The financial market plays a crucial role in economic development of a country facilitating the allocation of scarce resources. By transferring resources from the savers to the users i.e. borrowers, it directs resources from the idle to the productive sectors. This accelerates investment activities in the country. The allocation function of the financial market has been described succinctly by µStieglitz¶ (1994): "Financial markets essentially involve the allocation of resources. This can be thought of as the brain of the entire economic system, the locus of the central decision making: if they fail, not will the sectors' profit be lower than would otherwise have been, but the performance of the entire economic system may be impaired." The importance of financial development was amply acknowledged by classical economists (Adam Smith and others), and neo-classical economists (Alfred Marshall and others), who believed that there is a close relationship between capital accumulation and the process of economic development. Till 1980s banks used to dominate the financial system in India playing the role of intermediary to a great extent between the savers and the borrowers through accepting deposits and lending to the needy customers. However the financial reforms introduced in early 90s changed the scenario with many players entering the system to perform the role of intermediaries which was hitherto the domain of the banking system. Therefore, disintermediation in the Indian financial markets started in a big way. Thus, capital markets started playing a leading role in the Indian financial markets.

Indian financial system consists of a variety of institutions, markets and instruments. It provides the principal means-by which savings are transformed into investments. Savings are linked to investments by way of intermediaries through a range of complex financial products called "securities", which is defined in the Securities Contract (Regulation) Act, 1956 to include shares, bonds, scrip¶s, debentures, stocks or to other marketable securities of line nature in or of any incorporated company or body corporate, government securities, derivatives of securities, units of collective investment scheme, interest and rights in securities or any other instruments deployed by the central government. Thus, the securities market has essentially three categories of participants, namely, the issuers of securities, investors of securities and the intermediaries and two categories of products, namely, the services of the intermediaries and securities. Mutual funds operate as collective investment vehicles, on the principle of accumulating funds from a large number of investors and then investing on a big scale. For a fund to sell units across a wide retail base of individual investors, an established network of distribution agents is essential.


If both product providers and sales and distribution actors are making profits. These front-end inefficiencies flow back to AMCs in the form of higher costs. while it is 140% in the US and 96%in Brazil. It is designed for those who are interested in gradually accumulating wealth in a disciplined manner over a long term. AUM as a percentage of GDP works out to only 8% here.Distribution of mutual funds Mutual funds are sold through five principal distribution channels: 1) The direct channel 2) The advice channel 3) The retirement plan channel 4) The supermarket channel. independent financial advisors. Investment in mutual funds is still low in India. At one level. Many fund marketers have come out with innovative and customer friendly products that aim at satisfying the investors¶ financial goals. Independent financial advisors can be found everywhere. compared with 79% in the US. The proportion of independent financial advisors selling insurance is 35-40%. at 25%. The second is an escalation in churning practices. The prevailing incentive models in non-proprietary intermediation have imposed three serious threats to mutual funds operating in India. for mutual funds the number is slightly less at 20%. and 5) The institutional channel Distribution of financial products is essentially done through banking channels. The Indian mutual fund industry has traditionally been faced with an unstable asset composition. national and regional distributors in India. The customer is unlikely to complain as long as returns on investment match expectations and the actual costs are not transparent. The first is the captive market syndrome where commissioned agents depress both AMC margins and investor returns by demanding high frontend charges and trailing commissions. Though distribution through banking channels is fairly large at 30-35%. and 39% in Brazil. a small geographically skewed retail investor base. and a relatively insignificant share of household savings. lower profits and erratic investor behavior. Mutual funds are priced based on 4 . mutual funds and other products. They are easily accessible too and constitute the unorganized segment of the business. the role of others cannot be ignored. The third is distributor disinterest in sales to potential SIP investors. selling insurance. AUM as a percentage of bank deposits is also abysmally low in India. Systematic Investment Plan (SIP) is an innovation in payment option for mutual fund investors. this is simply an issue of how the costs involved are shared across the food chain. the only tension is the relative shares each receives. by both the retail and institutional categories. However.

The decline in distribution costs reflects a variety of developments. Investors can sell their units back to the fund at the prevailing NAV. and shares of a given fund were offered to all investors. companies sponsoring mutual funds have created new funds and share classes that have costs reflecting the different distribution services. the range of venues (or distribution channels) through which an investor can purchase fund shares has expanded since 1980. but each share class may offer shareholders different methods of paying for broker services. who provided advice. and increased availability of lowercost advice to investors. The purpose of this paper is to describe the current structure of the distribution system for mutual funds and to analyze trends and developments in distribution cost incurred by mutual fund investors since 1980. The shareholder paid for these distribution services through a front-end sales charge when he or she bought the fund. there have been dramatic changes in how mutual funds are sold to the investing public. traditional distribution channel ² a sales force or directly to investors ² often now compete head-to-head in the same distribution channels. 5 . and each distribution channel may offer different services. assistance. As a result. funds offer several different share classes ² all of which invest in the same underlying portfolio of assets. In the past 25 years. Other funds sold shares directly to investors without a sales charge. Investors in these funds either did not receive advice and assistance or obtained and paid for these services separately funds sold through financial professionals such as brokers have since adopted alternatives to the front-end sales charge. With the expansion in distribution channels. many fund sponsors have abandoned earlier. In many cases. all funds had a single share class. mutual fund sponsors that once marketed exclusively through a single.their net asset value. The changes in fund distribution have been accompanied by a significant decrease in the average cost of distribution services incurred by mutual fund buyers. As a consequence. expansion of the 401(k) plan market and other markets with low distribution costs. In addition. The alternative payment methods typically include a fee based on assets that may also be in combination with a front-end or back-end sales charge. which the fund houses declare on a daily basis. Most funds were sold through a broker. including competition between mutual funds. Before 1980. and ongoing service to the fund buyer. single-channel distribution strategies in favor of multi-channel distribution.


To study Size of various distribution channels To study the future of mutal funds y y y y y y y 7 . To examine the role of various distribution channels.OBJECTIVES OF THE STUDY y One of the important objective is to study is to understand the distribution of mutual funds in India. To study the distribution woes of mutual funds To understand the issues of distribution costs of mutual funds To study the practices of distributors To understand current structure of the distribution system for mutual funds and to analyze trends and developments in distribution cost incurred by mutual fund investors.


y Meeting the officials of BIRLA SUN LIFE financial services Ltd and discussing various aspects of the fund. market and the distribution channels. After collecting the data it was sorted out and analysed keeping in view the objectives of the study.METHODOLOGY Having selected mutual fund distribution in India for the study. y y 9 . Contacted mutual fund customers and collected information on their experiences. the following methodology was adopted to collect date.

and the potential of regulatory changes in the future y y y Comprehend the complex . or those firms already present in India and wishing to benchmark their performance against the industry standards This report helps mutual funds distributors to: y y y y Understand the competition. and benchmark themselves against industry standards Consider future strategies for the development of advice-based distribution Examine the role of assemblers in the context of new products and multimanagement trends Study the profitability distribution issues . distribution system for mutual funds Size the various distribution channels Understand the economics of mutual funds distribution 10 .Report scope Beneficiaries of this study The primary Beneficiaries of this research are asset management firms with an interest in either understanding the distribution dynamics in India¶s mutual fund market place. and often chaotic .

11 .A. with investments flowing into equity and debt instruments. investors need a financial intermediary who provides the required knowledge and professional expertise on successful investing.y Study the evolution of the IFA . Even those investors who continued as direct investors in the stock markets realized that the key to successful investing in the capital markets lay in building a diversified portfolio. many investors who bought highly priced shares lost money. It is no wonder that in the birth place of mutual funds the U. and withdrew from the markets altogether. As financial markets become more sophisticated and complex. more funds being under mutual fund management than deposited with banks. which in turn required substantial capital. and the other channels . besides the conventional mode of bank deposits. Place of Mutual Funds in Financial Markets Indian households started allocating more of their savings to the capital markets in 1980s. Primary market investors were effectively assured good returns as the issue price of new equity issues was controlled and low. and how they likely to grow in future Emergence of mutual funds Mutual funds now represent perhaps the most appropriate investment opportunity for most investors. We have started witnessing the phenomenon of more savings now being entrusted to the funds than to the banks. new issue prices were higher and with greater volatility in the stock markets. The Indian Mutual Fund industry has already opening up many of the exciting investment opportunities to Indian investors.S. Until 1992. After introduction of free pricing of shares.-the fund industry has already overtaken the banking industry.


A bond fund would mainly buy debt instruments such as debentures.ordinary shares. bonds or government securities.The Concept of Mutual Fund A mutual fund is a common pool of money into which investors place their contributions that are to be invested in accordance with a stated objective. It is these assets. A single investor's ownership fund is in the same proportion as the amount of the contribution made by him or her bears to the total amount of the fund. warrants etc. A mutual fund uses the money collected from investors to buy those assets. preference shares. The ownership of the fund is thus joint or "mutual". which are owned by the investors in 13 . the fund belongs to all investors. Thus. an equity fund would buy equity assets . which are specifically permitted by its stated investment objective.

Diversification reduces the risk of loss.A. as compared to investing directly in one or two shares or debentures or other instruments. 2. all the risk of potential loss is his own. This enables him to hold a diversified investment portfolio even with a small amount of investment that would otherwise require big capital. When an investor invests directly. a mutual fund is constituted as an investment company and an investor "buys into the fund".. 3) Reduction / Diversification of Risk: An investor in a mutual fund acquires a diversified portfolio no matter how small his investment. Each investor in a fund is a part owner of all the fund's assets. The investment management skills. 14 . which is where the term Unit Trust comes from. he benefits from the professional management skills brought in by the fund in the management of the investor's portfolio. In fact. However. global and sophisticated markets. a mutual fund is constituted as a Trust and the investor subscribes to the ³units´ issued by the fund. In India. The reduction is one of the most important benefits of a collective investment vehicle like the mutual funds. particularly for the investor who has limited resources available in terms of capital and ability to carry out detailed research and market monitoring.the same proportion as their contribution bears to the total contributions of all investors put together. whether the investor gets fund shares or units is only a matter of legal distinction Advantages of Mutual Funds If the mutual funds are emerging as the favorite investment vehicle. Professional management: Even if an investor has a big amount of capital available to him . any loss on one or two securities is also shared with other investors. Portfolio diversification: Mutual funds normally invest in a well ± diversified portfolio or securities. ensure a much better return than what an investor can manage on his own. Few investors have the skills and Resources of their own to succeed in today's fast . While investing in the pool of funds with other investors. A fund investor also reduces his risk in another way. it is because of The many advantages they have over other forms and avenues of investing.moving. The following are the major advantages offered by mutual funds to all investors: 1. along with the needed research into available investment options. in the U.S. meaning he buys the shares of the funds.

and so on. easily and quickly sell. by selling the units to the fund if open . A direct investor bears all the costs of investing such as brokerage or custody of securities. is more liquid. a benefit passed on to its investors. investors hold shares or bonds they cannot directly. 5) Liquidity: Often.4) Reduction of transaction costs: What is true of risk is also true of the transaction costs. the funds pay lesser costs because of larger volumes. on the other hand. 6) Convenience and flexibility: Mutual fund management companies offer many investor services that a direct market investor cannot get. An investor can liquidate the investment. he has the benefit of economies of scale. Investors can easily transfer their holdings from one scheme to the other get updated market information. Investment in a mutual fund.end and collect funds at the end of a period Specified by the mutual fund or the stock market. 15 .end. When going through a fund. or selling them in the market if the fund is closed .

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31 . Trust The Mutual Fund is constituted as a trust in accordance with the provisions of the Indian Trusts Act. 1908.The Sponsor is not responsible or liable for any loss or shortfall resulting from the operation of the Schemes beyond the initial contribution made by it towards setting up of the Mutual Fund. 1882 by the Sponsor.STRUCTURE OF MUTUAL FUND Sponsor Sponsor is the person who acting alone or in combination with another body corporate establishes a mutual fund. The trust deed is registered under the Indian Registration Act. The fund sponsor acts as the Settler of the Trust. Sponsor must contribute at least 40% of the net worth of the Investment managed and meet the eligibility criteria prescribed under the Securities and Exchange Board of India (Mutual Funds) Regulations.1996.. contributing to its initial capital and appoints a Trustee to hold the assets of the Trust.

2. 4. the Trustees have the right to dismiss the AMC. The main responsibility of the Trustee is to safeguard the interest of the unit holders and inter alia ensure that the AMC functions in the interest of investors and in accordance with the Securities and Exchange Board of India (Mutual Funds) Regulations. This agreement must be in accordance with the Fourth Schedule of SEBI (MF)Regulations. At least 2/3rd directors of the Trustee are independent directors who are not associated with the Sponsor in any manner. 4) The trustees must ensure due diligence on the part of the AMC empanelment of brokers. Obligations of Trustees 1) The trustees must enter into an investment management agreement with the AMC. 2) They must ensure that the fund's transactions are in accordance with the Trust deed 3) The trustees are responsible for ensuring that the AMC has proper systems and procedures in place and has appointed key personnel including Fund Managers and a Compliance officer. The trustees may take remedial action if they believe that the conduct of the fund's business is not in accordance with SEBI Regulations. with the approval of SEBI and in accordance with the regulations. They also approve each of the schemes floated by the AMC. 1996. 1996. They have the right to request any information from the AMC concerning the operations of various schemes managed by the AMC as often as required. 3.Trustees Trustee is usually a company (corporate body) or a Board of Trustees (body of individuals). 32 . The trustees appoint the AMC with the prior approval of SEBI. besides other constituents such as the auditors and registrars. In certain specific events. to ensure that the AMC is in compliance with the Trust deed and the regulations. the provisions of the Trust Deed and the Offer Documents of the respective Schemes. Rights of Trustees 1.

redemption requests and dispatches account statements to the unit holders.Asset Management Company The AMC is appointed by the Trustee as the Investment Manager of the Mutual Fund. paying for investments made. The Registrar processes the application form. Where an outside transfer agent is used. the fund investor will find the agent to be an important interface to deal with. The AMC is required to be approved by the Securities and Exchange Board of India (SEBI) to act as an asset management company of the Mutual Fund. The Registrar and Transfer agent also handles communications with investors and update investor records. since all of the investor services that a fund provides (besides the investment management) are going to be dependent on the transfer agent. A fund may choose to carry out its activity in .15 Custodian and Depositories Mutual funds are in the business of buying and selling of securities in large volumes. At least 50% of the directors of the AMC are independent directors who are not associated with the Sponsor in any manner. Transfer agents are responsible for issuing and redeeming units of the mutual fund and provide other related services such as preparation of transfer documents and updating investor records. Handling these securities in terms of physical delivery and eventual safekeeping is therefore a specialized 33 .house and charge the scheme for the service at a competitive market rate. Bankers A funds activity involve dealing with money on a continuous basis primarily with respect to buying and selling units. receiving the proceeds on sale of investments and discharging its obligations towards operating expenses. A fund's bankers therefore playa crucial role with respect to its financial dealings by holding its bank accounts and providing it with remittance services. The AMC must have a net worth of at least 10 crores at all times. Registrar and Transfer agent The AMC if so authorized by the Trust Deed appoints the Registrar and Transfer Agent to the Mutual Fund.

For a fund to sell units across a wide retail base of individual investors. Distributors Mutual funds operate as collective investment vehicles. 34 . on the principle of accumulating funds from a large number of investors and then investing on a big scale. an established network of distribution agents is essential.activity.


The fund company or an outside valuation agent values this type of fund. a mutual fund company or investment dealer. usually a mutual fund company. The sponsor has promised in the documents of the fund that it will issue and refund units of the fund at the fund unit value. will create a "trust fund" that raises funds through an underwriting to be invested in a specific fashion. Load and No Load Funds Marketing of a new mutual fund scheme involves initial expenses. establishes open-end mutual funds. These expenses may be recovered from the investors in different ways at different schemes.TYPES OF MUTUAL FUNDS Open-end Mutual Funds A fund sponsor. The fund retains an investment manager to manage the fund assets in the manner specified. A sponsor. 36 . Close-end Mutual Funds Close-end mutual funds are really financial securities that are traded on the stock market.

funds other than Equity funds have to pay a distribution tax. Fixed Term Term Plan Series .exempt securities. in response to investor needs. However.exempt Funds Generally.Cap Equity Funds 37 . a) Specialty Funds These funds have a narrow portfolio orientation and invest in only companies that meet predefined criteria.exempt VS Non . mutual funds have evolved an innovative middle option between the two.Tax .exempt fund.. it is called a tax . ii) Offshore Funds These funds invest in equities in one or more foreign countries thereby achieving diversification across the country's borders.Another Indian Variant A mutual fund scheme would normally be either open-end or closed-end. However they also have additional risks such as the foreign exchange rate risk . Pharmaceuticals or Fast Moving Consumer Goods that have recently been launched in India. before distributing income to investors.. when a fund invests in tax .and their performance depends on the economic conditions of the countries they invest in. iii) Small. However in India. Some funds may build portfolios that will exclude tobacco companies. i) Sector Funds Sector funds portfolios consist of investments in only one industry or sector of the market such as Information Technology. In India.Tax . all of the dividend income received from any of the mutual funds is tax free in the hands of the investor. Funds that invest in particular regions such as the Middle East or the ASEAN countries are also an example of specialty funds. after the 1999 Union Government Budget.

these funds seek to strike a balance between capital appreciation and income for the investor. and preference and equity shares. Their assets are generally held in more or less equal proportions between debt / money market securities and equities. c) Asset Allocation Funds Normally. blue chip companies. as smaller companies shares are not very liquid in the markets Hybrid Funds . a Debt Fund would not have major equity holdings. Thus. Some of the funds in this category are described below. b) Growth and Income Funds Unlike income focused or growth focused funds. By investing in a mix of this nature. most funds. 38 . Commodity Funds While all of the debt! Equity/ money market funds invest in financial assets. balanced. debt and equity. Commodity funds specialize in investing in different commodities directly or through shares of commodity companies or through commodity futures contracts. equity or debt always have some money market securities in their portfolios as these securities offer the much needed liquidity. Similarly. Such funds are termed "hybrid funds" as they have a dual equity bond focus.Quasi Equity / Quasi Debt We have seen that in terms of the nature of financial securities held. there are three major mutual fund types: money market. an Equity Fund would have its primary portfolio in equities most of the time. Many mutual funds mix these different types of securities in their portfolios.for example . They may thus be more volatile than other funds. convertible securities. the mutual fund vehicle is suited for investment in any other .These funds invest in shares of companies with relatively lower market capitalization than that of big. a) Balanced Funds A Balanced fund is one that has a portfolio comprising debt instruments.physical assets.

Contents of the Offer Document The front page of the Offer Document provided information about the scheme "at a glance". income. It is imperative that the investor fully studies the information contained in the offer document before committing his investment..) -Name of AMC -Classes of units offered for sale Price of units -Name of guarantor in case of assured return scheme -Opening and closing and earliest closing date for the offer -Statement to the effect that the document contains information that a prospective investor should know before investing and that it should be retained for future reference Importance of an offer document for the investor The offer document s one of the most important sources of information from the: respective of the prospective investor considering investment in a new mutual fund. 39 .Real Estate Funds Specialized Real Estate Funds would invest in Real Estate developers. the following items are covered: 1) Name of the mutual fund 2) Name of the scheme -Type of the scheme (whether growth.part from the scheme details. Specifically. the Offer document also gives much valuable information at is relevant for the investor's decision making on whether he should consider subscribing to the new scheme being proposed. . and contains the date of its publication.. or lend to them. name and type of the fund and its major objectives. balanced. or buy shares of housing finance companies or may even buy their securitized assets.


At the end of 1988. It launched its first scheme. 805 crores.HISTORY OF THE INDIAN MUTUAL FUND INDUSTRY The mutual Fund industry in India started in 1963 with the formation of Unit Trust of India.. the mutual fund industry had assets under management to the extent of Rs. Third Phase (1993-2003) This phase is marked by the entry of private sector mutual funds in a large way.44.47. SBI was first nonUTI mutual fund followed by many public sector banks and Life Insurance Corporation of India (LIC) and General Insurance Corporation of India (GIC).700 crores assets under management. Fourth Phase (Since 2003) In February 2003. The industry is covered by SEBI (Mutual Fund) Regulations. By the end of 1993. It was taken over by the Industrial Development Bank of India in 1978. First Phase (1946-87) Unit Trust of India was established in 1963 by an act of Parliament. The history of mutual Funds in India can be broadly divided into four distinct phases.541 crores of assets under management was way ahead of other funds. At the end of January 2003. UTI had Rs.Unit Scheme 1964. at the initiative of the Government of India and Reserve Bank of India. 21. The Unit Trust of India with RS. 1996. there were 33 mutual funds with total assets of Rs. UTI was bifurcated into two separate entities with one looking after the assets 41 . This period also witnessed several mergers and acquisitions.6. I t was set up by the RBI . Second Phase (1987-1993) The second phase is marked by the entry of other public sector mutual Funds.OO4 crores.

BOB and LIC was registered with SEBI. The second one sponsored by SBI.of US 64 scheme. PNB. The mutual fund industry has entered its current phase consolidation and growth 42 .



units 100 211 311 402 485 Cum amount 1000 2000 3000 4000 5000 Value of investment 1000 1900 3111 4422 5824 .91 83. Milestones like buying the first car. Power of compounding: In reality. the faster it will grow.33 45 Cum. What is a SIP? A Systematic Investment Plan (SIP) is an option that allows you to invest a fixed sum at periodic intervals on specific dates. your own house.11 100. Building wealth SIP by SIP Life is but a few grand milestones. When your returns begin to earn money and those returns start to earn.00 111.About Systematic Investment Plans (sip¶s) Systematic Investment Plan (SIP) Systematic Investment Plans give you have the flexibility of either investing through regular installments thus allowing you to take advantage of disciplined investing. further the need deeper is the urge to postpone. How does compounding power works? An illustrates Amount invested 1000 1000 1000 1000 1000 NAV 10 09 10 11 12 Units 100.00 90. But the fact is the longer you leave your money invested. sending your kid to that Ivy League business school or a lavish marriage for your kid or for that matter touring the globe in your golden years. The benefits of this are obvious.

91 100.85 71.92 58. 11.43 90. 12. 12 46 . 12.1000 1000 1000 1000 1000 1000 1000 13 17 14 11 10 12 15 76.000 Average cost per Unit = Rs.000/1033 = Rs.33 66.67 Total Units = 1033 562 621 693 783 883 967 1033 6000 7000 8000 9000 10000 11000 12000 7310 10559 9695 8618 8834 11601 15502 Total Amount= Rs.00 83.60 Average Price per Unit = Rs.

ABOUT DISTRIBUTION MUTUAL FUNDS OF Distribution of mutual funds Mutual funds are sold through five principal distribution channels: 1) The direct channel 2) The advice channel 47 .

3) The retirement plan channel 4) The supermarket channel, and 5) The institutional channel The first four channels primarily serve individual investors. In the direct channel, investors carry out transactions directly with mutual funds. In the advice, retirement plan, and supermarket channels, individual investors. In the direct channel, investors carry out transactions directly with mutual funds. In the advice, Retirement Plan, and supermarket channels individual investors use third party or intermediaries that conduct Transactions with mutual funds are sold through five principal distribution channel: mutual funds on their behalf of mutual funds. Capital structure The Capital structure of mutual funds has changed over the past two dacades from solely singleclass funds to a mixture of single ±and multi-class funds. The majority of funds to a mixture of single- and multi-class funds, the majority of funds are now multi class. The change in capital structure partly reflects the Broadening of the distribution system. In particular ,the multi class structures enables funds to offer different distributions and service arrangements to investors with differing needs.

Distribution cost Distribution cost the combination of sales loads and 12b-1 fees incurred by buyers of mutual funds ± decreased 60% for equity fund shares classes with loads between 1980 and 2001. Distribution cost fell as load share classes were sold with greater frequency in retirement plans and other accounts that reduce or waive the load. The decline in cost of purchasing load share classes was also partly in response to competition from no load companies. Mutual fund distribution channel Mutual funds are offered for sale in five distribution channels. In the direct channel, investors carry out transactions directly with mutual funds themselves by mail, phone, the Internet, or at customer service centers. In the advice channel, investors purchase and redeem shares through financial advisers at securities firms, banks, insurance agencies, and financial planning firms. In the supermarket channel, discount brokers offer a large number of mutual funds to investors from a broad array of fund companies. Direct channel:


In the direct channel, investors buy and redeem shares directly from the fund or, more precisely, through the fund¶s transfer agent. The fund company sponsoring the fund does not provide investment advice, so investors must undertake their own research to choose funds Advice channel: The principal feature of the advice channel is the provision of investment guidance, assistance, and advice by financial professionals. These include full-service brokers at national wirehouses, independent financial planners and advisers, registered sales representatives at banks and savings institutions, and insurance agents. Such advisers help fund shareholders identify financial goals such as retirement, tax management, education savings, and estate planning. They assess the risk tolerance of their clients and select mutual funds and other investments to meet these goals. Retirement plan channel In the 1990s, defined contribution retirement plans, such as 401(k) plans, became one of the primary sources through which investors buy mutual funds. In 2002, $1 trillion was invested in mutual funds through defined contribution plans, up from $67 billion in 1990. Supermarket channel The introduction of the first mutual fund supermarket by a discount broker in 1992 represented a significant innovation in the distribution of mutual funds. Many other discount brokers, some affiliated with mutual fund companies, have since organized fund supermarkets. Institutional channel: The institutional channel comprises a variety of institutions purchasing fund shares for their own accounts. These institutions include businesses, financial institutions, endowments, foundations, and state and local governments.

CAPITAL STRUCTURE OF MUTUAL FUNDS: The capital structure of mutual funds has changed significantly since1980. In 2002, over half of all mutual funds had two or more share classes, a marked contrast to the early 1980s when all funds had only one share class The movement to a multi-class capital structure reflects two developments. The first is the use of multi-channel distribution strategies, which has led many funds to establish share classes with different distribution, service, and expense arrangements. The use of multi-class funds permits investors in each share class to benefit from economies of scale associated with a single portfolio of securities while obtaining distribution and service arrangements suited to their specific needs. Class A, B, and C shares


One use of the multi-class structure is to provide investors in the advice channel with alternative ways to pay for advice and service provided by financial professionals. The share classes offered in these channels are typically labeled class A, B, and C shares. A Shares. The A share class represents the traditional means for paying for investment advice. Class A shares carry a front-end sales load that is charged at the time of purchase as a percentage of the sales price or offering price. In 2001, the average equity fund¶s B share had an annual expense ratio that was 72 basis points greater than its A share. B share: investors also avoid the front-end load charged by A shares, which reduces the amount of the original investment. In theory, the investor could achieve the same result by buying A shares and borrowing the amount of the front-end load. In practice, however, it would not be economical to do so because the interest rate on the loan would generally be higher than that incorporated into the cost of B shares.

C Shares. Class C shares offer a third option for paying for advice and assistance. C shares are offered at net asset value with no front-end load, and they typically recover distribution costs through a combination of an annual 12b-1 fee of100 basis points and a CDSL set at 1 percent in the first year of purchase. Choice Between A, B, and C Shares. Several factors can influence an investor¶s choice of share classes. One factor is the amount invested by the shareholder because investors in A shares typically receive load reductions for large purchases, whereas investors in B and C shares do not. Another factor is the investor¶s preference for paying an upfront sales load as opposed to spreading the payments over time through 12b-1 fees. Some investors would prefer to invest the full amount, as in the case of B and C shares, rather than reduce the amount to be invested by paying the front-end load In addition, successive decreases in the CDSL boost the annual return. Moreover, the conversion of B shares to A shares after the eighth year increases the return further, as the 12b-1 fee drops to the lower level of A shares The constancy of the return on C shares after the first hold shares. that would alter the level of the 12b-1 fee. For holding periods from one to six years, C shares are the highest yielding investment in the example. The return advantage is especially large in the first several years when A and B shares are most affected by sales loads.


crore) private sector Total N/A N/A N/A N/A N/A N/A 1548 1333 301 172 344 1677 1548 301 344 1978 7826 19178 2021 3784 6708 6149 11266 13029 11223 11352 6493 10105 11395 22704 29842 Year 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 UTI 1763 3483 5504 3132 8686 11051 9288 8686 5891 9589 9116 13201 public sector 258 301 1204 2967 2580 1978 387 1333 1999-2000 9159 Source web document at AMFI FEATURES OF MUTUAL FUNDS: 51 .Gross mobilization by Mutual Funds (Rs.

Indian mutual fund industry reached Rs 1.90.By December 2004.537 crore. the total assets of all scheduled commercial banks should be Rs 40.4% during the rest of the decade. by year 2010.50.Crore) Month/Year Deposits Change in % over last yr Source ± RBI Mar98 Mar00 Mar01 Mar02 Mar03 Mar04 Sep-04 4-Dec 15672 16225 51 79 18 3 60541 85159 98914 11311 12808 0 3 1 88 53 15 14 13 12 - 52 . mutual fund assets will be double. It is estimated that by 2010 March-end. Let us discuss with the following table: Aggregate deposits of Scheduled Com Banks in India (Rs. In the last 5 years we have seen annual growth rate of 9%.000crore. The annual composite rate of growth is expected 13. According to the current growth rate.

y y y y y y governance. Soon they will find scope in the growing cities. Our saving rate is over 23%. Mutual fund can penetrate rurals like the Indian insurance industry with simple and limited products. highest in the world. Number of foreign AMC's are in the que to enter the Indian markets like Fidelity Investments. 'B' and 'C' class cities are growing rapidly.Mutual Growth Month/Year MF AUM's Fund AUM¶s Mar98 Mar00 Mar01 Mar02 Mar03 Mar04 Sep04 4-Dec 68984 93717 83131 94017 75306 26 13 12 25 13762 15114 14930 6 1 0 45 9 1 Change in % over last yr Source ± AMFI Some facts for the growth of mutual funds in India y y 100% growth in the last 6 years. There is a big scope for expansion. SEBI Emphasis allowing the on MF's to better launch commodity corporate mutual funds. Only channelizing these savings in mutual funds sector is required. US based. with over US$1trillion assets under management worldwide. Today most of the mutual funds are concentrating on the 'A' class cities. We have approximately 29 mutual funds which is much less than US having more than 800. 53 .

The top five asset management companies (AMCs) account for more than half of the total AUM and Reliance Mutual fund and ICICI Prudential Mutual fund together comprise 25.1 billion. this brings down the amount invested in the fund by investors. With the growing popularity of commodity trading in two of India¶s commodity exchanges. 3. Year-on-year assets under management ballooned by a whopping 57%. whose economy is ranked as having the world's second-fastest-growing gross domestic product. which is not a very exciting proposition for them. the asset management industry in India is witnessing rapid growth. India appears to be ready for commodity-traded funds. 655.y Trying to curb the late trading practices. In real estate market. favorable stock markets. Spurred on by the economic boom.7 billion in June 2007. there has been 48. Because entry loads have been a contentious issue. Mutual fund boom in India Mutual funds are soaring as the top investment choice in India. entry of foreign asset management companies.8 billion to $67. rising salaries.22 percent increase in assets under management (AUM) from Rs.2. Distribution woes Few retail investors are aware why they are charged an entry load of 2-2. softer interest rates for home loans. Commodity Traded Funds and Real Estate Funds are EmergingOpportunities Commodity traded funds and real estate funds are two promising areas of opportunity in the Indian asset management market.5% when they invest in a mutual fund. from US$42. and liberalization leading to the influx of investments by foreign funds have led to a big boom. distribution and marketing expenses of the asset management company (AMC) in whose fund the investor has put in his money. in 2004-05 according to published market figures. Overall. 54 . Multi Commodity Exchange of India Limited and the National Commodity and Derivatives Exchange Limited.3 billion in June 2006 to Rs. Naturally. The money goes towards selling. thereby creating a new market in the mutual funds industry. and aggressive marketing by mutual funds.8 percent of the total AUM as of June 2007.935. the Securities and Exchange Board of India (SEBI) recently passed an order saying that investors who approach fund houses directly will not be charged.

However. lack of investor awareness. Furthermore. and limited banking facilities. Key findings y y y Banks are a key player in distribution and are likely to grow their marketshare. June 2007 direct 11% banks 32% national &regional distributors 30% ifa 27% CONCLUSION 55 . "This apart. the biggest challenge faced by mutual funds today is hiring and retaining qualified and experienced professionals. An Indian IFA firm could rival a regional distributors with asset under administration and a private bank with service and delivery of advice. Experts suggested that the IFA channel is a viable alternative to the national/regional distributor. asset management companies are generally reluctant to invest in infrastructure in smaller towns due to lesser margins from rural business. Mutual funds are largely out of reach for the majority of rural population due to poor distribution." notes the analyst of this research service. the limited participation of the rural sector is a crucial restraint to the industry¶s growth. Mutual funds AUM Market share by distribution channels. but they face competition from national and regional distribution firms and IFAs.

Companies sponsoring are able to tailor funds and share classes to provide packages of services and means of paying for those services that better meet investors needs the wider availability of mutual funds through new distribution channels. investors increased reliance on no load mutual funds.The change in the distribution mutual fund during the last two decades has allowed the investors to choose from a wider range of services and has provided greater access to mutual funds than was available in 1980. 56 .

trade and industrial scenarios.OBERVATIONS OBSERVATION ROM THE STUDY ON DISTRIBUTION OF MUTUAL FUNDS IN INDIA FOLLOWING OBSERVATION ARE MADE: 1. LPG environment has exposed various 57 . Liberalization. Privatization and Globalization (LPG) has brought unprecedented changes in the economic.

In India. The competitive environment has helped the players in the market to put in place new strategies to improve their market share. whose economy is ranked as having the world's second-fastest-growing gross domestic product. 20 of each month. You have the flexibility of specifying dates for example . Year-on-year assets under management ballooned by a whopping 57%. taking the total AUM in India today to $92 billion. segmentation 58 .1 billion. respectively. Systematic Transfer Plan (STP) You can opt for the Systematic Transfer Plan by investing a lump sum amount in one scheme of the fund and providing a standing instruction to transfer sums at monthly intervals (for a minimum period of 6 months) into any scheme of Mutual Fund. Please check with the AMC before investing. 10. The AMC reserves the right to change any of the above. from US$42. and the institutional investor segment. asset management business is nascent. expected to grow at 36% annually. expected to grow at 29% annually. in 2004-05 according to published market figure. The main drivers of this will be the retail segment.8 billion to $67. The fund is offering schemes taking into account the market and customer Mutual fund boom in India Mutual funds are soaring as the top investment choice in India. though still behind Russia and China. The business has grown 47% annually since 2003. One reason why it also has the fastest growth rate. service quality and cost. You have the option of specifying a fixed sum to be transferred every month or transferring just the capital appreciation.1. This will take the total assets under management (AUM) to $440 billion. Opportunity for asset management companies: The next five years will see the Indian asset management business grow at least 33% annually.organizations including the mutual fund industry to the challenges of competition. It grew 97% and 67% in Russia and China.

59 .


At present retailers continue to pay higher expenses compared to corporates. 4. 2. 61 . the fund may explore the opportunities to enter the rural market to meet the requirements of the rural population. the following recommendations are made to improve the market share of the fund. the customer retention will be facilitated. There are two benefits for the MF to increase its retailer base. 1. Further fund have to open its presence at every at all the branches to increase its customer base.Improvement of physical infrastructure: Number of branches have to be increased for market penetration. (i) Client acquisition cost will come down. As rural markets have high potential for business development. Now banks are showing interest to market third party products. The cost of corporate client: Acquisition is prohibitively high for mutual funds. Customer Segmentation: Fund may develop products to suit the needs of rural population. (ii) Retailer base will increase. Third Party Products: The fund may enter into tie up arrangements with leading banks for increasing the reach. MF may focus their efforts on retail customers whose number is very high.RECOMMENDA TIONS Based on the study of mutual fund distribution in India. With the increase in retailer base. 3.

EXECUTIVE SUMMARY \ Bibliography 1. Association of Mutual Funds of ( 62 . Mutual Funds India.

Economic Times 4. 63 . Google. Sebi. 6.

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