Summer Internship project

On
Rural Market Study
At



Submitted by:

Nikita Banerjee
Balaji Institute Modern Management

Analysis of Rural Markets for Investments

At
SBI Mutual Funds

Under the guidance of
Mr. Vijay Prabhu
Head and Asst Vice President
(Private and foreign banks)

Submitted By:
Nikita Banerjee
Balaji Institute Of Modern Management
Batch 2013-2015



ACKNOWLEDGEMENT


I take this opportunity to express my profound sense of gratitude and respect to
all those who helped me throughout this project. I hereby express my sincere
thanks to the Mr. Dinesh Khara, (CEO & MD) for providing me an opportunity to
undergo Summer Internship at their esteemed organization. I would like to thank
my mentor Mr. Vijay Prabhu, Asst. Vice President & Head (private &foreign
banks) at the organization without whose support, knowledge sharing, concern
and co-operation, the project would not have been successful. Last but not the
least, I would like to thank all others who have directly or indirectly helped me
complete my project and have not been mentioned in this acknowledgement.


Nikita Banerjee
Balaji Institute of Modern Management
Batch 2013-15


TABLE OF CONTENT
Executive Summary

1. The Indian mutual fund industry is one of the fastest growing and most
competitive segments of the financial sector. As of August 2013, the total
AUM stood at Rs. 7.66 trillion. However, growth rates of AMCs have come
down from the peak levels seen in the early 2000s. One of the biggest
reasons behind this is the lack of healthy participation from a large part of
the country.

2. This lack of penetration can be due to two reasons:
Low demand of mutual funds from the public outside the major (T-15)
cities. This low demand in turn could be caused by low levels of financial
literacy, cultural attitudes towards savings and investments etc.
Low supply of mutual funds from AMCs outside the major cities. The low
supply could be due to perceived lack of demand from the general retail
investor or due to lack of available manpower in these areas.

3. The study first documents how Assets under Management (AUM) are
Unevenly distributed across the country and then proceed to scrutinize the reasons
behind this uneven penetration. It focuses on the AMCs distribution networks
using proxies such as the distribution of independent financial agents (IFAs) across
the country, sales made by IFAs, distributional efficiency of AMCs etc.

4. A survey of fund houses was carried out to gain a better understanding of the
causes holding them back from expanding beyond T-15 cities.

5. The study found that low number of agents (per capita) in sub-urban and rural
areas and the slow growth rates in mutual fund sales in the
corresponding areas are closely associated with each other.

Although a large number of studies have been carried out on the growth and
financial performance of mutual funds in India (Boston Analytics, 2010),
(PWC,2013), not much light has been shed on the causes for the low penetration of
mutual funds outside the top fifteen cities. There is research looking at the causes
for the variation of mutual funds industry across developed countries. However,
such work typically does not differentiate between the various regions of the
nations .While such studies may help policy makers in determining the ideal inter-
regional macroeconomic conditions to develop a healthy mutual fund industry,
they rarely explain the differences in mutual fund penetration within a country.

While, state-run banks have been the leaders in rural banking so far, their private
sector counterparts such as HDFC Bank, ICICI Bank and Axis Bank too are
beginning to focus on a market which is believed to be worth thousands of crores.
State-run banks and micro-finance entities together enjoy an estimated Rs 60,000
crore business in the rural banking segment. Private banks have now started
tapping this massive market after regulatory clampdown weakened the
microfinance sector.


Those people that moved away from the villages to the towns would earn increased
incomes:
Higher incomes generate more savings.
Increased savings meant more fund available for investment.
Increased investment meant more capital and increased productivity in the
industrial sector, higher wages, more incentive to move from low productivity
agriculture to high productivity industry, the circle continue.













INTRODUCTION

SBI Mutual Fund

SBI Fund Management Private Limited is one of the leading fund houses in India
with an investor base of over 5.4 million and over 25 years of rich experience in
fund management. It has a strong linkage that traces back to State bank of India
(SBI) Indias largest bank. SBI Fund management Pvt. Ltd. is a joint venture
between SBI and AMUDI (France), one of the worlds leading fund management
companies. Today, the fund house manages a diverse profile of customers with
over Rs.65,499 crores (AAUM for April 2014) of assets which is parked across 36
active schemes. SBI Mutual Fund serves its vast family of investors through a
network of over 222 points of acceptance. It aims at providing its investors a well-
diversified basket of products and services on time to time basis to fulfil their
investment needs conveniently. Different services provided by the fund house
are: Mutual funds, Offshore Funds and Portfolio Management and Advisory
Services .SBI Mutual Fund is one of the best and the top mutual fund investment
company among mutual funds companies in India. SBI Mutual Fund stands at 6th
position according the AUM (April 2014). SBI Mutual Fund provide variety of
funds to its investors like Equity schemes, Debt/Income schemes, Liquid schemes,
Hybrid schemes, Exchange Traded schemes, Fund of Fund Schemes and many
more. It also offers Systematic Investment Planning schemes (SIP) option to
investors so that they can invest on regular intervals.
History
There are over 30 fund houses managing a couple of hundred schemes in the
Indian mutual fundindustry7. As of the end of March 2009, India's mutual funds
had assets under management of Rs.417,300 crores. India's market for mutual
funds has generated substantial growth in assets under management (AUM) over
the past 10 years, but as shown in figure below, this rate of growth has been
particularly impressive during the period 2005 to 2008. There was a slight decline
in the AUM during the year 2008-09 owing to the global financial crisis, however,
Indias low penetration level (AUM to GDP ratio) as compared to other developed
economies, indicates significant scope for future growth.

The Indian MF industry has gone through some evolutionary changes.

Phase-I (Mar-65 to Mar-87): The only player during Phase-I is UTI.

Phase II (Mar-87 to Mar-93): Entry of non- UTI, public sector mutual
funds set up by public sector banks and Life Insurance Corporation of India
(LIC) and General Insurance Corporation of India (GIC). SBI Mutual Fund
was the first non- UTI Mutual Fund established in June 1987.

Phase III (Mar-93 to Jan-03): Entry of private sector mutual funds. As at
the end of January 2003, there were 33 mutual funds with total assets of Rs.
1,21,805 crores The Unit Trust of India with Rs.44,541 crores of assets
under management was way ahead of other mutual funds

Phase IV (Since Feb-03): UTI was bifurcated into two separate entities and
with recent mergers taking place among different private sector funds, the
mutual fund industry has entered its current phase of consolidation and
growth.

Currently, there is need for more product innovations for higher penetration level
to increase the customer base. There is also a need to evolve the distribution
channels. Many of the mutual fund players, has tied up with various banks and
institutions and even with the department of post to help increase the volume of
business apart from the traditional channels. All these initiatives will give birth to
more employment opportunities at the customer touch point level.

Growth Story
The Indian mutual fund industry is one of the fastest growing sectors in the Indian
capital and financial markets. The mutual fund industry in India has seen dramatic
improvements in quantity as well as quality of product and service offerings in
recent years. The concept of mutual funds was introduced in India with the
formation of Unit Trust of India in 1963. The first scheme launched by UTI was
the now infamous Unit Scheme 64 in 1964. UTI continued to be the sole mutual
fund until 1987, when some public sector banks and Life Insurance Corporation of
India and General Insurance Corporation of India set up mutual funds. It was only
in 1993 that private players were allowed to open shops in the country. Today, 32
mutual funds collectively manage Rs 6713575.19 cr under hundreds of schemes.
The industry has steadily grown over the decade. For example, before the public
sector mutual funds entry, UTI was managing around Rs 6,700 crore on its own.
Public sector mutual funds also helped accelerate the growth of Assets Under
Management. UTI and its public sector counterparts were managing around Rs
47,000 crore when Kothari Pioneer, the first private sector mutual fund, set up
shop in 1993. The growth rate was 100 % in 6 previous years.
The UTI was way ahead of other mutual funds with Rs 44,541 crore assets under
management. The industry overall has performed well over the years. Of course,
there were a few funds houses, which disappointed investors. However, overall
performance has been good. However, lack of awareness still impedes the growth
of the mutual fund industry. Unlike developed countries, most of the household
savings still go to bank deposits in India. In the year 2004, the mutual fund
industry in India was worth Rs 1,50,537 crores. The mutual fund industry is
expected to grow at a rate of 13.4% over the next 10 years. Mutual funds assets
under management grew by 96% between the end of 1997and June 2003 and as a
result it rose from 8% of GDP to 15%. The industry has grown in size and manages
total assets of more than $30351 million. Of the various sectors, the private sector
accounts for nearly 91% of the resources mobilized showing their overwhelming
dominance in the market. Individuals constitute 98.04% of the total number of
investors and contribute US$12062 million, which is 55.16% of the net assets
under management.



The worlds population can be divided into three basic segments based on the
economic pyramid. Majority of them would lie at the bottom of the pyramid with
annual income less than $1000. This economic inequality must be overcome to
ensure the welfare and happiness of people all around. The need of the hour is to
develop innovative products or services for these people. A mutual fund for the
rural population is one such solution. The fund would require minimal investment
on the part of the people in the rural areas and will be designed in such a manner
that it helps them increase their financial position with respect to the other strata of
the society. The fund will be designed in the simplest possible manner so that even
a layman or an illiterate can understand the way it will function and will have no
complex terms and conditions. The fund will not only boost the income of the rural
households but will also increase their spending capacity thereby leading to the
overall welfare and development of the regions in which they reside. If we
consider the case of India, even the irregularity of monsoon can play a role in the
overall functioning of the fund. By securing or insuring the rural people against
such natural phenomenon, the fund can extend its advantages to higher levels .But
for all this to happen, private partnership in this initiative is also a must. Large
corporate houses must come forward and join hands with the government in
building a financial instrument of this kind so that the people at the bottom of the
pyramid can have something to cheer about and lead a better life altogether. While
the Indian Mutual fund industry has come a long way since its inception, there are
certain areas of concerns which need to be addressed in order to grow at the rapid
pace.
Low level of Customer Awareness
Low levels of customer awareness are the biggest challenge in channelizing
households savings into mutual funds. A majority of investors in Tier 2 cities as
well as metros lack understanding of mutual fund products and can draw little
distinction in their approach to investing in mutual funds and direct stock market
investments. As a result, they are generally unwilling to undertake even minimal
risk.
Inadequate reach of funds / distributors to retail investors
The mutual funds in India have historically raised funds by targeting the
institutional investors segment that accounts for 63% share in AUM as at March
2008. This can primarily be attributed to the tax arbitrage available to corporates
on investing in money market mutual funds and easy access to institutional
customers concentrated in Tier 1 cities. Besides, raising funds from retail
investors require a significant distribution capability. The Indian Mutual fund
industry has limited penetration beyond the top 20 cities. In fact, the retail
investors residing in Tier 2 & 3 towns, though aware and willing are unable to
invest in mutual funds due to limited access to suitable distribution channels and
investor servicing. However, with the deepening of the global financial crisis,
many mutual funds witnessed sudden redemption pressures due to their
dependence on institutional AUM. This is expected to lead AMCs to start
focusing on retail investors segment.
Limited innovation in product offering
Though over the years, the Indian Mutual fund industry has introduced a range of
products, it has limited focus on innovation and new product development. It is
still to launch green funds, socially responsible instruments, fund of hedge funds,
enhanced money market funds, renewable and energy/ climate change funds, etc.
Multi-manager funds that are among the most hybrid funds world-over have also
not grown in India due to the prevailing tax structure.
Multiple Regulatory Frameworks
Besides, multiple regulatory frameworks governing financial services sector
verticals have affected the Mutual fund industry in India. For instance, the
mandatory PAN card requirement for an investment of Rs 50,000 and above in
mutual funds has restricted the Mutual fund industrys ability to tap small
investors. On the other hand, Unit Linked Insurance Plans (ULIPs) which is a
competing product do not have the mandatory PAN requirement. In addition to
the PAN card requirement, the customers are required to procure KYC
acknowledgement which requires submission of several documents and an
extensive paper-work.
Further, this calls for an urgent need for government to harmonize policies and
processes across different verticals in the financial services sector.
Financial exclusion is a common phenomenon in rural areas. A large number of
small and marginal farmers, agricultural laborers and rural artisans are still
excluded from wide range of financial services. The challenges of achieving more
inclusive growth can be met by a policy that encourages easier and affordable
access to financial services. Financial inclusion may be defined as the process of
ensuring access to financial services and timely and adequate credit where needed
by vulnerable groups such sections and low income groups at an affordable cost.
Thus, if the sector has to grow fast, it needs to devise appropriate schemes to
attract the saving of low income groups, especially in rural areas. This is the only
way to ensure participation of all categories of investors in the financial markets,
which is crucial for sustained development, both of the financial sector and the
economy as a whole.







Branch license linked to rural branches: Will it work?

The Reserve Bank of India (RBI) recently changed its policy of giving new branch
licenses. It has linked new branch licensing to the number of rural branches that banks
open. It has stipulated that banks should have at least 25% of the total number of
branches in rural areas. What does this mean for Indian banks?

Earlier banks could reach rural areas through correspondents or through non-banking
financial subsidiaries. But the new circular stipulates that banks should have a brick-and-
mortar branch in un-banked rural areas. Opening a branch in an un-banked area is not
always considered viable for the banks which have invested heavily.

There are various reasons why banks are not too keen on opening branches in rural areas.
The mode of operating a rural branch and generating revenues is different from that of an
urban branch. Traditional money lender has a hold in rural areas. Though the credit is not
cheap, the access to it is easy. Most of the monetary transactions are based on trust.
Banks have their procedures to adhere to which people in rural areas find it difficult to
comply with. In order to make credit affordable and accessible to farmers, there are caps
on interest rates. The chances of defaulting are high and farmers usually look for credit
waivers. It becomes difficult for banks to enforce repayment.

Technology has made accessibility to credit possible. Mobile banking, ATM kiosks have
given a new definition to banking. No frills accounts and other smaller financial products
have been conceived. But there are other ways in which rural banking can be made
viable. Abolish cap on interest rates so that banks can compete with local money lenders.
Freedom to price smaller loans and deposit rates would also help banks to give higher
commission to correspondents. As for enticing employees to work in rural branches,
apart from providing local employment, private banks can look at differential salaries for
those who are willing to relocate to a rural bank. Foreign and private banks would then
find the rural areas viable to set up branches.

In the larger sense, it is a positive step taken by the RBI towards financial inclusion.
Mature and established banks would find this as an opportunity as the regulation gives
them permission to open one new urban branch for every rural branch over and above the
statutory requirement. But for the nascent and smaller banks it would be difficult unless
there see business viability.
Companies that enter a rural region of an emerging market to sell a product or service
will face myriad challenges. Dispersed populations, sporadic incomes, and low education
levels are just a few of the many problems that companies will have to address to be
successful. Of course, merely performing these activities is not enough, if a company
seeks to be profitable in the long-term, the activities will have to be performed with an
eye towards cost effectiveness and economic return.
By educating consumers, designing creative affordability strategies, and building brand
trust, companies will be able to unlock rural customers latent desire to consume. By
designing appropriate distribution networks and constructing trustworthy distribution
channels, companies will be able make products available when and where rural
consumers expect them. And by providing effective after-sales service, companies will
be able to maintain positive customer relationships and continue to gain brand trust.
Although the challenges for companies entering into rural emerging markets are
great, the opportunities are even greater.
Although individuals are poor, the aggregate spending power of this group is
enormous. Furthermore, the needs of these consumers are just beginning to be met,
meaning there are large, profitable opportunities available for companies willing to
make the investment.
New Business Models. Beyond profits, companies entering rural emerging
markets have the opportunity to develop new types of business models that
have never existed before. ITC, for example, placed computers in rural
farmers homes to facilitate its commodities supply chain. Amul dairy
cooperative organized millions of farmers into a supply chain that provides
high quality and low-cost milk to Indian consumers and the cooperative is
now entering other countries as well.
Social Good. Consumers in rural emerging markets have traditionally not
been included in the formal market economy that is much of the developed
worlds success is based on. By extending the markets reach into these
regions, companies that offer high-quality and trustworthy goods and
services will be enabling rural consumers to capture value they otherwise
wouldnt have. Beyond just purchasing goods, many companies also
employee rural consumers in their supply chain and promotional initiatives,
further extending the benefits that the regions receive.



Factors affecting mutual fund penetration:

1. Lack of information/financial sophistication of the customers about mutual
funds.
2. Finding quality distributors / agents in small towns and villages.
3. Cost of entering new regions with no existing mutual funds.
4. KYC / Paperwork / restrictions on cash transactions.






RURAL TOUCHPOINTS


While there is ample opportunity for insurers to achieve a new era of growth by
focusing on the hinter lands of India where 70% of the population resides and is
currently underpenetrated, initiatives and attempts by the regulator, the government
and the insurers in the past have not achieved the level of success that was
anticipated. Players willing to invest in the rural areas will have to understand and
appreciate the uniqueness of this vast base of customers in order to reach them
effectively in terms of products, pricing and customer service. Investments in rural
India, while may take sometime to show returns, can be potential game changers
for insurers, the customers and the economy as a whole.




Current state

Indian mutual funds industry is witnessing a rapid growth on the back of
infrastructural development, increase in personal financial assets, and rise in
foreign participation. With the growing risk appetite, rising income, and increasing
awareness, mutual funds in India are becoming a preferred investment option
compared to other investment vehicles. The industry is expected to secure growth
by catering to the needs of retail customers. The industry has been largely product-
led and not customer focused as the players are not concentrating on new product
development as per the needs of the consumers. The industry seeks to target an
increased share of the customer pocket through the expansion of innovative
products combined with deeper retail penetration by expanding its presence in
urban and rural locations.
Aadhar has tied up with Eicher motors to provide commercial vehicles and HDFC
bank for delivering financial services to rural consumers.
Government ownership/control also means that RRBS and rural cooperatives have
to operate in line with government diktat and are not able to take decisions
independently.



AMCS having banks as promoters like principal, HDFC, SBI, Axis, Canara
Robeco, union KBC,ICICI Prudential,IDBI etc. have a large proportion of their
AUM coming from B-15 cities, shows an analysis of geographical concentration
of AMCS AAUM in B-15 cities done by cafemutual out of Rs. 4134 crore AUM
managed by principal ,24% comes from B-15 cities.


Overall, UTI Mutual Fund has the highest proportion of its AUMs coming from B-
15 cities. Out of Rs 74,233 crore AUM managed by UTI, 34% comes from B-15
cities.
Channelizing rural income into mutual funds
Rural income has undergone a rise and still the surplus cash is getting invested in
traditionally followed fixed deposits.due to their low investor education they are
not aware of the returns in mutual funds and they remain investing in fixed
deposits which gives a return of 9-9.25% annually. Nearly 60% of the respondents
in Ahmadabad and Lucknow followed an opportunistic approach of investing
despite the volatile market conditions.
While the equity markets have given better returns investors should be more
cautious in planning investments and allocate only that much money to equity
funds which you dont require for at least the next 5-years and which you can
emotionally see it going down by up to 50% in the short term and not panic on it.
Risk and return are inextricably entwined. Do not expect higher return from safe
investments.
The emphasis has been on capital preservation than super normal growth .There is
no chasing of equities but investing only when seen some value.
Liquid funds are only for parking temporary surplus and not for long term
investments. If you believe that liquid funds are for long term investments, then
you believe in the fallacy that saving is investing and are in for a rude shock.
In rural areas they should be encouraged for investing in mutual funds rather than
fixed deposits since higher the risk higher will be the return on investment. Fixed
maturity plans (FMPs), which are close-ended debt funds, gave an average return
of 5.5 per cent during the July 2010-June 2011 period. FMPs are touted by fund
houses as good alternatives to FDs because they are more tax efficient and carry a
lower risk.
Financial services has given an overall rise of 18% to rural sector which has made
them optimistic about their future growth but pessimism still lies amongst the
farmers.



The investment portfolio has been through a drastic change in these years where it
increased from 29.0% to 32.0% and equity increased from 34.0% to 35.0%.










ICICIS RURAL STRATEGY

ICICI Bank has adopted inclusive banking strategy to provide financial
intermediation to farmers, traders and processors as well as the underserved
segments. The elements on which the Banks rural strategy is based are multiple
products that meet customer requirements, offered through technology-based
channels. Multiple products ICICI Bank offers a complete suite of products and
services to meet the individual financial requirements of customer segments.
Savings, investments and insurance products are made available to its rural and
agri customer base. The Bank also offers microfinance services to low-income
households and crop loans, farm equipment loans, commodity based loans to
farmers.
Hybrid channels ICICI Bank employs delivery channels backed by technological
innovations to achieve scale and outreach in a sustainable manner. The Banks
channel architecture includes branch and non-branch channels. Branches act as a
business hub providing banking services on the one hand, while facilitating the
fulfillment of products that have been sourced by the business facilitators and
business correspondents.
Non-branch channels are of two types, business facilitators and business
correspondents. Business facilitators, referred to as Vikas Sahyogis, are
outsourced channels that generate business opportunities for the Bank. Network of
Vikas Sahyogis has been set to act as referral or sourcing agents for loans,
insurance and investment products such as mutual funds. These centres are
operated by local people with existing relationship with the Banks customer
segments. Vikas Sahyogis include agri input dealers, tractor dealers, automobile
dealers and diesel dealers.
Vodafone India and ICICI Bank launched a mobile banking service across the
country called 'M-Pesa', which enables selected retailers to offer banking services
to Vodafone customers, who are able to withdraw from or deposit to their ICICI
account and transfer funds using their mobile device.
The FINO team has developed a platform using a biometric enabled multi-
application hybrid smart cards and biometric enabled handheld devices to cater to
the needs of Local Financial Institutions (LFIs) serving the rural masses. The
platform has been sized for 12 - 50 million customers at the moment but can easily
be expanded if the needs are larger
ICICI Banks approach involves linking ICICI bank network of about 100 rural
branches to SHGS through this approach, ICICI funds about 6000 groups. To
overcome the constraints faced by the lack of ICICI banks rural branch network,
the bank uses local promoters to help organize groups. ICICI works closely with
MFIS and NGOS to adapt its products to suit consumer needs.


FINDINGS:

The mutual fund in India recent year has experienced some ups and downs
due to the stock market fluctuations.
Now the mutual fund is on the growth path and is showing continuous
growth.
As mutual funds are on the growth track so investment in mutual fund now
can facilitate the investor with attractive returns.
The book value and the EPS of some major mutual funds are showing an
increasing trend.
Comparing the above mutual fund companies the ICICI mutual fund is
showing a consistent performance over years.
Out of all the four mutual fund studied Reliance mutual fund has depicted
almost perfect result in earnings per share by showing the actual and the
trend line in a single straight line.










CONCLUSION

As nearly three-fourths of India still lives in villages, investment potential of
savings lies in rural areas. Banks Alone will not be able to achieve the financial
inclusion .Mutual funds, an indirect route for investment in the equity Market can
effectively be used for the purpose of financial inclusion. Mutual funds, which are
an instrument where the investment required is low and any salaried person or
person with limited income can invest, can enable the Common man to participate
in the capital market and get financially included.
The claim that private banks could contribute to quickly resolving this problem is
based on a number of arguments. The first is that inclusion is promoted by
augmenting the number of banks, since competition would drive players to under-
banked and unbanked areas. The second is that since large corporate houses have
rural reach and deep pockets, they would stretch themselves to tap this large
market where per capita income has crossed some critical threshold.
The third is that the guidelines for those seeking licences to establish private banks
have made clear that they have to meet financial inclusion requirements. Assuming
there is much profit to be made from banking in areas conventionally targeted by
private banks, the latter are expected to meet the inclusion requirement to get a
hand in the till.



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