in a total AUM of INR 4. distributors. both negative and positive.000 and above in mutual funds. an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International. Availability of a large number of mutual funds schemes makes investment decision complex and difficult The Indian investor witnessed significant rise in New Fund Offers (NFOs) over the last two to three years from AMCs seeking to augment AUM and diversify product basket. the customers are required to procure KYC acknowledgement. the respondents perceive a difficulty in investing in mutual funds in the absence of quality advice. . The ratio of the assets per scheme is one of the highest in the world. This requires submission of several documents and extensive paper-work. but I do not have a PAN card. a Swiss cooperative. can I invest without it?” . Complicated KYC norms restrict potential investors In addition to the PAN card requirement.Salaried person Tier 1 city Not an investor in mutual funds 26 AMFI data © 2009 KPMG. All rights reserved. service providers and regulators.173 billion as on 31 March 200926. for an investment amount of INR 50. there was a diverse set of views obtained. The survey has highlighted several reasons that respondents have cited for not buying mutual funds. Hence. Impediments to Mutual Fund Investing Customers believe that the mutual fund industry falls short of expectations in meeting their needs at time of economic uncertainty and market volatility. This warrants a need to immediately tackle some of the negative perceptions and capitalise on the positive ones. AMCs need to design simple products that the target segment can easily understand and also realign their product portfolio to merge/ close schemes with overlapping objectives. Given that there is a plethora of options with limited differentiation across mutual fund schemes.Page 16 Reasons provided by Survey Respondents for Not Investing in Mutual Funds The survey revealed several interesting observations and resulted in a long customer’s wish-list pointing to the expectations from the AMCs. Some of the prominent challenges highlighted by the respondents have been listed below. While a significant portion of customers are aware of and also invest in mutual funds. The respondents to the survey expressed difficulty in understanding the Source: CII-KPMG Survey in May 2009 “I want to invest in mutual funds.

Customers expressed confidence in banks given the long standing relationship and the trust built with the banks over the years. so I chose MF. the survey respondents were not satisfied with the quality of advice. customers have reported instances of mis-selling that has affected the performance of their portfolios significantly. Similarly. IFAs have demonstrated flexibility in providing customised offerings to the customers at the household level. Hence. an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International. This comfort is expected to play a key role in according priority to the growth of the IFA channel. Banks and IFAs are the preferred channel for investing in mutual funds. Banks and IFAs remain the preferred channel given that investors trust them for their advice and after sales service. In some cases.Page 17 “Last time I wanted to invest some money in MF. the customers have become accustomed to dealing with IFAs to seek independent advice on a wide range of investment and financial planning issues. there is urgent need for the Government to facilitate harmonisation of policies and processes across different verticals in the financial services sector and to simplify documentation that could thereby ease the process of mutual fund investments for retail customers.Salaried Person Tier 1 City Investor in Mutual Funds Drivers for Investment in Mutual Funds The factors that can incentivise potential customers to commence and gradually increase their investment in mutual funds are discussed below. Channels Preferred by Survey Respondents for Investing in Mutual Funds Preferred Channels for Investment Source: CII-KPMG Survey in May 2009 “I had some money in PPF and wanted to invest in something which gives good returns with balanced risk. © 2009 KPMG. Some customers are of the view that the IFAs are less qualified and do not adopt a holistic approach to financial planning. it is imperative for distributors to re-look at their strategy for financial planning and dispensing advice to customers. it is working for me” . this regulatory directive is viewed negatively by potential customers as investments in insurance products can be undertaken without the requirement for a PAN card. the fund house asked me for so many documents that I got totally confused and wondered why I should share so much with them?” . Hence.Businessman Tier 1 city Not an investor in mutual funds complex terminology and the paperwork involved in mutual fund investing. Further. a Swiss cooperative. . All rights reserved. After sales service and ongoing follow up have been identified by customers as a key differentiator in assessing the capabilities of distributors. It is important to note that an overwhelming majority of the customers have not been satisfied with the quality of advice being provided to them by the advisors. However.

Source: CII-KPMG Survey in May 2009 “I find it really difficult to understand different forms of different fund houses. Customers consider mutual funds as a medium of ensuring financial independence and security. Further. . All rights reserved. an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International. Simplification of Processes to Increase the Quantum of Investments Customers obtain the requisite confidence in their investment process when distributors explain the concepts and the meaning of key terms used in mutual fund application forms in simple terms. Selection of mutual funds by a customer is a function of both the fund performance and brand equity of the fund house. Liquidity for the future is deemed to be of utmost importance in making any investment decision. this reinforces confidence in the distributor’s capabilities and quality of advice provided that facilitate the decision process for investment in a mutual fund scheme. Customers also expressed the view that a single common application form could be used for all mutual fund investments across multiple mutual fund houses. Since most mutual fund schemes carry easy liquidity options.Salaried Person Tier 1 City Investor in Mutual Funds © 2009 KPMG. customers believe that mutual funds are a avenue of savings thereby eliminating the need for borrowing money in case of financial exigencies. Simplifying the process for redemption of funds was also identified as a means for further increasing investments in mutual funds. The brand equity of a mutual fund includes factors like perception of the brand capability drawn from its performance in other sectors.Page 18 Reasons provided by Survey Respondents on Selection of Mutual Funds for Investment Purposes Reasons for selection of Mutual Funds Investment in Mutual Funds is attractive to customers owing to tax benefits The tax benefits associated with investment in mutual funds is the key drivers for customers. Customers are of the view that the key differentiator at the time of selection of a fund is the positive outlook on performance even if the numbers do not reveal a spectacular historic performance. can I have a single form which can be centrally used for all fund houses.” .Salaried Person Tier 1 City Investor in Mutual Funds “My investment in mutual fund provides me tax benefit as well as a regular source of attractive returns” . a Swiss cooperative. Consistency in fund performance and brand equity influence customers to make relevant selection of mutual fund schemes Customers believe that fund performance is necessary but is not a sufficient condition to drive their selection of mutual fund products.

and not just to handle routine operational level problems.Page 19 “ Customers’ Wish-list from Mutual Funds. All rights reserved. Investment Advice • Since I make my own investment decisions without relying on anyone’s advice. Funds Management • I want to listen to fund managers’ views on outlook for various sectors. etc. an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International. How can anyone provide unbiased advice if they are paid by the fund house for advising me? This ensures that the advisor is acting in the favor of the fund house and is not driven by my interests and needs. Distributors. • The Government must provide tax sops to encourage investment in equity (including overseas equity) as a long term saving and to encourage investments in the infrastructure sector (debt as well as equity). but have never been invited by any fund house for this. • We want to interact with more knowledgeable people at the call centers to attend to our complaints from a technical perspective. I want a single platform for transacting and performance monitoring. industry performance.In the Words of Customers27 Mutual Fund Products • I want protective products with guaranteed income and good absolute returns. • I want all the services at my door step . • As a retired person. • 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. • 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. • As long as the fund house pays the commission to the advisor. • I want a clear and easy explanation of various schemes.right from getting help in filling in the application form to depositing a cheque for my investments. Investor Servicing • I want easy access to the Fund House for direct subscription since I do not want to pay entry load. fund performance. May 2009 © 2009 KPMG. • AMCs should not depend on the Fund Manager but its process for the success of their products. I want more debt funds options with a safe mechanism of regular saving along with the varied pension options. • I want objective advice that’s best suited to my needs and which is not driven by commissions received by my advisor. which should be payable in phases. tax sops should also be extended to schemes investing in these areas as well. Regulator Intervention • Can SEBI provide me with Certification of Fund managers. “ • Why should I be required to pay long-term capital gain tax on my debt funds when I am not required to pay this on equity funds? . Regulator and Government . depending upon the success of the advice provided • Please reduce and simplify the documentation required and the processes involved and help me to understand the purpose for which this will be used. 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 is certified and qualified to advise me. • I want assured returns schemes that are a mix of risk-free and high-risk portfolio where I can invest small sums of money. How do I ensure that he gets penalised for the loss caused with his incorrect advice? Tax Benefits • Why am I required to pay Securities Transaction Tax? • The Government must provide a favourable tax regime for Fund of Funds that implies extending tax benefits to investors and also to the funds. a Swiss cooperative. 27 CII-KPMG Survey on Mutual Funds. to track my mutual fund investments across various AMCs. • I want better service from the fund house in terms of NAV updates through weekly SMS alerts so that I know the value of my investments. there is always a conflict.

a Swiss cooperative. products.Page 20 5. . distribution channels and regulatory frameworks. Future Outlook in a Dynamic Environment This section contains a summary of the expected drivers for future growth. All rights reserved. expected industry growth projections and overall future outlook across various dimensions – customers. the key underlying driver for all the categories of funds is the key economic indicator – the GDP growth rate. © 2009 KPMG. an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International. Growth Drivers Although several macroeconomic and demographic factors affect the growth of the industry. markets. The growth drivers for customer segments have been listed in the table below along with the expected impact of each on the AUM.

000 to 18. enabled by rising disposable incomes and increased financial savings Source: KPMG analysis • Innovations in distribution driven by increase in the number of certified IFAs and banks selling mutual funds focusing on Tier 2 and Tier 3 towns 28 Discussions with key industry stakeholders and customers © 2009 KPMG.Page 21 Customer Segment Key Growth Drivers Retail Segment • Rising disposable incomes and savings • Favourable demographics such as increasing proportion of working population (20-59 years) and increasing urbanisation resulting in increased levels of financial savviness • Innovations in distribution • Increased awareness levels • Quality financial planning Expected Impact • Increase in disposable incomes and household financial savings may result in households seeking alternate avenues for investments to yield higher returns with reasonable risk • Favourable demographics like urbanisation and a relatively young population having an increased risk appetite. Key growth drivers for this scenario include: • Increased retail investor participation with a preference for mutual funds over other asset classes perceived to be more risky. Industry AUM is likely to continue to grow in the range of 15 to 25 percent from the period 2010 to 2015 Projected AUM Growth from 2010 to 2015 Scenario 1: Favourable growth scenario with quick economic revival In the event of a quick economic revival and positive reinforcement of growth drivers identified. a Swiss cooperative. an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International. resulting in AUM of INR 16. are likely to save more and seek to invest a higher proportion of those savings in market-linked instruments such as mutual funds • Distribution innovations are expected to increased mutual fund penetration specifically in Tier 2 and Tier 3 towns thereby expanding the mutual fund customer base • Improved awareness levels and enhanced financial literacy is expected to aid the understanding of mutual fund products • Appropriate asset allocation and potential for wealth creation Institutional Segment • Rising corporate earnings • Maturing capital markets • Interest rate cycle • Call money market rates • Corporate debt and commercial papers • Increased demand for sophisticated treasury management products • A better economic situation in the country is likely to ensure a steady fall in the interest rates Our Point of View on the Future Outlook28 This section on the “Point of view on the Future Outlook” is based on our discussions with key stakeholders and expected trends in the Indian mutual fund industry.000 billion in 2015. All rights reserved. based on the global experiences. . This could result in the fulfilment of growing financial aspirations. KPMG in India is of the view that the Indian mutual fund industry may grow at the rate of 22-25 percent in the period from 2010 to 2015.

• Decline in investment management fees is expected as risk averse customers prefer investments in debt products • Increase in distribution costs as players attempt to set up their own branch presence in smaller towns • Existing players are likely to review business strategy and explore exit/ mergers in case of no significant competitive advantage. Industry profitability may reduce further as revenues shrink and operating costs escalate Industry profitability is expected to gradually reduce as revenues of AMCs shrink due to focus on low margin products to attract risk averse investors. .Page 22 Scenario 2: Relatively lower growth scenario with slow economic revival • Increase in institutional participation triggered by rising corporate revenues with increased economic activity. In the event of a relatively slower economic revival resulting in the identified growth drivers not reaching their full potential. © 2009 KPMG. KPMG in India is of the view that the Indian mutual fund industry may grow in the range of 15-18 percent in the period from 2010 to 2015. and also as operating costs escalate due to the focus on penetrating retail population beyond Tier 2 cities. thereby driving investments from the institutional investors. an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International. All rights reserved.000 to 17 . Key factors driving the growth inspite of the slow revival of the economy include: Source: KPMG analysis • Incremental increase in retail investor participation owing to limited focus beyond Tier 2 towns and limited efforts to draw risk averse customers of traditional products under the fold of mutual funds • Tightening of liquidity leading to better yields on instruments liquid funds invest in. resulting in AUM of INR 15.000 billion in 2015. thereby resulting in industry consolidation • Competition is expected to intensify further with the entry of global players who are facing stagnant growth in global markets. a Swiss cooperative. This is expected to result in a fall in market shares of the Top 10 players and result in a further squeeze on margins • Co-existence of large players with diversified portfolios and some niche plays expected.

towns and rural areas join the mutual fund fold. resulting in an increase in the contribution of the retail segment to the industry AUM in the range of 46-48 percent by 2015. from 36 percent as of 2008 as mentioned earlier • Domestic players expected to tap the overseas markets to grow their AUM through alliances with global players • HNIs and Mass Affluent segments may dominate the retail segment • Average holding period for mutual funds and average ticket size of investments in mutual funds likely to remain unchanged. including rural centres • Share of top 10 cities in total AUM expected to decline as retail investors from smaller cities. Market focus • Greater participation expected from Tier 2 cities and Tier 3 towns. • 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. outcome-oriented funds such as principal-protected. Multi manager funds. a Swiss cooperative. an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International. taxmanaged and inflation-indexed funds. . expected to have marginal share of AUM inspite of rapid growth. debt market which should increase in depth. Institutional Segment • Institutional segment likely to witness the emergence of a new category of SMEs seeking advice on managing their funds. Market deepening and widening is expected with the objective of increased retail penetration and participation in mutual funds Retail Segment • Increased focus on growing investor awareness and increasing financial literacy is expected. All rights reserved. REMFs. © 2009 KPMG.Page 23 Product innovation is expected to be limited • 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.

Massive expansion is expected in the mutual fund distribution network • 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. All rights reserved. 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 © 2009 KPMG. Other channels • India likely to witness the entry of global fund super-markets enabled by regulatory changes • Cooperative sector. an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International. and will therefore have to focus on initiatives to develop and support this channel (for example. focusing on increasing penetration. a Swiss cooperative. . though beset with internal administrative issues. recruitment and training support).Page 24 Banks • The public sector network of nationalised banks and post offices likely to increase their focus on the distribution of mutual funds • Entry of public sector banks as mutual fund manufacturers expected to increase their focus on mutual fund distribution • Private banks providing financial advice to HNIs expected to marginally increase their market share. recognised by local authorities to interact and reach out to the lower middle class and poorer segments of population to increase mutual fund penetration • Distributors likely to explore the possibility of innovations such as a common online platform and the usage of debit and credit cards for transactions. likely to emerge as another channel which should be tapped by Mutual Funds • Tapping the large network of NGOs. and will therefore have to focus on initiatives to develop and support this channel (for example. IFAs • IFAs expected to emerge as a dominant channel in a scenario of robust stock market growth.

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. insurance and banking expected to work towards harmonisation of policies. faces the challenge of achieving sustained profitable growth while increasing retail penetration and expanding the reach of mutual funds into rural areas. All rights reserved. a Swiss cooperative. investor protection and good governance going forward. the Indian mutual fund industry is expected to witness rapid growth in AUM over the next few years. an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International. however. In summary. © 2009 KPMG. The industry. pension. 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 • 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. The regulatory and compliance framework for mutual funds is likely to get aligned with the frameworks across the financial services spectrum • Regulators across Financial services spectrum viz. . mutual funds and capital markets.

service providers such as R&T Agents. the regulator SEBI and the media. distribution channel partners. 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 CII through a collaborative effort across all the key stakeholders to reach out to the customer. 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. Source: CII-KPMG analysis © 2009 KPMG. a Swiss cooperative. AMFI. CII. viz. an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International. custodians and fund accountants.Page 26 6. AMCs. Action Plan for Achieving Transformational Growth Key stakeholders of the mutual fund industry Based on discussions with key industry stakeholders. All rights reserved. among others. .

. This will require a directive from the Ministry of HRD. hoardings. asset allocation and portfolio diversification to meet multiple needs. 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. street plays and other mechanisms to reach the masses. The course should encompass modules on mutual funds. 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. as a mandatory course starting from Class 8 upto the graduation level. 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. This course should be incorporated in the curriculum across all schools and colleges.Page 27 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. flyers. All rights reserved. a Swiss cooperative. 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. © 2009 KPMG. 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. there is a need for planning. followed by an examination. AMFI and NISM should rollout customer awareness campaigns and provide infrastructure. 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. and other financial products along with concepts like risk management. Government of India. self help groups and other affinity groups should be identified to facilitate investor workshops in cities and towns across the country. an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International. 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.

Page 28 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. given the growing dominance of women in influencing investment decisions in households across the country. 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. a Swiss cooperative. Further commodity related. an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International. Introduction of Customer-Friendly Products and Product Features • AMCs through AMFI should conduct a nationwide survey of customer needs across liquidity. degree of service provided and the timeframe for payment. All rights reserved. . 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. irrespective of product portfolio mix • Enable mutual fund investments through mobile telephony. back-end load and fixed annual fee as a percentage of all investments. Some options include exploring the possibility of introducing a multiple share class structure with pricing options for front-end load. 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. risk. These requirements are common at the industry level. © 2009 KPMG.

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. an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International. Nationalised Banks. © 2009 KPMG. so that they may be inducted as trainers to support customer awareness campaigns run by NISM and AMFI. All rights reserved. . on sale of mutual funds and basic financial planning concepts through the “Train the Trainer” approach. a Swiss cooperative. 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 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. Opening Up of the Public Sector Branch Network in Tier 3 and Tier 4 Towns • Commence sale of mutual funds through the branch network of India Post. Regional Rural Banks and Cooperative Banks. Nationalised Banks.

operations and customer service. reducing distribution costs and making transactions free from operational issues. a Swiss cooperative. distribution channels. 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.Page 30 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. enabled by a supporting regulatory framework • Augment the employee base of AMFI so as to support NISM in conducting nation-wide customer awareness campaigns. All rights reserved. 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. © 2009 KPMG. products and pricing. 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. retail penetration. 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. an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International. 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.

Areas Requiring Harmonisation • Outsourcing of funds management by insurance companies to AMCs independent of the assets under management. © 2009 KPMG. 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). a Swiss cooperative. pension. banking and other verticals along with representation from CBDT. The Committee’s objective should be defined as achieving harmonisation in policies and procedures across multiple regulatory frameworks in the Financial Services Sector. . Acceptance and Rollout of the Unique Identification Card • Implementation of the Unique Identification Card as a valid document for KYC. an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International. All rights reserved. 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.Page 31 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. 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. 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. insurance.

but for collectively promoting the financial success of customers across all facets of their professional and personal lives. innovative product offerings. profitable growth. going forward. As customers seek trusted advisors. efficient service delivery and supporting technology. to meet fiduciary responsibilities and the increasing demand for transparency. an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International. the next phase for the industry is likely to be characterised by a stronger focus on customer centricity. the manufacturer-distributor-customer relationship is expected to be centered not on the sale of products. © 2009 KPMG. . a Swiss cooperative. Summary There is a perceived need to review risk and performance analysis capabilities and governance structures.Page 32 7. Given that the industry needs to collectively work towards riding over the dynamic and relatively less favourable economic environment at present. All rights reserved.all aimed at helping the industry achieve sustained. The mutual fund industry today needs to develop products to fulfill customer needs and help customers understand how its products cater to their needs. This requires creating a collaborative network of experts in funds management and financial advice. Other areas of focus are likely to be cost management and enabling strong governance and regulatory framework . AMCs therefore need to re-orient their business towards fulfilling customer needs.

All rights reserved. a Swiss cooperative. an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International.List of Abbreviations AMC AMFI AML AUM bps CAGR CBDT CFT CII CSO ETF FY GDP HNI HRD ICI IFA IIMS INR ISC KYC MF NAV NFO NGO NISM NPS PMLA PSU PAN PBT R&T RBI REMF SEBI SIP SMS UK ULIP USA UTI Asset Management Company Association of Mutual Funds in India Anti Money Laundering Assets Under Management Basis Points Compounded Annual Growth Rate Central Board of Direct Taxes Combating Financing of Terrorism Confederation of Indian Industry Central Statistical Organisation Exchange Traded Fund Financial Year Gross Domestic Product High Networth Individual Human Resource Development Investment Company Institute Independent Financial Advisor Invest India Market Solutions Indian Rupee Investor Service Center Know Your Customer Mutual Fund Net Asset Value New Fund Offer Non-Governmental Organisation National Institute of Securities Markets New Pension Scheme Prevention of Money Laundering Public Sector Undertaking Permanent Account Number Profit Before Tax Registrar & Transfer Agent Reserve Bank of India Real Estate Mutual Fund Securities & Exchange Board of India Systematic Investment Plan Short Messaging Service United Kingdom Unit Linked Insurance Plan United States of America Unit Trust of India © 2009 KPMG. .

Kolkata and Pune.000 international and national clients. All rights reserved. Chennai. . The independent member firms of the KPMG network are affiliated with KPMG International. many of whom are internationally trained. As members of a cohesive business unit they respond to a client service environment by leveraging the resources of a global network of firms. Tax & Advisory services. which reflect a shared knowledge of global and local industries and our experience of the Indian business environment. in India. Hyderabad.KPMG in India KPMG International is a global network of professional services firms with over 135. a Swiss cooperative. KPMG in India draws on our firms' deep industry experience to provide Audit. Each KPMG firm is a legally distinct and separate entity and describes itself as such. © 2009 KPMG. performance-based.000 people working together to deliver value in more than 140 countries. We provide services to over 5. Delhi. The Indian member firms affiliated with KPMG International were established in September 1993. The firms in India have access to more than 3000 Indian and expatriate professionals. an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International. Bangalore. We strive to provide rapid. KPMG has offices in India in Mumbai. markets and competition. providing detailed knowledge of local laws. a Swiss cooperative. regulations. industry-focused and technologyenabled services.

Major emphasis is laid on projecting a positive image of business. All rights reserved. including SMEs and MNCs. skill development and water. an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International. UK. livelihood. a Swiss cooperative. It also provides a platform for sectoral consensus building and networking. diversity management. CII is a non-government. assisting industry to identify and execute corporate citizenship programmes. CII catalyses change by working closely with government on policy issues. With 64 offices in India. technologically innovative.000 companies from around 385 national and regional sectoral associations. Austria. CII’s focus this year is on revival of the Economy. it is India’s premier business association. Partnerships with over 120 NGOs across the country carry forward our initiatives in integrated and inclusive development. socially and ethically vibrant global leader by year 2022. not-for-profit. which include health. and an indirect membership of over 90. enhancing efficiency. Founded over 114 years ago. to name a few. © 2009 KPMG. . partnering industry and government alike through advisory and consultative processes. playing a proactive role in India’s development process. education. and USA. Infrastructure and Governance. 9 overseas in Australia.’ Within the overarching agenda to facilitate India’s transformation into an economically vital. China. CII’s theme for 2009-10 is ‘India@75: Economy. CII serves as a reference point for Indian industry and the international business community. competitiveness and expanding business opportunities for industry through a range of specialised services and global linkages. and institutional partnerships with 213 counterpart organisations in 88 countries. Japan. industry led and industry managed organisation. fast tracking Infrastructure and improved Governance. with a direct membership of over 7800 organisations from the private as well as public sectors.Confederation of Indian Industry (CII) The Confederation of Indian Industry (CII) works to create and sustain an environment conducive to the growth of industry in India. Germany. France. Complementing this vision. Singapore.

Operations. Vishnu Pillai. ICICI Prudential Asset Management Company Limited • Mr Nitin Jain. Chief Operating Officer. SBI Funds Management Private Limited • Mr Sandesh Kirkire. Managing Director. Chief Executive Officer. Pranav Desai and Nisha Fernandes. Chief Executive Officer. Kunal Pande. HSBC Asset Management (India) Private Limited • Mr Vivek Kudva. Taurus Asset Management Company Limited • Mr Sanjiv Shah. Advisor. Senior Vice President and Head . .Client Servicing. HDFC Asset Management Company Limited • Mr Navin Suri. © 2009 KPMG. Aashutosh Chaudhari. Managing Director and Country Head. Bajaj Capital Limited • Mr R S Srinivas Jain. Franklin Templeton Asset Management (India) Private Limited • Mr John Mathews. Vinay Garodiya. We would sincerely like to acknowledge and thank the following industry leaders for providing their valuable views for this report (in alphabetical order): • Mr Achal Kumar Gupta. Chairman – CII National Committee on Mutual Funds and Chairman & Managing Director. Senior Vice President. Vikash Madhogaria. Chief Executive Officer. Sowmya Anantharaman. Tasneem Lakdawalla. Chairman. Vice Chairman & Managing Director. Fidelity Fund Management • Mr Harshendu Bindal. Managing Director and Chief Executive Officer. ING Investment Management (India) Private Limited • Mr Nilesh Shah. Tata Asset Management Limited • Mr Vikramaaditya. Sneha Rohekar. SBI Funds Management Private Limited • Ms Ashu Suyash. Managing Director.Acknowledgements We express our sincere gratitude to Mr U K Sinha. Chief Marketing Officer. AMFI for sharing his perspective and supporting us with data as required. HDFC Asset Management Company Limited • Mr Ved Prakash Chaturvedi. Managing Director . Chief Operations Officer. an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International. Chief Executive Officer. JM Financial Asset Management Private Limited • Mr Paul Armstrong. Vinit Mehta. Religare Finvest Limited • Mr N P Ghanekar. a Swiss cooperative. UTI Asset Management Company Limited for his guidance in preparation of this report. Franklin Templeton Investments • Mr Vipul Jhaveri. Shruti Rustagi. Director – Personal Financial Services. Benchmark Asset Management Company Private Limited • Mr Sundeep Sikka. Reliance Capital Asset Management Limited • Mr Suresh Babu V. President. All rights reserved. Deputy Managing Director. Kunal Jain. This report has been written by P S Deepa and Vikas Arora with support from the KPMG team comprising Divya Arora. JM Financial Asset Management Private Limited We also thank other stakeholders in the industry who have supported us with their perspectives and all the respondents of the “Voice of Customer” survey conducted by KPMG. Kotak Mahindra Asset Management Company Limited • Mr Sanjay Parikh.India & CEEMEA. Senior Vice President and Head . ING Investment Management (India) Private Limited • Mr Rajiv Deep Bajaj. Sundar Ramaswamy. Executive Director. We are also grateful to Mr A P Kurian.

11. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. Mumbai 400 013 Tel: +91 22 3989 6000 Fax: +91 22 3983 6000 Delhi DLF Building No.10 Mahatma Gandhi Road Nungambakkam Chennai 600 034 Tel: +91 44 3914 5000 Fax: +91 44 3914 5999 Hyderabad 8-2-618/2 Reliance Humsafar.com Tel: +91 22 3983 6202 P S Deepa Associate Director Business Advisory e-Mail: psdeepa@kpmg.in Abha Seth Director e-Mail: abha. Bangalore 560 071 Tel: +91 80 3980 6000 Fax: +91 80 3980 6999 Chennai No.in CII Head Office Confederation of Indian Industry 23 Institutional Area Lodi Road New Delhi .com KPMG in India Mumbai KPMG House. 3rd Floor.Road. Palal Towers M.cii. Kochi 682 016 Tel: +91 484 309 4120 Fax: +91 484 309 4121 KPMG Contacts Pradip Kanakia Executive Director Head . Inner Ring Road. Ravipuram.com Tel: +91 22 3983 6293 Vikas Arora Associate Director Corporate Finance e-Mail: vikasarora@kpmg. 10.110 023 Tel:91-11-24629994-7 (4 lines) Fax: 91-11-24626419/24615693 Website:www. Although we endeavor to provide accurate and timely information. 10th floor.in N V N Sudha Deputy Director e-Mail: n.com Tel: +91 22 3983 5703 Manoj Kumar Vijai Executive Director Financial Services e-Mail: mkumar@kpmg. DLF Cyber City. KPMG and the KPMG logo are registered trademarks of KPMG International.seth@cii.Financial Services e-Mail: adiwanji@kpmg. Printed in India.com Tel: +91 22 3983 5301 Naresh Makhijani Executive Director Head . Block .kpmg.in.V. Gurgaon 122 002 Tel: +91 124 307 4000 Fax: +91 124 254 9101 Bangalore Solitaire 139/26.Funds e-Mail: nareshmakhijani@kpmg.com Tel: +91 22 3983 5321 CII Contacts Marut Sen Gupta Senior Director e-Mail: marut. Sector . Senapati Bapat Marg. Phase 2. 8th Floor.G.sengupta@cii.n. an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International. Kamala Mills Compound 448. Plot No. Koramangala.com Tel: +91 80 3980 6100 Abizer Diwanji Executive Director Head .Markets e-Mail: pkanakia@kpmg. Godrej Castlemaine Bund Garden Pune 411 001 Tel: +91 20 3058 5764/65 Fax: +91 20 3058 5775 Kochi 4/F. 4th Floor Road No. Salt Lake City.sudha@cii.v. there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future.in The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. . © 2009 KPMG. Banjara Hills Hyderabad 500 034 Tel: +91 40 6630 5000 Fax: +91 40 6630 5299 Kolkata Infinity Benchmark. a Swiss cooperative. Tower B.com Tel: +91 22 3983 5121 Ravi Trivedy Executive Director Business Advisory e-Mail: rtrivedy@kpmg. a Swiss cooperative. Lower Parel. All rights reserved. Kolkata 700 091 Tel: +91 33 4403 4000 Fax: +91 33 4403 4199 Pune 703. G-1.EP & GP.

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