Mutual fund-web

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IndianMutualFundIndustry –TheFutureinaDynamicEnvironment Outlookfor2015 JUNE 2009

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Transcript of Mutual fund-web

Page 1: Mutual fund-web

Indian�Mutual�Fund�Industry�–�The�Future�in�a�Dynamic�EnvironmentOutlook�for�2015

JUNE 20 09

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Table of Contents

1. Executive Summary 01

2. The Indian Mutual Fund Industry - Current State 03

3. Challenges and Issues 10

4. Voice of the Customer 15

5. Future Outlook in a Dynamic Environment 20

6. Action Plan for Achieving Transformational Growth 26

7. Summary 32

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

The�Indian�mutual�fund�industry�has�witnessed�significant�growth�in�the

past�few�years�driven�by�several�favourable�economic�and�demographic

factors�such�as�rising�income�levels�and�the�increasing�reach�of�Asset

Management�Companies�(AMCs)�and�distributors.�However,�after�several

years�of�relentless�growth,�the�industry�witnessed�a�fall�of�8�percent�in

the�assets�under�management�in�the�financial�year�2008-09�that�has

impacted�revenues�and�profitability.�

Recent�developments�triggered�by�the�global�economic�crisis�have

served�to�highlight�the�vulnerability�of�the�Indian�mutual�fund�industry�to

global�economic�turbulence�and�exposed�our�increased�dependence�on

corporate�customers�and�the�retail�distribution�system.�It�is�therefore�an

opportune�time�for�the�industry�to�dwell�on�the�experiences�and�develop

a�roadmap�through�a�collaborative�effort�across�all�stakeholders,�to

achieve�sustained�profitable�growth�and�strengthen�investor�faith�and

confidence�in�the�health�of�the�industry.�Innovative�strategies�of�AMCs

and�distributors,�enabling�support�from�the�regulator�SEBI,�and�pro-active

initiatives�from�the�industry�bodies�CII�and�AMFI�are�likely�to�be�the�key

components�in�defining�the�future�shape�of�the�industry.

This�report�summarises�the�current�state�of�the�Indian�mutual�fund

industry�highlighting�the�key�challenges�and�issues.�We�have�also

presented�the�‘Voice�of�Customers’�to�understand�their�needs�and

priorities�as�the�industry�defines�the�future�roadmap�for�2015.�The�report

outlines�an�action�plan�for�key�stakeholders�so�as�to�surpass�expectations

of�industry�growth�and�profitability.

KPMG�acknowledges�the�inputs�received�from�AMCs,�distributors,

customers�and�service�providers�for�this�report.

KPMG�is�privileged�to�be�associated�with�the�CII�Mutual�Fund�Summit

2009�as�Knowledge�Partner�on�the�theme�’Indian�Mutual�Fund�Industry�–

The�Future�in�a�Dynamic�Environment’.

Abizer DiwanjiHead – Financial Services KPMG in India

Preface

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Relatively�low�penetration�levels�combined�with�rapid�growth�in�the

assets�under�management�in�recent�years�point�to�the�high�growth

potential�of�the�Indian�mutual�fund�industry.

The�recent�developments�of�the�past�few�months,�triggered�by�the�global

economic�crisis,�have�shown�that�the�Indian�mutual�fund�industry�is�not

decoupled�from�global�developments.�The�financial�turmoil�has�served�to

highlight�the�benefits�of�investing�in�mutual�funds,�in�particular,�in

comparison�with�directly�investing�in�stocks.�

Going�forward,�the�Indian�mutual�fund�industry�is�expected�to�secure

growth�by�catering�to�the�evolving�aspirations�of�retail�customers.�The

industry�seeks�to�target�an�increased�share�of�the�customer�wallet

through�product�innovation�combined�with�deeper�retail�penetration�by

expanding�reach�into�Tier�2�and�Tier�3�towns.�The�industry�will�need�to

incorporate�capital�safety�features�in�product�design,�build�strong�brands

that�are�hallmarks�of�financial�integrity,�service�orientation�and�sustained

fund�performance.�Building�investors’�trust�and�increased�customer

awareness�through�initiatives�aimed�at�promoting�financial�literacy�will�be

critical�factors�towards�building�greater�retail�participation.

It�is�therefore�an�opportune�time�for�the�industry�to�introspect�on�the

learnings�and�experiences�of�the�past�decade�and�develop�a�roadmap

through�a�collaborative�effort�across�all�stakeholders,�to�achieve�sustained

profitable�growth.�

We�hope�you�will�find�this�report�interesting�and�useful.

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

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

Foreword

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Current State

India�has�been�amongst�the�fastest�growing�markets�for�mutual�funds�since�2004,�witnessing�a�CAGR�of�29percent�in�the�five-year�period�from�2004�to�2008�as�against�the�global�average�of�4�percent.�The�increase�inrevenue�and�profitability,�however,�has�not�been�commensurate�with�the�AUM�growth�in�the�last�five�years.�

Low�share�of�global�assets�under�management,�low�penetration�levels,�limited�share�of�mutual�funds�in�thehousehold�financial�savings�and�the�climbing�growth�rates�in�the�last�few�years�that�are�amongst�the�highest�inthe�world,�all�point�to�the�future�potential�of�the�Indian�mutual�fund�industry.

Challenges and Issues

Low�customer�awareness�levels�and�financial�literacy�pose�the�biggest�challenge�to�channelising�householdsavings�into�mutual�funds.�Further,�fund�houses�have�shown�limited�focus�on�increasing�retail�penetration�andbuilding�retail�AUM.�Most�AMCs�and�distributors�have�a�limited�focus�beyond�the�top�20�cities�that�ismanifested�in�limited�distribution�channels�and�investor�servicing.�The�Indian�mutual�fund�industry�has�largelybeen�product-led�and�not�sufficiently�customer�focused�with�limited�focus�being�accorded�by�players�toinnovation�and�new�product�development.�Further�there�is�limited�flexibility�in�fees�and�pricing�structurescurrently.�

Distributors�and�the�mutual�fund�houses�have�exhibited�limited�interest�in�continuously�engaging�withcustomers�post�closure�of�sale�as�the�commissions�and�incentives�have�been�largely�in�the�form�of�upfrontfees�from�product�sales.�Limited�focus�of�the�public�sector�network�including�public�sector�banks,�India�Postetc�on�distribution�of�mutual�funds�has�also�impeded�the�growth�of�the�industry.�Further�multiple�regulatoryframeworks�govern�different�verticals�within�the�financial�services�sector,�such�as�differential�policies�pertainingto�the�PAN�card�requirement,�mode�of�payment�(cash�vs�cheque),�funds�management�by�insurance�companiesand�commission�structures,�among�others.

Voice of the Customer

CII-KPMG�conducted�a�‘Voice�of�the�Customer’�survey�to�help�understand�the�buying�behaviour�of�existing�andpotential�investors�in�mutual�funds,�and�to�obtain�feedback�on�their�wish-list�from�various�stakeholders�includingfund�houses,�distributors,�service�providers�and�the�regulator.

Factors�that�are�impediments�to�mutual�fund�investing�are�availability�of�a�large�number�of�mutual�fundsschemes�that�makes�investment�decision�complex�and�difficult,�complicated�KYC�norms�that�restrict�potential

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

1. Executive Summary

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investors,�and�quality�of�advice�provided.�After�sales�service�and�ongoing�follow�up�have�been�identified�bycustomers�as�the�key�differentiators�in�assessing�the�capabilities�of�distributors.�

Drivers�for�purchase�of�mutual�funds�include�tax�benefits�of�mutual�fund�investments,�consistency�in�fundperformance�and�brand�equity.�Simplification�of�processes�such�as�the�application�and�redemption�processcould�potentially�increase�the�quantum�of�investments�in�mutual�funds.

Future Outlook in a Dynamic Environment

KPMG�in�India�is�of�the�view�that�the�industry�AUM�is�likely�to�continue�to�grow�in�the�range�of�15�to�25percent�from�the�period�2010�to�2015�based�on�the�pace�of�economic�growth.�In�the�event�of�a�quick�economicrevival�and�positive�reinforcement�of�growth�drivers�identified,�KPMG�in�India�is�of�the�view�that�the�Indianmutual�fund�industry�may�grow�at�the�rate�of�22�to�25�percent�in�the�period�from�2010�to�2015,�resulting�inAUM�of�INR�16,000�to�18,000�billion�in�2015.�In�the�event�of�a�relatively�slower�economic�revival�resulting�in�theidentified�growth�drivers�not�reaching�their�full�potential,�KPMG�in�India�is�of�the�view�that�the�Indian�mutualfund�industry�may�grow�in�the�range�of�15�to�18�percent�in�the�period�from�2010�to�2015,�resulting�in�AUM�ofINR�15,000�to�17,000�billion�in�2015.�

Industry�profitability�may�reduce�further�as�revenues�shrink�and�operating�costs�escalate.�Product�innovation�isexpected�to�be�limited.�Market�deepening�and�widening�is�expected�with�the�objective�of�increased�retailpenetration�and�participation�in�mutual�funds.�The�regulatory�and�compliance�framework�for�mutual�funds�islikely�to�get�aligned�with�the�other�frameworks�across�the�financial�services�sector.

Action Plan for Achieving Transformational Growth

There�is�a�need�for�a�collaborative�effort�across�all�key�stakeholders�to�harness�the�future�growth�potential�andreach�out�to�the�customer.

Given�that�customer�awareness�is�the�pre-requisite�for�the�achievement�of�the�industry�growth�potential,�thereis�a�need�for�planning,�financing�and�executing�initiatives�aimed�at�increasing�financial�literacy�and�enhancinginvestor�education�across�the�country�through�a�sustained�collaborative�effort�across�all�stakeholders,�that�isexpected�to�result�in�a�massive�increase�in�mutual�fund�penetration.�AMCs�should�focus�on�product�innovationand�introduction�of�flexibility�in�pricing.�

Public�sector�thrust�into�mutual�funds�distribution�and�focus�on�strengthening�presence�beyond�Tier�2�cities�willentail�training�of�the�public�sector�employee�base�through�the�“Train�the�Trainer”�approach,�so�that�they�may�beinducted�as�trainers�to�support�customer�awareness�campaigns�to�be�facilitated�by�CII,�NISM�and�AMFI.

Opening�up�of�the�public�sector�branch�network�in�Tier�3�and�Tier�4�towns�will�include�India�Post,�NationalisedBanks,�Regional�Rural�Banks�and�Cooperative�Banks.�This�will�also�require�a�boost�to�be�provided�to�InvestorService�Centres�(ISCs)�through�R&T�Agents�should�be�given�a�thrust.

Focus�on�increasing�customer�engagement�pre�and�post�completion�of�the�investment�will�be�beneficial.�CIIand�AMFI�should�help�to�steer�the�industry�vision.�The�recognition�of�the�Association�of�Distributors�by�SEBIwould�also�be�beneficial�for�the�long�term�wellbeing�of�the�industry.

It�is�proposed�that�harmonisation�of�policies�across�multiple�regulatory�frameworks�in�the�financial�servicessector�must�be�taken�up�on�high�priority�through�constitution�of�a�Steering�Committee�under�the�aegis�of�theMinistry�of�Finance,�comprising�the�Financial�Services�Regulators�for�mutual�funds�and�capital�markets,pension,�insurance,�banking�and�other�verticals�along�with�representation�from�the�CBDT.�

Given�that�the�industry�needs�to�collectively�work�towards�riding�over�the�dynamic�and�relatively�less�favourableeconomic�environment�at�present,�the�next�phase�for�the�industry�is�likely�to�be�characterised�by�a�strongerfocus�on�customer�centricity,�cost�management�and�robust�governance�and�regulatory�framework�-�all�aimed�atenabling�the�industry�to�achieve�sustained,�profitable�growth,�going�forward.

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

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The�Indian�mutual�fund�industry�has�evolved�from�a

single�player�monopoly�in�1964�to�a�fast�growing,

competitive�market�on�the�back�of�a�strong�regulatory

framework.

AUM GrowthThe�Assets�under�Management�(AUM)�have�grown�at�a

rapid�pace�over�the�past�few�years,�at�a�CAGR�of�35

percent�for�the�five-year�period�from�31�March�2005�to

31�March�20091.�Over�the�10-year�period�from�1999�to

2009�encompassing�varied�economic�cycles,�the

industry�grew�at�22�percent�CAGR2.�This�growth�was

despite�two�falls�in�the�AUM�-�the�first�being�after�the

year�2001�due�to�the�dotcom�bubble�burst,�and�the

second�in�2008�consequent�to�the�global�economic

crisis�(the�first�fall�in�AUM�in�March�2003�arising�from

the�UTI�split).

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

2. The Indian Mutual Fund Industry – The Current State

Note: As of 31 March for each yearSource: AMFI data

Growth in AUM in the Indian Mutual Fund Industry (Average AUM in INR Billion)

1�AMFI�data2�AMFI�data

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AUM Base and Growth Relative To the GlobalIndustryIndia�has�been�amongst�the�fastest�growing�markets

for�mutual�funds�since�2004;�in�the�five-year�period

from�2004�to�2008�(as�of�December)�the�Indian�mutual

fund�industry�grew�at�29�percent�CAGR�as�against�the

global�average�of�4�percent3.�Over�this�period,�the

mutual�fund�industry�in�mature�markets�like�the�US�and

France�grew�at�4�percent,�while�some�of�the�emerging

markets�viz.�China�and�Brazil�exceeded�the�growth

witnessed�in�the�Indian�market.

However,�despite�clocking�growth�rates�that�are

amongst�the�highest�in�the�world,�the�Indian�mutual

fund�industry�continues�to�be�a�very�small�market;

comprising�0.32�percent�share�of�the�global�AUM�of

USD�18.97�trillion�as�of�December�20084.

AUM to GDP RatioThe�ratio�of�AUM�to�India’s�GDP,�gradually�increased

from�6�percent�in�2005�to�11�percent�in�2009.�Despite

this�however,�this�continues�to�be�significantly�lower

than�the�ratio�in�developed�countries,�where�the�AUM

accounts�for�20-70�percent�of�the�GDP5.

Share of Mutual Funds in Household FinancialSavingsInvestment�in�mutual�funds�in�India�comprised�7.7

percent�of�the�gross�household�financial�savings�in�FY

2008,�a�significant�increase�from�1.2�percent�in�FY

2004.�The�households�in�India�continue�to�hold�55

percent�of�their�savings�in�fixed�deposits�with�banks,

18�percent�in�insurance�and�10�percent�in�currency�as

of�FY�20086.

In�2008,�the�UK�had�more�than�thrice�the�investments

into�mutual�funds�as�a�factor�of�total�household�savings

(26�percent),�than�India�had�in�the�same�time�period.

As�of�December�2008,�UK�households�held�61�percent

of�the�total�savings�in�bank�deposits,�11.6�percent�in

equities�and�1�percent�in�bonds7.

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

Source: ICI Factbook 2009, AMFI dataNote: Based on AUM as of 31 December

AUM Growth Rate in Select Countries (CAGR for 2004-2008)

Source: AMFI data, CSONote: Based on AUM as of 31 December of each year

AUM to GDP Ratio for India

Source: RBI dataNote: As of 31 March for every year

Share of Mutual Funds in Households’ Gross FinancialSavings in India

3�ICI�data4�ICI�and�AMFI�data5�AMFI�and�CSO�data

6�RBI�data7�Datamonitor�Report,�December�2008

Page�4

Source: RBI data

Composition of Households’ Gross Financial Savings inIndia in FY 2008

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ProfitabilityThe�increase�in�revenue�and�profitability�in�the�Indian

mutual�fund�industry�has�not�been�commensurate�with

the�AUM�growth�in�the�last�5�years.�The�AUM�grew�at

35�percent�CAGR�in�the�period�from�March�2005�to

2009,�while�the�profitability�of�AMCs�-�which�is�defined

as�PBT�as�a�percentage�of�the�AUM�-�declined�from�24

bps�in�FY�2004�to�14�bps�in�FY�20088.�

During�FY�2004�and�FY�2008,�the�investment

management�fee�as�a�percent�of�average�AUM�was�in

the�range�of�55�to�58�bps�(small�increase�to�64�bps�in

FY�2006)�due�to�the�industry�focus�on�the�underlying

asset�mix�comprising�relatively�low�margin�products

being�targeted�at�the�institutional�segment9.

The�operating�expenses,�as�a�percentage�of�AUM,�rose

from�41�bps�in�FY�2004�to�113�bps�in�FY�2008�largely

due�to�the�increased�spend�on�marketing,�distribution

and�administrative�expenses�impacting�AMC�margins10.

Rising�cost�pressures�and�decline�in�profitability�have

impacted�the�entry�plans�of�global�players�eyeing�an

Indian�presence.�

The�growth�in�AUM�accompanied�by�a�decline�in

profitability�necessitates�an�analysis�of�the�underlying

characteristics�that�have�a�bearing�on�the�growth�and

profitability�of�the�Indian�mutual�fund�industry.

The Indian Mutual Fund Industry – KeyCharacteristics

Customers

The�Indian�mutual�fund�industry�has�significantly�high

ownership�from�the�institutional�investors.�Retail

investors�comprising�96.86�percent�in�number�terms

held�approximately�37�percent�of�the�total�industry

AUM�as�at�the�end�of�March�200811,�significantly�lower

than�the�retail�participation�in�the�US�at�82�percent�of

AUM�as�at�December�200812.�

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

Source: KPMG Analysis based on published financials of AMCs

Industry Profitability as a percentage of AUM

Source: SEBI data

Indian Mutual Fund Industry – Industry Investor Mix

8�KPMG�Analysis�of�published�financial�statements�of�AMCs�with�AUM�datafrom�AMFI9�KPMG�Analysis�

10�KPMG�Analysis�11�SEBI12�ICI

Page�5

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Out�of�a�total�population�of�1.15�billion,�the�total

number�of�mutual�fund�investor�accounts�in�India�as�of

31�March�2008�was�42�million�(the�actual�number�of

investors�is�estimated�to�be�lower�as�investors�hold

multiple�folios)13.�In�the�US,�an�estimated�92�million

individual�investors�owned�mutual�funds�out�of�a�total

population�of�305�million14 in�2008.

As�per�the�Invest�India�Incomes�and�Savings�Survey

2007�of�individual�wage�earners�in�the�age�group�18�to

59�years�conducted�by�IIMS�Dataworks,�only�1.6

percent�invested�in�mutual�funds.�Ninety�percent�of�the

savers�interviewed�were�not�aware�of�mutual�funds�or

of�investing�in�mutual�funds�through�a�Systematic

Investment�Plan�(SIP).�The�mutual�fund�penetration

among�the�paid�Indian�workforce�with�annual

household�income�less�than�INR�90,000�was�0.1

percent.

In�the�last�few�years,�the�retail�investor�participation,�in

particular,�in�Tier�2�and�Tier�3�towns,�has�been�on�the

rise�aided�by�the�buoyant�equity�markets.

Products

The�Indian�mutual�fund�industry�is�in�a�relatively

nascent�stage�in�terms�of�its�product�offerings,�and

tends�to�compete�with�products�offered�by�the

Government�providing�fixed�guaranteed�returns.�As�of

December�2008,�the�total�number�of�mutual�fund

schemes�was�1,002�in�comparison�to�10,349�funds�in

the�US.

Debt�products�dominate�the�product�mix�and

comprised�49�percent�of�the�total�industry�AUM�as�of

FY�200915,�while�the�equity�and�liquid�funds�comprised

26�percent�and�22�percent�respectively.�Open-ended

funds�comprised�99�percent�of�the�total�industry�AUM

as�of�March�2009.

As�of�December�2008,�the�US�mutual�fund�market

comprised�money�market�funds,�equity�funds,�debt/

bond�funds�and�hybrid�funds�at�40,�39,�16�and�5

percent�of�the�total�AUM�respectively16.�

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

Source: AMFI data

Growth Rate (Five year CAGR) across Fund Categories

13�SEBI14�ICI,�CIA15�SEBI16�ICI�Factbook�2009

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While�traditional�vanilla�products�dominate�in�India,�new

product�categories�viz.�Exchange�Traded�Funds�(ETFs),

Gold�ETFs,�Capital�Protection�and�Overseas�Funds�have

gradually�been�gaining�popularity.�As�of�March�2009,

India�had�a�total�of�16�ETFs�(0.3�percent�of�total�AUM)

while�the�US�had�a�total�of�728�ETFs�as�of�December

200817.

Markets

While�the�mutual�fund�industry�in�India�continues�to�be

metro�and�urban�centric,�the�mutual�funds�are

beginning�to�tap�Tier�2�and�Tier�3�towns�as�a�vital

component�of�their�growth�strategy.�The�contribution�of

the�Top�10�cities�to�total�AUM�has�gradually�declined

from�approximately�92�percent�in�2005�to

approximately�80�percent�currently18.�

Distribution Channels

As�of�March�2009,�the�mutual�fund�industry�had�92,499

registered�distributors�as�compared�to�approximately

2.5�million�insurance�agents19.�The�Independent

Financial�Advisors�(IFAs)�or�Individual�distributors,

corporate�employees�and�corporates�comprised�73,�21

and�6�percent�respectively�of�the�total�distributor�base.

Banks�in�general,�foreign�banks�and�the�leading�new

private�sector�banks�in�particular,�dominate�the�mutual

fund�distribution�with�over�30�percent�AUM�share.

National�and�Regional�Distributors�(including�broker-

dealers)�together�with�IFAs�comprised�57�percent�of

the�total�AUM�as�of�2007.�The�public�sector�banks�are

gradually�enhancing�focus�on�mutual�fund�distribution

to�boost�their�fee�income20.

Industry Structure

The�Indian�mutual�fund�industry�currently�consists�of�38

players�that�have�been�given�regulatory�approval�by

SEBI.�The�industry�has�witnessed�a�shift�has�changed

drastically�in�favour�of�private�sector�players,�as�the

number�of�public�sector�players�reduced�from�11�in

2001�to�5�in�2009.�

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

Source: AMFI dataNote: Data as of 31 March for every year except for December 2002

Number of Distributors by Category Registered Annually byAMFI

Source: CII Mutual Fund Summit 2008 quoted from Cerulli Associates

Distribution Channel Mix

Source: AMFI data

Growth in the Number of AMCs in India

17�AMFI�data,�ICI�Factbook�200918�Industry�discussions19�AMFI�and�IRDA�data

20�CII�Mutual�Fund�Summit�2008�quoted�from�Cerulli�Associates21�AMFI�data

Page�7

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The�public�sector�has�gradually�ceded�market�share�to

the�private�sector.�Public�sector�mutual�funds

comprised�21�percent�of�the�AUM�in�2009�as�against

72�percent�AUM�share�in�200122.

The�industry�concentration�has�been�stagnant�in�the

four-year�period�from�2005�to�2008;�the�top�5�players

comprising�50-52�percent�of�industry�AUM.�However,

as�of�March�2009,�the�share�of�Top�5�players�increased

to�58�percent,�as�against�38�percent�in�the�US.�The

AUM�share�of�the�Top�10�players�has�consistently�been

in�the�vicinity�of�75�percent.23

The�mutual�fund�houses�based�on�product�portfolio�and

distribution�strategy,�the�key�elements�of�competitive

strategy,�can�be�segmented�into�three�categories:

•�The�market�leaders�having�presence�across�all

product�segments

•�Players�having�dominant�focus�on�a�single�product

segment�-�debt�or�equity�

•�Players�having�niche�focus�on�an�emerging�product

category�or�distribution�channels.

The�market�leaders�have�focused�across�product

categories�for�a�more�diversified�AUM�base�with�an

equitable�product�mix�that�helps�maintain�a�consistent

AUM�size.

Although�the�Indian�market�has�relatively�low�entry

barriers�given�the�low�minimum�networth�required�to

venture�into�mutual�fund�business,�existence�of�a

strong�local�brand�and�a�wide�and�deep�distribution

footprint�are�the�key�differentiators.�

Operations

The�Indian�mutual�fund�industry�while�on�a�high�growth

path�needs�to�address�efficiency�and�customer

centricity.�AMCs�have�successfully�been�using

outsourced�service�providers�such�as�custodians,

Registrar�and�Transfer�Agents�(R&T)�and�more�recently,

fund�accountants,�so�that�mutual�funds�can�focus�on

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

Source: AMFI data

Market Share of Players as of March 2009

Source: KPMG analysis based on AMFI data

Market Share Trend of the Top 5 and Top 10 players in India

Source: KPMG analysis based on public financials of AMCs

Administrative & Other Expenses as a percentage of AUM

22�AMFI�data23�AMFI�data

Page�8

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core�aspects�of�their�business�such�as�product�development�and

distribution.�Functions�that�have�been�outsourced�are�custody�services,

fund�services,�registrar�and�transfer�services�aimed�at�investor�servicing

and�cash�management.�Managing�costs�and�ensuring�investor

satisfaction�continue�to�be�the�key�goals�for�all�mutual�funds�today.

However,�there�is�likely�to�be�scope�for�optimising�operations�costs�given

the�trend�of�rising�administrative�and�associated�costs�as�a�percentage�of

AUM.

Regulatory Framework

The�Indian�mutual�fund�industry�in�terms�of�regulatory�framework�is

believed�to�match�up�to�the�most�developed�markets�globally.�The

regulator,�Securities�and�Exchange�Board�of�India�(SEBI),�has�consistently

introduced�several�regulatory�measures�and�amendments�aimed�at

protecting�the�interests�of�the�small�investor�that�augurs�well�for�the�long

term�growth�of�the�industry.�

The�implementation�of�Prevention�of�Money�Laundering�(PMLA)�Rules,

the�latest�guidelines�issued�in�December�2008,�as�part�of�the�risk

management�practices�and�procedures�is�expected�to�gain�further

momentum.�The�current�Anti�Money�Laundering�(AML)�and�Combating

Financing�of�Terrorism�(CFT)�measures�cover�two�main�aspects�of�Know

Your�Customer�(KYC)�and�‘suspicious�transaction�monitoring�and

reporting’.�

The�regulatory�and�compliance�ambit�seeks�to�dwell�on�a�range�of�issues

including�the�financial�capability�of�the�players�to�ensure�resilience�and

sustainability�through�increase�in�minimum�networth�and�capital

adequacy,�investor�protection�and�education�through�disclosure�norms�for

more�information�to�investors,�distribution�related�regulations�aimed�at

introducing�more�transparency�in�the�distribution�system�by�reducing�the

information�gap�between�investors�and�distributors,�and�by�improving�the

mechanism�for�distributor�remuneration.

The�success�of�the�relatively�nascent�mutual�fund�industry�in�India,�in�its

march�forward,�will�be�contingent�on�further�evolving�a�robust�regulatory

and�compliance�framework�that�in�supporting�the�growth�needs�of�the

industry�ensures�that�only�the�fittest�and�the�most�prudent�players

survive.�

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

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

Context SettingWhile�the�Indian�mutual�fund�industry�has�grown�at�an�impressive�rate�in

the�last�few�years,�the�recent�developments�of�the�past�few�months

triggered�by�the�global�financial�crisis�have�impacted�the�fortunes�of�the

industry�resulting�in�AUM�decline,�adversely�impacting�the�revenue�and

profitability.�

KPMG,�through�discussions�with�the�industry�participants,�has�attempted

to�identify�and�highlight�some�of�the�key�issues�and�challenges�being

faced�by�the�industry�participants�that�are�preventing�the�industry�from

harnessing�its�true�growth�potential.

3. Challenges and Issues

“Mutual funds are still sold,not bought.”- A large national distributor

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Low Levels of Customer Awareness Low�customer�awareness�levels�and�financial�literacy�pose�the�biggest

challenge�to�channelising�household�savings�into�mutual�funds.�IIMS

Dataworks�data�released�in�2007�establishes�that�low�awareness�levels

among�retail�investors�has�a�direct�bearing�on�the�low�mutual�fund

offtake�in�the�retail�segment.�

The�general�lack�of�understanding�of�mutual�fund�products�amongst

Indian�investors�is�pervasive�in�metros�and�Tier�2�cities�alike�and�majority

of�them�draw�little�distinction�in�their�approach�to�investing�in�mutual

funds�and�direct�stock�market�investments.�A�large�majority�of�retail

investors�lack�an�understanding�of�risk-return,�asset�allocation�and

portfolio�diversification�concepts.

Low�awareness�of�SIPs�in�India�has�resulted�in�a�majority�of�the

customers�investing�in�a�lump�sum�manner.

Limited Focus on Increasing Retail PenetrationThe�Indian�mutual�fund�industry�had�limited�focus�on�building�retail�AUM

and�has�only�recently�stepped�up�efforts�to�augment�branch�presence�in

Tier�2�and�Tier�3�towns.�Players�have�historically�garnered�AUM�by

targeting�the�institutional�segment�that�comprises�63�percent�AUM�share

as�at�March�2008.�

Large�ticket�size,�tax�arbitrage�available�to�corporates�on�investing�in

money�market�mutual�funds,�easy�accessibility�to�institutional�cutomers

concentrated�in�Tier�1�cities�are�the�factors�instrumental�in�mutual�fund

houses�focussing�on�the�institutional�segment.�Building�retail�AUM

requires�significant�distribution�capability�and�a�wide�footprint�to�be�able

to�penetrate�into�Tier�2�and�Tier�3�towns,�which�AMCs�have�recently

started�focusing�on.�Institutional�AUM,�however,�makes�the�industry

vulnerable�to�the�possibility�of�sudden�redemption�pressures�that�impact

the�fund�performance.

Limited Focus Beyond the Top 20 Cities The�mutual�fund�industry�has�continues�to�have�limited�penetration

beyond�the�top�20�cities.�Cities�beyond�Top�20�only�comprise

approximately�10�percent�of�the�industry�AUM�as�per�industry

practitioners.�The�retail�population�residing�in�Tier�2�and�Tier�3�towns,

even�if�aware�and�willing,�are�unable�to�invest�in�mutual�funds�owing�to

limited�access�to�suitable�distribution�channels�and�investor�servicing.

The�distribution�network�of�most�mutual�fund�houses�is�largely�focused

on�the�Top�20�cities�given�the�high�cost�associated�with�deeper

penetration�into�Tier�2�and�Tier�3�towns.�However,�some�of�the�mutual

fund�houses�have�begun�focussing�on�cities�beyond�the�Top�20�by

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

“Perhaps most frustrating hasbeen the reality that mutualfunds have made relatively littleimpact in attracting newhousehold financial savings.”- A leading mutual fund in India

“Investor education andawareness has made limitedinroads in increasing customerinvestments in mutual fundsEfforts across AMCs anddistributors have largelyremained disjointed.” - A mid-sized mutual fund in India

“Most AMCs have focused ongrowing AUMs primarily throughinstitutional clients which ismuch easier than penetrating theretail base.” - A large national distributor

“Investor education by AMCs isprimarily on focused on metros.”- A large IFA

“AMCs must focus on investoreducation so that they canchallenge distributors.”- A large AMC

“We need to focus beyond theTop 20 cities to increase retailpenetration.”- A leading national distributor

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building�their�branch�presence�and�strengthening�distribution�reach

through�non-branch�channels.

Limited Innovation in Product OfferingsThe�Indian�mutual�fund�industry�has�largely�been�product-led�and�not

sufficiently�customer�focused.�The�popularity�of�NFOs�triggered�a

proliferation�of�schemes�with�a�large�number�of�non-differentiated

products.�The�industry�has�had�a�limited�focus�on�innovation�and�new

product�development,�thereby�catering�to�the�limited�needs�of�the

customer.�Products�that�cater�specifically�to�customer�life�stage�needs

such�as�education,�marriage,�and�housing�are�yet�to�find�their�way�in�the

Indian�market.

Despite�the�regulations�for�Real�Estate�Mutual�Funds�(REMF)�being

introduced�in�2008,�the�market�is�still�awaiting�the�first�REMF�launch.

Further,�relatively�nascent�product�categories�viz.�multi-manager�funds

that�are�among�the�most�popular�hybrid�funds�globally�have�not�grown�in

India�owing�to�the�prevailing�taxation�structure.

The�Indian�mutual�fund�industry�offers�limited�investment�options�viz.

capital�guarantee�products�for�the�Indian�investors,�a�large�majority�of

whom�are�risk�averse.�The�Indian�market�is�still�to�witness�the�launch�of

green�funds,�socially�responsible�investments,�fund�of�hedge�funds,

enhanced�money�market�funds,�renewable�and�energy/�climate�change

funds.

Limited Flexibility in Fees and Pricing StructuresThe�fee�structure�in�the�Indian�mutual�fund�industry�enjoys�little�flexibility

unlike�developed�markets�where�the�level�of�management�fees�depend

on�a�variety�of�factors�such�as�the�investment�objective�of�the�fund,�fund

assets,�fund�performance,�the�nature�and�number�of�services�that�a�fund

offers.�While�the�expenses�have�continuously�risen,�the�management�fee

levels�have�remained�stagnant.

Distributors�are�compensated�for�their�services�through�a�fixed�charge�in

the�form�of�entry�load�and�additional�fees�as�considered�appropriate�by

the�AMC.�Regardless�of�the�quality�of�advice�and�service�provided,�the

commission�payable�by�the�mutual�fund�customer�to�the�distributors�is

fixed.�

Limited Customer EngagementMutual�fund�distributors�have�been�facing�questions�on�their

competence,�degree�of�engagement�with�customer�and�the�value

provided�to�the�customer.�

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

“Fees should only be on trailbasis so that advisors arecompensated based on ongoingadvice and service provided.”- A large IFA

“There is a tendency to pushselect products during specificeconomic cycles. Debt productsare seldom sold during a stockmarket boom.”- A large regional distributor

“AMCs must focus on investoreducation so that they canchallenge distributors.” - A large AMC

Source: ICI

Fee structures in the US Mutual Fund

Market - A case study

In�the�US�mutual�fund�market,�financialadvisors�are�professionals�who�helpinvestors�define�their�investment�goals,select�suitable�funds�based�on�riskappetite,�and�provide�ongoing�advice�andservice.�These�financial�advisors�arecompensated�for�their�services,�in�part,through�a�specific�fee,�known�as�a�12b-1fee,�which�is�included�in�a�fund’sexpense�ratio.�In�addition,�no-load�fundsare�sold�directly�to�investors�or�are�soldto�investors�through�financial�advisorswho�charge�investors�separately�for�theinvestment�advice�and�service�provided,thereby�providing�flexibility�to�theinvestor,�based�on�the�level�of�adviceand�service�sought.�

Advisors�are�compensated�for�providingthese�services�through�a�combination�offront-end�or�back-end�loads�and

12b-1�fees.�Investors�who�opt�not�to�usea�financial�advisor�or�those�who�pay�thefinancial�advisor�directly�for�servicesrendered,�purchase�no-load�funds,�whichhave�neither�front�-�nor�back-end�loadsand�have�either�low�or�no�12b-1�fees.

Page�12

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In�the�absence�of�a�framework�to�regulate�distributors,�both�the

distributors�and�the�mutual�fund�houses�have�exhibited�limited�interest�in

continuously�engaging�with�customers�post�closure�of�sale�as�the

commissions�and�incentives�had�been�largely�in�the�form�of�upfront�fees

from�product�sales�(although�trail�commissions�have�also�been�paid�in

limited�instances�regardless�of�the�service�rendered).�As�a�result�of�the

limited�engagement,�there�have�been�rising�instances�of�mis-selling�to

customers.�

Limited Focus of the Public Sector Network on Distribution of MutualFundsPublic�sector�banks�with�a�large�captive�customer�base,�significant�reach

beyond�the�Top�20�cities�in�semi-urban�and�rural�areas,�and�the�potential

to�build�the�retail�investor�base,�have�so�far�played�a�very�limited�role�in

mutual�funds�distribution.�

The�India�Post�network�operating�the�largest�postal�network�in�the�world

majority�of�which�is�in�rural�areas,�is�stated�to�have�250�post�offices

selling�mutual�funds�of�five�AMCs�only;�further�most�of�the�post�offices

selling�mutual�funds�are�located�in�Tier�1�and�Tier�2�cities�which�are

already�been�catered�to,�by�national�level�and�other�distributors24.�India

Post�with�its�customer�base�of�170�million�account�holders�and�branch

network�of�over�154,000�branches,�doubling�the�size�of�all�bank�branches

put�together�is�a�formidable�channel�which�has�been�under�utilised�to

date�for�mutual�fund�distribution25.�The�postal�network�also�serves�as�a

means�to�facilitate�inclusive�and�equitable�growth�to�all�regions�and�social

groups�by�providing�them�with�access�to�financial�products�such�as

mutual�funds.

Further�the�credibility�enjoyed�by�the�Nationalised�Banks,�Regional�Rural

Banks�and�Cooperative�Banks�in�the�rural�hinterland�has�not�been�fully

leveraged�to�target�the�retail�segment.

Multiple Regulatory Frameworks Governing Financial Services SectorVerticalsThe�regulatory�and�compliance�requirements�vary�across�verticals�within

the�financial�services�sector�specifically�mutual�funds,�insurance�and

pension�funds�each�of�which�are�governed�by�an�independent�regulatory

framework�and�are�competing�for�the�same�share�of�the�customer’s

wallet.�The�mutual�fund�industry�lacks�a�level�playing�field�in�comparison

with�other�verticals�within�the�financial�services�sector.

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

“AMFI must focus on definingthe industry vision and long-termstrategic direction.” - A mid-sized AMC

“Valuations in the Indian mutualfund industry should be based onEBITDA multiples and not on thebasis of AUM alone.” - A large AMC

“PAN card being mademandatory is a deterrent toindustry growth.”- A large national distributor

“AMCs do not contribute totraining costs for distributors.”- A mid-sized national distributor

“Manufacturers need toincrease the level of engagementwith customers and play a muchlarger role beyond sales.”- A small AMC

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The�mandatory�PAN�card�requirement�for�investing�in�mutual�funds�is

perceived�to�restrict�significant�potential�of�the�mutual�fund�industry�in

being�able�to�tap�small�ticket�investors�from�investing�in�mutual�funds.

On�the�other�hand,�ULIPs�which�are�deemed�to�be�competing�products

do�not�have�the�mandatory�PAN�requirement.

While�the�payment�for�investment�into�mutual�funds�can�be�made�only

through�banking�facilities,�the�purchase�of�ULIPs�can�be�undertaken

through�cash.�

The�recently�introduced�NPS�regulations�requiring�the�AMCs�to�create�a

separate�legal�entity�for�pension�funds�management�has�created�an

additional�cost�structure�for�the�mutual�fund�players.

Outsourcing�funds�management�in�excess�of�INR�80�billion�by�insurance

companies�is�not�permitted�and�thus�restricts�an�additional�revenue

opportunity�for�the�mutual�fund�industry.�

In�summary,�the�challenges�and�issues�faced�by�the�Indian�mutual�fund

industry�will�need�to�be�addressed�at�the�earliest�to�ensure�long�term

sustained,�profitable�growth�of�the�industry.

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

24�India�Post25�India�Post

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

The�endeavour�of�mutual�fund�investments�is�to�leverage�professional

and�prudent�fund�management�techniques�and�thereby�maximise�returns

for�the�investors�while�minimising�risk.�While�mutual�funds�are�often�the

preferred�avenue�for�investment�over�direct�investments�into�the�capital

markets�by�risk�averse�investors,�customers�have�had�widely�varying

experiences�with�purchase�of�mutual�funds.�Thus,�it�is�critical�for�the

industry�to�understand�the�perspectives�of�Indian�investors�so�as�to�use

their�inputs�to�further�enhance�the�customer�experience�with�mutual

funds.

MethodologyTo�understand�the�voice�of�the�Indian�investors,�CII-KPMG�conducted�an

investor�survey�across�the�Top�10�cities�in�India�in�May�2009.�As�part�of

this�survey,�CII-KPMG�facilitated�interviews�with�a�large�representative

sample�of�population�from�diverse�backgrounds�(education,�age,

occupation�and�gender)�to�understand�their�preferences�and�perspective

on�investment�in�mutual�funds.

4. Voice of the Customer

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The�survey�revealed�several�interesting�observationsand�resulted�in�a�long�customer’s�wish-list�pointing�tothe�expectations�from�the�AMCs,�distributors,�serviceproviders�and�regulators.�While�a�significant�portion�ofcustomers�are�aware�of�and�also�invest�in�mutualfunds,�there�was�a�diverse�set�of�views�obtained,�bothnegative�and�positive.�This�warrants�a�need�toimmediately�tackle�some�of�the�negative�perceptionsand�capitalise�on�the�positive�ones.

Impediments to Mutual Fund InvestingCustomers�believe�that�the�mutual�fund�industry�fallsshort�of�expectations�in�meeting�their�needs�at�time�ofeconomic�uncertainty�and�market�volatility.

The�survey�has�highlighted�several�reasons�thatrespondents�have�cited�for�not�buying�mutual�funds.Some�of�the�prominent�challenges�highlighted�by�therespondents�have�been�listed�below.

Availability of a large number of mutual funds

schemes makes investment decision complex and

difficult

The�Indian�investor�witnessed�significant�rise�in�NewFund�Offers�(NFOs)�over�the�last�two�to�three�yearsfrom�AMCs�seeking�to�augment�AUM�and�diversifyproduct�basket.�India�has�over�979�mutual�fundschemes�resulting�in�a�total�AUM�of�INR�4,173�billionas�on�31�March�200926.�The�ratio�of�the�assets�perscheme�is�one�of�the�highest�in�the�world.�Given�thatthere�is�a�plethora�of�options�with�limited�differentiationacross�mutual�fund�schemes,�the�respondents�perceivea�difficulty�in�investing�in�mutual�funds�in�the�absenceof�quality�advice.

Hence,�AMCs�need�to�design�simple�products�that�thetarget�segment�can�easily�understand�and�also�realigntheir�product�portfolio�to�merge/�close�schemes�withoverlapping�objectives.

Complicated KYC norms restrict potential investors

In�addition�to�the�PAN�card�requirement,�for�aninvestment�amount�of�INR�50,000�and�above�in�mutualfunds,�the�customers�are�required�to�procure�KYCacknowledgement.�This�requires�submission�of�severaldocuments�and�extensive�paper-work.�The�respondentsto�the�survey�expressed�difficulty�in�understanding�the

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

Source: CII-KPMG Survey in May 2009

Reasons provided by Survey Respondents for NotInvesting in Mutual Funds

26�AMFI�data

“I want to invest in mutual funds, but I donot have a PAN card, can I invest withoutit?”- Salaried personTier 1 cityNot an investor in mutual funds

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complex�terminology�and�the�paperwork�involved�inmutual�fund�investing.�

Further,�this�regulatory�directive�is�viewed�negatively�bypotential�customers�as�investments�in�insuranceproducts�can�be�undertaken�without�the�requirementfor�a�PAN�card.�Hence,�there�is�urgent�need�for�theGovernment�to�facilitate�harmonisation�of�policies�andprocesses�across�different�verticals�in�the�financialservices�sector�and�to�simplify�documentation�thatcould�thereby�ease�the�process�of�mutual�fundinvestments�for�retail�customers.

Banks and IFAs remain the preferred channel given

that investors trust them for their advice and after

sales service. However, the survey respondents

were not satisfied with the quality of advice.

Banks�and�IFAs�are�the�preferred�channel�for�investingin�mutual�funds.�Customers�expressed�confidence�inbanks�given�the�long�standing�relationship�and�the�trustbuilt�with�the�banks�over�the�years.�Similarly,�thecustomers�have�become�accustomed�to�dealing�withIFAs�to�seek�independent�advice�on�a�wide�range�ofinvestment�and�financial�planning�issues.�This�comfortis�expected�to�play�a�key�role�in�according�priority�tothe�growth�of�the�IFA�channel.�IFAs�have�demonstratedflexibility�in�providing�customised�offerings�to�thecustomers�at�the�household�level.

It�is�important�to�note�that�an�overwhelming�majority�ofthe�customers�have�not�been�satisfied�with�the�qualityof�advice�being�provided�to�them�by�the�advisors.Some�customers�are�of�the�view�that�the�IFAs�are�lessqualified�and�do�not�adopt�a�holistic�approach�tofinancial�planning.�In�some�cases,�customers�havereported�instances�of�mis-selling�that�has�affected�theperformance�of�their�portfolios�significantly.�Hence,�it�isimperative�for�distributors�to�re-look�at�their�strategy�forfinancial�planning�and�dispensing�advice�to�customers.After�sales�service�and�ongoing�follow�up�have�beenidentified�by�customers�as�a�key�differentiator�inassessing�the�capabilities�of�distributors.

Drivers for Investment in Mutual FundsThe�factors�that�can�incentivise�potential�customers�tocommence�and�gradually�increase�their�investment�inmutual�funds�are�discussed�below.

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

Source: CII-KPMG Survey in May 2009

Channels Preferred by Survey Respondents for Investing inMutual Funds

Preferred Channels for Investment

“Last time I wanted to invest somemoney in MF, the fund house asked mefor so many documents that I got totallyconfused and wondered why I shouldshare so much with them?”- BusinessmanTier 1 cityNot an investor in mutual funds

“I had some money in PPF and wanted toinvest in something which gives goodreturns with balanced risk, so I chose MF,it is working for me”- Salaried PersonTier 1 City Investor in Mutual Funds

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Investment in Mutual Funds is attractive to

customers owing to tax benefits

The�tax�benefits�associated�with�investment�in�mutualfunds�is�the�key�drivers�for�customers.�Customersconsider�mutual�funds�as�a�medium�of�ensuringfinancial�independence�and�security.�Since�most�mutualfund�schemes�carry�easy�liquidity�options,�customersbelieve�that�mutual�funds�are�a�avenue�of�savingsthereby�eliminating�the�need�for�borrowing�money�incase�of�financial�exigencies.�Liquidity�for�the�future�isdeemed�to�be�of�utmost�importance�in�making�anyinvestment�decision.

Consistency in fund performance and brand equity

influence customers to make relevant selection of

mutual fund schemes

Customers�believe�that�fund�performance�is�necessarybut�is�not�a�sufficient�condition�to�drive�their�selectionof�mutual�fund�products.�Selection�of�mutual�funds�by�acustomer�is�a�function�of�both�the�fund�performanceand�brand�equity�of�the�fund�house.�Customers�are�ofthe�view�that�the�key�differentiator�at�the�time�ofselection�of�a�fund�is�the�positive�outlook�onperformance�even�if�the�numbers�do�not�reveal�aspectacular�historic�performance.�The�brand�equity�of�amutual�fund�includes�factors�like�perception�of�thebrand�capability�drawn�from�its�performance�in�othersectors.�

Simplification of Processes to Increase the

Quantum of Investments

Customers�obtain�the�requisite�confidence�in�theirinvestment�process�when�distributors�explain�theconcepts�and�the�meaning�of�key�terms�used�in�mutualfund�application�forms�in�simple�terms.�Further,�thisreinforces�confidence�in�the�distributor’s�capabilitiesand�quality�of�advice�provided�that�facilitate�thedecision�process�for�investment�in�a�mutual�fundscheme.�Customers�also�expressed�the�view�that�asingle�common�application�form�could�be�used�for�allmutual�fund�investments�across�multiple�mutual�fundhouses.�Simplifying�the�process�for�redemption�offunds�was�also�identified�as�a�means�for�furtherincreasing�investments�in�mutual�funds.

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

Source: CII-KPMG Survey in May 2009

Reasons provided by Survey Respondents on Selection ofMutual Funds for Investment Purposes

Reasons for selection of Mutual Funds

“I find it really difficult to understanddifferent forms of different fund houses,can I have a single form which can becentrally used for all fund houses.”- Salaried PersonTier 1 City Investor in Mutual Funds

“My investment in mutual fund providesme tax benefit as well as a regularsource of attractive returns”- Salaried PersonTier 1 City Investor in Mutual Funds

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

Mutual Fund Products

• I�want�protective�products�with�guaranteed�income�and�good�absolute�returns.

• As�a�retired�person,�I�want�more�debt�funds�options�with�a�safe�mechanism�of�regular�saving�along�with�the�variedpension�options.

• I�want�assured�returns�schemes�that�are�a�mix�of�risk-free�and�high-risk�portfolio�where�I�can�invest�small�sums�ofmoney.

• I�want�a�clear�and�easy�explanation�of�various�schemes.

Funds Management

• I�want�to�listen�to�fund�managers’�views�on�outlook�for�various�sectors,�industry�performance,�fund�performance,�etc.but�have�never�been�invited�by�any�fund�house�for�this.�

• AMCs�should�not�depend�on�the�Fund�Manager�but�its�process�for�the�success�of�their�products.

Investor Servicing

• I�want�easy�access�to�the�Fund�House�for�direct�subscription�since�I�do�not�want�to�pay�entry�load.

• I�want�better�service�from�the�fund�house�in�terms�of�NAV�updates�through�weekly�SMS�alerts�so�that�I�know�thevalue�of�my�investments.

• I�want�all�the�services�at�my�door�step�-�right�from�getting�help�in�filling�in�the�application�form�to�depositing�a�chequefor�my�investments.

• We�want�to�interact�with�more�knowledgeable�people�at�the�call�centers�to�attend�to�our�complaints�from�a�technicalperspective,�and�not�just�to�handle�routine�operational�level�problems.

• AMCs�should�send�a�report�to�me�on�my�investment�status�and�performance�on�a�timely�and�regular�basis

• I�believe�agents�commission�should�be�linked�to�investor�satisfaction�and�attractiveness�of�the�fund�suggested,�whichshould�be�payable�in�phases,�depending�upon�the�success�of�the�advice�provided�

• Please�reduce�and�simplify�the�documentation�required�and�the�processes�involved�and�help�me�to�understand�thepurpose�for�which�this�will�be�used.

Investment Advice

• Since�I�make�my�own�investment�decisions�without�relying�on�anyone’s�advice,�I�want�a�single�platform�for�transactingand�performance�monitoring,�to�track�my�mutual�fund�investments�across�various�AMCs.

• I�want�objective�advice�that’s�best�suited�to�my�needs�and�which�is�not�driven�by�commissions�received�by�my�advisor.

• As�long�as�the�fund�house�pays�the�commission�to�the�advisor,�there�is�always�a�conflict.�How�can�anyone�provideunbiased�advice�if�they�are�paid�by�the�fund�house�for�advising�me?�This�ensures�that�the�advisor�is�acting�in�the�favorof�the�fund�house�and�is�not�driven�by�my�interests�and�needs.

Regulator Intervention

• Can�SEBI�provide�me�with�Certification�of�Fund�managers,�to�assure�me�of�high�quality�management�of�my�funds?

• I�want�SEBI�to�provide�me�with�a�list�of�registered�distributors�on�their�website�since�I�do�not�know�if�my�advisor�iscertified�and�qualified�to�advise�me.

• Can�SEBI�put�in�place�a�mechanism�through�which�we�can�rely�upon�the�advice�provided�by�the�Mutual�Fund�agent?

• My�advisor�has�given�me�incorrect�advice�owing�to�which�I�have�lost�money.�How�do�I�ensure�that�he�gets�penalisedfor�the�loss�caused�with�his�incorrect�advice?

Tax Benefits

• Why�am�I�required�to�pay�Securities�Transaction�Tax?

• Why�should�I�be�required�to�pay�long-term�capital�gain�tax�on�my�debt�funds�when�I�am�not�required�to�pay�this�onequity�funds?

• The�Government�must�provide�a�favourable�tax�regime�for�Fund�of�Funds�that�implies�extending�tax�benefits�toinvestors�and�also�to�the�funds.

• The�Government�must�provide�tax�sops�to�encourage�investment�in�equity�(including�overseas�equity)�as�a�long�termsaving�and�to�encourage�investments�in�the�infrastructure�sector�(debt�as�well�as�equity);�tax�sops�should�also�beextended�to�schemes�investing�in�these�areas�as�well.

Customers’ Wish-list from Mutual Funds, Distributors, Regulator and Government - In the Words of Customers27

27�CII-KPMG�Survey�on�Mutual�Funds,�May�2009

““

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

This�section�contains�a�summary�of�the�expected�drivers�for�future

growth,�expected�industry�growth�projections�and�overall�future�outlook

across�various�dimensions�–�customers,�markets,�products,�distribution

channels�and�regulatory�frameworks.

Growth DriversAlthough�several�macroeconomic�and�demographic�factors�affect�the

growth�of�the�industry,�the�key�underlying�driver�for�all�the�categories�of

funds�is�the�key�economic�indicator�–�the�GDP�growth�rate.�

The�growth�drivers�for�customer�segments�have�been�listed�in�the�table

below�along�with�the�expected�impact�of�each�on�the�AUM.

5. Future Outlook in a Dynamic Environment

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In�the�event�of�a�quick�economic�revival�and�positivereinforcement�of�growth�drivers�identified,�KPMG�inIndia�is�of�the�view�that�the�Indian�mutual�fund�industrymay�grow�at�the�rate�of�22-25�percent�in�the�periodfrom�2010�to�2015,�resulting�in�AUM�of�INR�16,000�to18,000�billion�in�2015.�

Key�growth�drivers�for�this�scenario�include:�

•�Increased�retail�investor�participation�with�apreference�for�mutual�funds�over�other�assetclasses�perceived�to�be�more�risky.�This�could�resultin�the�fulfilment�of�growing�financial�aspirations,enabled�by�rising�disposable�incomes�and�increasedfinancial�savings

• Innovations�in�distribution�driven�by�increase�in�thenumber�of�certified�IFAs�and�banks�selling�mutualfunds�focusing�on�Tier�2�and�Tier�3�towns

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

Customer Segment Key Growth Drivers Expected Impact

Retail�Segment� • Rising�disposable�incomes�andsavings

• Favourable�demographics�suchas�increasing�proportion�ofworking�population�(20-59years)�and�increasingurbanisation�resulting�inincreased�levels�of�financialsavviness

• Innovations�in�distribution�

• Increased�awareness�levels

• Quality�financial�planning

• Increase�in�disposable�incomes�and�household�financialsavings�may�result�in�households�seeking�alternateavenues�for�investments�to�yield�higher�returns�withreasonable�risk

• Favourable�demographics�like�urbanisation�and�a�relativelyyoung�population�having�an�increased�risk�appetite,�arelikely�to�save�more�and�seek�to�invest�a�higher�proportionof�those�savings�in�market-linked�instruments�such�asmutual�funds

• Distribution�innovations�are�expected�to�increased�mutualfund�penetration�specifically�in�Tier�2�and�Tier�3�townsthereby�expanding�the�mutual�fund�customer�base

• Improved�awareness�levels�and�enhanced�financial�literacyis�expected�to�aid�the�understanding�of�mutual�fundproducts

• Appropriate�asset�allocation�and�potential�for�wealthcreation

InstitutionalSegment

• Rising�corporate�earnings

• Maturing�capital�markets�

• Interest�rate�cycle

• Call�money�market�rates�

• Corporate�debt�andcommercial�papers

• Increased�demand�for�sophisticated�treasury�managementproducts

• A�better�economic�situation�in�the�country�is�likely�toensure�a�steady�fall�in�the�interest�rates

Our Point of View on the Future Outlook28

Industry AUM is likely to continue to grow in the range of 15 to 25 percent from the period 2010 to 2015

Source: KPMG analysis

Projected AUM Growth from 2010 to 2015Scenario 1: Favourable growth scenario with quickeconomic revival

This�section�on�the�“Point�of�view�on�the�Future�Outlook”�is�based�onour�discussions�with�key�stakeholders�and�expected�trends�in�the�Indianmutual�fund�industry,�based�on�the�global�experiences.

28�Discussions�with�key�industry�stakeholders�and�customers

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• Increase�in�institutional�participation�triggered�byrising�corporate�revenues�with�increased�economicactivity.

In�the�event�of�a�relatively�slower�economic�revivalresulting�in�the�identified�growth�drivers�not�reachingtheir�full�potential,�KPMG�in�India�is�of�the�view�thatthe�Indian�mutual�fund�industry�may�grow�in�the�rangeof�15-18�percent�in�the�period�from�2010�to�2015,resulting�in�AUM�of�INR�15,000�to�17,000�billion�in2015.

Key�factors�driving�the�growth�inspite�of�the�slowrevival�of�the�economy�include:

•�Incremental�increase�in�retail�investor�participationowing�to�limited�focus�beyond�Tier�2�towns�andlimited�efforts�to�draw�risk�averse�customers�oftraditional�products�under�the�fold�of�mutual�funds

• Tightening�of�liquidity�leading�to�better�yields�oninstruments�liquid�funds�invest�in,�thereby�drivinginvestments�from�the�institutional�investors.�

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

Industry�profitability�is�expected�to�gradually�reduce�asrevenues�of�AMCs�shrink�due�to�focus�on�low�marginproducts�to�attract�risk�averse�investors,�and�also�asoperating�costs�escalate�due�to�the�focus�onpenetrating�retail�population�beyond�Tier�2�cities.

•�Decline�in�investment�management�fees�is�expectedas�risk�averse�customers�prefer�investments�in�debtproducts

• Increase�in�distribution�costs�as�players�attempt�toset�up�their�own�branch�presence�in�smaller�towns

• Existing�players�are�likely�to�review�businessstrategy�and�explore�exit/�mergers�in�case�of�nosignificant�competitive�advantage,�thereby�resultingin�industry�consolidation

• Competition�is�expected�to�intensify�further�with�theentry�of�global�players�who�are�facing�stagnantgrowth�in�global�markets.�This�is�expected�to�resultin�a�fall�in�market�shares�of�the�Top�10�players�andresult�in�a�further�squeeze�on�margins

• Co-existence�of�large�players�with�diversifiedportfolios�and�some�niche�plays�expected.�

Industry profitability may reduce further as

revenues shrink and operating costs escalate

Source: KPMG analysis

Scenario 2: Relatively lower growth scenario with sloweconomic revival

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

Retail Segment

•�Increased�focus�on�growing�investor�awareness�and�increasingfinancial�literacy�is�expected,�resulting�in�an�increase�in�thecontribution�of�the�retail�segment�to�the�industry�AUM�in�the�range�of46-48�percent�by�2015,�from�36�percent�as�of�2008�as�mentionedearlier�

• Domestic�players�expected�to�tap�the�overseas�markets�to�grow�theirAUM�through�alliances�with�global�players

• HNIs�and�Mass�Affluent�segments�may�dominate�the�retail�segment

• Average�holding�period�for�mutual�funds�and�average�ticket�size�ofinvestments�in�mutual�funds�likely�to�remain�unchanged.

Institutional Segment

•�Institutional�segment�likely�to�witness�the�emergence�of�a�newcategory�of�SMEs�seeking�advice�on�managing�their�funds.

Market focus

•�Greater�participation�expected�from�Tier�2�cities�and�Tier�3�towns,including�rural�centres

• Share�of�top�10�cities�in�total�AUM�expected�to�decline�as�retailinvestors�from�smaller�cities,�towns�and�rural�areas�join�the�mutualfund�fold.

Market deepening and widening is expected with the objective of

increased retail penetration and participation in mutual funds

•�High�margin�products�such�as�equity�and�select�debt�products�likely�to

continue�to�contribute�a�significant�share�of�industry�AUM

• Flexibility�in�product�pricing�by�AMCs�expected�to�be�permitted�based

on�the�type�of�services�offered

• Emerging�product�categories�such�as�ETFs,�Multi�manager�funds,

REMFs,�outcome-oriented�funds�such�as�principal-protected,�tax-

managed�and�inflation-indexed�funds,�expected�to�have�marginal�share

of�AUM�inspite�of�rapid�growth.

• Possibility�of�introducing�mandatory�rating�for�mutual�fund�products

through�Rating�agencies�likely�to�increase�investor�confidence

• Efforts�expected�to�be�undertaken�for�developing�a�well�structured

and�well�managed�regulated,�debt�market�which�should�increase�in

depth.

Product innovation is expected to be limited

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

Banks

•�The�public�sector�network�of�nationalised�banks�and�post�offices�likelyto�increase�their�focus�on�the�distribution�of�mutual�funds�

• Entry�of�public�sector�banks�as�mutual�fund�manufacturers�expectedto�increase�their�focus�on�mutual�fund�distribution

• Private�banks�providing�financial�advice�to�HNIs�expected�to�marginallyincrease�their�market�share.

IFAs

•�IFAs�expected�to�emerge�as�a�dominant�channel�in�a�scenario�ofrobust�stock�market�growth,�focusing�on�increasing�penetration,�andwill�therefore�have�to�focus�on�initiatives�to�develop�and�support�thischannel�(for�example,�recruitment�and�training�support).

Other channels

•�India�likely�to�witness�the�entry�of�global�fund�super-markets�enabledby�regulatory�changes

• Cooperative�sector,�though�beset�with�internal�administrative�issues,likely�to�emerge�as�another�channel�which�should�be�tapped�byMutual�Funds

• Tapping�the�large�network�of�NGOs,�recognised�by�local�authorities�tointeract�and�reach�out�to�the�lower�middle�class�and�poorer�segmentsof�population�to�increase�mutual�fund�penetration

• Distributors�likely�to�explore�the�possibility�of�innovations�such�as�acommon�online�platform�and�the�usage�of�debit�and�credit�cards�fortransactions.

•�The�public�sector�network�of�nationalised�banks�and�post�offices�are

likely�to�increase�their�focus�on�the�distribution�of�mutual�funds�

• Entry�of�public�sector�banks�as�mutual�fund�manufacturers�are

expected�to�increase�their�focus�on�mutual�fund�distribution

• IFAs�are�expected�to�emerge�as�a�dominant�channel�focused�on

increasing�penetration,�and�will�therefore�have�to�focus�on�initiatives

to�develop�and�support�this�channel�(for�example,�recruitment�and

training�support)

• IFA�channels�are�expected�to�witness�growth�at�a�faster�pace�than

banks

• Private�banks�providing�financial�advice�to�HNIs�expected�to�marginally

increase�their�market�share

Massive expansion is expected in the mutual fund distribution

network

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

•�Regulators�across�Financial�services�spectrum�viz.�mutual�funds�and

capital�markets,�pension,�insurance�and�banking�expected�to�work

towards�harmonisation�of�policies,�with�support�from�industry�bodies

like�the�CII�and�the�respective�industry�associations

• Thrust�of�the�regulatory�and�compliance�framework�expected�to�be�on

enhancing�resilience�and�sustainability,�investor�protection�and�good

governance�going�forward.

The regulatory and compliance framework for mutual funds is likely to

get aligned with the frameworks across the financial services spectrum

In summary, the Indian mutual fund industry is expected towitness rapid growth in AUM over the next few years. Theindustry, however, faces the challenge of achieving sustainedprofitable growth while increasing retail penetration andexpanding the reach of mutual funds into rural areas.

• Distributors�likely�to�explore�the�possibility�of�innovations�such�as�a

common�online�platform�and�the�usage�of�debit�and�credit�cards�for

transactions

• AMCs�are�expected�to�invest�in�channel�innovation�such�as�Mobile

and�Internet�services.�Mobile�telephony�enabling�mobile�transactions

for�the�purchase�and�sale�of�mutual�funds�and�SMS-based�services�is

expected�to�revolutionise�the�industry.

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

Based�on�discussions�with�key�industry�stakeholders,

KPMG�in�India�is�of�the�view�that�opportunities�exist�for

surpassing�the�growth�potential�of�the�Indian�mutual

fund�industry�and�making�the�industry�more�profitable

through�a�collaborative�effort�across�all�the�key

stakeholders�to�reach�out�to�the�customer,�viz.�AMCs,

distribution�channel�partners,�service�providers�such�as

R&T�Agents,�custodians�and�fund�accountants,�CII,

AMFI,�the�regulator�SEBI�and�the�media,�among�others.

This�section�seeks�to�identify�and�prioritise�key

initiatives�that�are�required�to�be�undertaken�for�the

Indian�mutual�fund�industry�to�grow�and�effectively

compete�in�a�dynamic�environment.

6. Action Plan for Achieving Transformational Growth

CII

Key stakeholders of the mutual fund industry

Source: CII-KPMG analysis

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

Massive Increase in Mutual Fund Penetration Through Customer Awareness Campaigns

Given�that�customer�awareness�is�the�pre-requisite�for�the�achievement�of�the�industry�growth�potential,

there�is�a�need�for�planning,�financing�and�executing�initiatives�aimed�at�increasing�financial�literacy�and

enhancing�investor�education�across�the�entire�country�through�a�sustained�collaborative�effort�across�all

stakeholders.

Financing a Sustainable Nationwide Customer Awareness Program

• Creation�of�the�‘Mutual�Fund�Education�Fund’�–�a�common�corpus�of�funds�from�AMCs�and�distributors

through�mandatory�levy�on�the�investment�management�fee�earned�by�AMCs�and�on�the�commissions

earned�by�distributors�from�mutual�fund�sales

• This�Fund�should�be�suitably�ring-fenced�and�managed/�administered�by�the�industry�association.

Conducting a Nationwide Customer Awareness Program

• NISM�along�with�the�industry�association�to�design�the�content�for�promoting�customer�awareness

programs�on�mutual�funds

• AMCs�with�support�from�CII,�AMFI�and�NISM�should�rollout�customer�awareness�campaigns�and�provide

infrastructure,�content�and�speakers�for�running�the�campaigns�on�a�pan-India�basis�over�a�sustained

period�of�five�years

• Social�marketing�firms�and�media�companies�to�design�effective�and�meaningful�mass�media�campaigns

in�multiple�languages�using�television,�hoardings,�flyers,�street�plays�and�other�mechanisms�to�reach�the

masses.�

Promoting Financial Planning Awareness in Educational Institutions

• NISM�to�take�the�lead�in�developing�and�finalising�a�Financial�Planning�course�within�the�next�three

months.�The�course�should�encompass�modules�on�mutual�funds,�and�other�financial�products�along�with

concepts�like�risk�management,�asset�allocation�and�portfolio�diversification�to�meet�multiple�needs.�This

course�should�be�incorporated�in�the�curriculum�across�all�schools�and�colleges,�as�a�mandatory�course

starting�from�Class�8�upto�the�graduation�level,�followed�by�an�examination.�This�will�require�a�directive

from�the�Ministry�of�HRD,�Government�of�India,�and�will�need�to�be�facilitated�by�the�education�boards

and�the�universities�

• NISM�should�be�the�nodal�agency�and�should�work�in�a�collaborative�manner�with�AMCs,�CII�and�AMFI

by�adopting�the�‘train�the�trainer’�concept�to�train�teaching�faculty�in�schools�and�colleges�across�India

• The�India�Post�and�public�sector�banks�could�also�be�used�to�promote�customer�awareness�by�using�their

infrastructure�for�conducting�awareness�programs�and�campaigns

• Investor�associations,�self�help�groups�and�other�affinity�groups�should�be�identified�to�facilitate�investor

workshops�in�cities�and�towns�across�the�country.

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

New Products and Pricing to Attract Risk Averse Customers

The�objective�of�product�innovation�by�AMCs�should�be�driven�by�the�need�to�introduce�simple�products�to

attract�and�retain�risk�averse�and�first�time�investors�to�start�investing�in�mutual�funds.

Introduction of Customer-Friendly Products and Product Features

• AMCs�through�AMFI�should�conduct�a�nationwide�survey�of�customer�needs�across�liquidity,�risk,

frequency�and�quantum�of�contribution�to�determine�product�variants�and�features�that�meet�customer

needs

• Allow�investible�surplus�of�investors�to�be�invested�at�any�time�in�ongoing�schemes�with�a�flexible�SIP

option

• Introduce�simple�products�that�have�features�of�capital�protection�with�returns�that�are�higher�than

traditional�products�and�limit�market�risk

• Focus�on�design�of�products�around�women�and�children�related�needs,�given�the�growing�dominance�of

women�in�influencing�investment�decisions�in�households�across�the�country.�Further�commodity�related,

crop�related�and�agriculture�oriented�fund�products�may�be�conceptualised�and�developed�by�cater�to

segment�specific�needs

• Focus�on�product�appeal�for�the�low�income�group�by�keeping�ease�of�investment�and�minimum

thresholds�within�affordable�limits

• Encourage�the�introduction�of�customised�ETFs�for�retail�and�institutional�customers�

• Regulatory�framework�to�allow�niche�players�to�co-exist�with�players�having�a�diversified�product�portfolio

without�raising�requirements�for�minimum�networth.�These�requirements�are�common�at�the�industry

level,�irrespective�of�product�portfolio�mix

• Enable�mutual�fund�investments�through�mobile�telephony.�

Pricing Flexibility

• Pricing�innovations�should�focus�on�distributor�compensation�and�administration

• Enable�flexibility�in�regulations�to�allow�customers�to�pay�for�the�advice�and�service�rendered�by�the

distributors�through�varying�arrangements�based�on�the�method�of�purchase,�degree�of�service�provided

and�the�timeframe�for�payment.�Some�options�include�exploring�the�possibility�of�introducing�a�multiple

share�class�structure�with�pricing�options�for�front-end�load,�back-end�load�and�fixed�annual�fee�as�a

percentage�of�all�investments.

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

Public Sector Thrust into Mutual Funds Distribution and Focus on Strengthening Presence Beyond Tier 2 Cities

Training of the Public Sector Employee Base

• Training�of�employees�in�the�public�sector�network�including�India�Post,�Nationalised�Banks,�Regional

Rural�Banks�and�Cooperative�Banks,�on�sale�of�mutual�funds�and�basic�financial�planning�concepts

through�the�“Train�the�Trainer”�approach,�so�that�they�may�be�inducted�as�trainers�to�support�customer

awareness�campaigns�run�by�NISM�and�AMFI.

Opening Up of the Public Sector Branch Network in Tier 3 and Tier 4 Towns

• Commence�sale�of�mutual�funds�through�the�branch�network�of�India�Post,�Nationalised�Banks,�Regional

Rural�Banks�and�Cooperative�Banks�by�focusing�on�Tier�2�and�Tier�3�towns�initially�

• India�Post�to�sell�mutual�fund�products�of�all�SEBI�registered�AMCs�instead�of�limiting�the�customer�to

five�AMCs�only�as�is�currently�prevalent

• Boost�the�presence�of�Investor�Service�Centres�(ISCs)�through�R&T�Agents�in�Tier�2�and�Tier�3�towns�and

utilise�their�presence�to�promote�customer�awareness�of�mutual�funds.

Focus on Increasing Customer Engagement Pre and Post Completion of the Investment

• AMCs�to�focus�on�growing�the�IFA�channel�and�encourage�them�to�reach�out�to�and�engage�with

customers�on�their�mutual�fund�needs�on�an�ongoing�basis�pre�and�post�completion�of�their�investment

• AMCs�to�focus�on�enhancing�the�marketing�and�advisory�capabilities�of�all�distributors�so�that�they�win

the�trust�and�confidence�of�customers

• AMCs�and�distributors�to�focus�on�establishing�base�level�financial�planning�capabilities�to�facilitate�the

transition�from�distribution�to�‘advice’.

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

Strengthening of Associations

Strengthening of AMFI

• AMFI�to�play�an�active�role�in�bringing�all�the�stakeholders�together�and�evolving�a�strong�vision�for�the

mutual�fund�industry�across�all�dimensions�–�aspirational�AUM�growth�and�profitability,�retail�penetration,

products�and�pricing,�distribution�channels,�operations�and�customer�service,�enabled�by�a�supporting

regulatory�framework

• Augment�the�employee�base�of�AMFI�so�as�to�support�NISM�in�conducting�nation-wide�customer

awareness�campaigns.

Development of a Common Online Platform

• AMFI�to�coordinate�the�roll�out�of�a�common�online�platform�for�AMCs�which�will�result�in�increasing

reach,�reducing�distribution�costs�and�making�transactions�free�from�operational�issues.

Facilitating Distributor Education and Mandatory Certification

• CII�and�AMFI�to�support�NISM�in�the�promotion�of�distributor�awareness�programs�

• AMFI�to�include�additional�financial�planning�modules�in�the�distributor�certification�and�make�certification

valid�for�a�two-year�period,�thereby�necessitating�a�bi-annual�renewal�

• AMFI�to�facilitate�annual�updation�of�the�course�curriculum�in�line�with�the�latest�products�being�adopted

by�the�industry

• AMFI�to�facilitate�issue�of�identity�card�with�distributor�certification�which�should�be�mandated�to�be

provided�to�the�customer�at�the�time�of�closing�the�mutual�fund�sale.

Building an Industry Data Repository

• AMFI�to�build�a�data�warehouse�which�tracks�the�financial�performance�of�all�AMCs�in�India�across�key

parameters�such�as�revenue�and�profitability,�and�performance�of�all�mutual�funds�schemes�in�addition�to

tracking�AUM�growth�and�composition

• AMFI�to�publish�data�on�the�financial�health�of�all�AMCs�in�a�consolidated�manner�through�the�AMFI

website

• Provide�a�listing�on�the�AMFI�website�of�all�certified�distributors�who�have�received�AMFI�certification�and

update�the�list�based�on�certification�renewals.�

Creation of an Association of Distributors

• Creation�of�a�SEBI�recognised�association�of�distributors�of�mutual�fund�products�with�a�clearly�defined

charter�and�role.

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

Harmonisation of Policies across Multiple Regulatory Frameworks in the Financial Services Sector

Constitution of a Steering Committee of Financial Services Regulators under the Ministry of Finance

• It�is�proposed�that�the�Government�of�India�should�constitute�a�Steering�Committee�under�the�aegis�of

the�Ministry�of�Finance�comprising�the�Financial�Services�Regulators�for�mutual�funds�and�capital

markets,�pension,�insurance,�banking�and�other�verticals�along�with�representation�from�CBDT.�The

Committee’s�objective�should�be�defined�as�achieving�harmonisation�in�policies�and�procedures�across

multiple�regulatory�frameworks�in�the�Financial�Services�Sector.

Areas Requiring Harmonisation

• Outsourcing�of�funds�management�by�insurance�companies�to�AMCs�independent�of�the�assets�under

management,�by�removing�the�threshold�of�INR�80�billion�which�exists�currently

• Allow�PSUs�to�invest�larger�surpluses�in�mutual�funds�and�open�up�investment�in�private�sector�and

foreign�mutual�funds.�

Acceptance and Rollout of the Unique Identification Card

• Implementation�of�the�Unique�Identification�Card�as�a�valid�document�for�KYC.�The�Government�has

announced�that�a�Unique�Identification�Card�would�be�issues�to�all�Citizens�(President's�speech�at�the

Joint�Session�of�Parliament�on�4th�June�2009).�This�should�be�implemented�and�the�card�should�be�a

valid�document�for�KYC.

This�will�entail�undertaking�public�awareness�campaign�to�make�holding�of�the�Unique�Identification�Card

mandatory�for�all�Indian�citizens�and�build�the�supporting�institutional�infrastructure�to�issue�these�cards�at�a

nominal�rate�through�the�public�sector�network.

The�Government�of�India�could�facilitate�issuance�of�the�Unique�Identification�Card�free�of�cost�to�all�Indian

citizens�below�a�specified�income�threshold�which�could�be�in�line�with�the�minimum�taxation�slab�limit.

Page�31

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

There�is�a�perceived�need�to�review�risk�and�performance�analysis�capabilities�and

governance�structures,�to�meet�fiduciary�responsibilities�and�the�increasing�demand�for

transparency.

AMCs�therefore�need�to�re-orient�their�business�towards�fulfilling�customer�needs.�As

customers�seek�trusted�advisors,�the�manufacturer-distributor-customer�relationship�is

expected�to�be�centered�not�on�the�sale�of�products,�but�for�collectively�promoting�the

financial�success�of�customers�across�all�facets�of�their�professional�and�personal�lives.�This

requires�creating�a�collaborative�network�of�experts�in�funds�management�and�financial

advice,�innovative�product�offerings,�efficient�service�delivery�and�supporting�technology.�The

mutual�fund�industry�today�needs�to�develop�products�to�fulfill�customer�needs�and�help

customers�understand�how�its�products�cater�to�their�needs.

Given�that�the�industry�needs�to�collectively�work�towards�riding�over�the�dynamic�and

relatively�less�favourable�economic�environment�at�present,�the�next�phase�for�the�industry�is

likely�to�be�characterised�by�a�stronger�focus�on�customer�centricity.�Other�areas�of�focus�are

likely�to�be�cost�management�and�enabling�strong�governance�and�regulatory�framework�-�all

aimed�at�helping�the�industry�achieve�sustained,�profitable�growth,�going�forward.

7. Summary

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

List of Abbreviations

AMC Asset�Management�Company

AMFI Association�of�Mutual�Funds�in�India

AML Anti�Money�Laundering

AUM Assets�Under�Management

bps Basis�Points

CAGR Compounded�Annual�Growth�Rate

CBDT Central�Board�of�Direct�Taxes

CFT Combating�Financing�of�Terrorism�

CII Confederation�of�Indian�Industry

CSO Central�Statistical�Organisation

ETF Exchange�Traded�Fund

FY Financial�Year

GDP Gross�Domestic�Product

HNI High�Networth�Individual

HRD Human�Resource�Development

ICI Investment�Company�Institute

IFA Independent�Financial�Advisor

IIMS Invest�India�Market�Solutions

INR Indian�Rupee

ISC Investor�Service�Center

KYC Know�Your�Customer

MF Mutual�Fund

NAV Net�Asset�Value

NFO New�Fund�Offer

NGO Non-Governmental�Organisation

NISM National�Institute�of�Securities�Markets

NPS New�Pension�Scheme

PMLA Prevention�of�Money�Laundering

PSU Public�Sector�Undertaking

PAN Permanent�Account�Number

PBT Profit�Before�Tax

R&T Registrar�&�Transfer�Agent

RBI Reserve�Bank�of�India

REMF Real�Estate�Mutual�Fund

SEBI Securities�&�Exchange�Board�of�India

SIP Systematic�Investment�Plan

SMS Short�Messaging�Service

UK United�Kingdom

ULIP Unit�Linked�Insurance�Plan

USA United�States�of�America

UTI Unit�Trust�of�India

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KPMG�International�is�a�global�network�of�professional�services�firms

with�over�135,000�people�working�together�to�deliver�value�in�more�than

140�countries.�KPMG�in�India�draws�on�our�firms'�deep�industry

experience�to�provide�Audit,�Tax�&�Advisory�services.�The�independent

member�firms�of�the�KPMG�network�are�affiliated�with�KPMG

International,�a�Swiss�cooperative.�Each�KPMG�firm�is�a�legally�distinct

and�separate�entity�and�describes�itself�as�such.

The�Indian�member�firms�affiliated�with�KPMG�International�were

established�in�September�1993.�As�members�of�a�cohesive�business�unit

they�respond�to�a�client�service�environment�by�leveraging�the�resources

of�a�global�network�of�firms,�providing�detailed�knowledge�of�local�laws,

regulations,�markets�and�competition.�We�provide�services�to�over�5,000

international�and�national�clients,�in�India.�KPMG�has�offices�in�India�in

Mumbai,�Delhi,�Bangalore,�Chennai,�Hyderabad,�Kolkata�and�Pune.�The

firms�in�India�have�access�to�more�than�3000�Indian�and�expatriate

professionals,�many�of�whom�are�internationally�trained.�We�strive�to

provide�rapid,�performance-based,�industry-focused�and�technology-

enabled�services,�which�reflect�a�shared�knowledge�of�global�and�local

industries�and�our�experience�of�the�Indian�business�environment.

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

KPMG in India

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The�Confederation�of�Indian�Industry�(CII)�works�to�create�and�sustain�an

environment�conducive�to�the�growth�of�industry�in�India,�partnering

industry�and�government�alike�through�advisory�and�consultative

processes.�

CII�is�a�non-government,�not-for-profit,�industry�led�and�industry�managed

organisation,�playing�a�proactive�role�in�India’s�development�process.

Founded�over�114�years�ago,�it�is�India’s�premier�business�association,

with�a�direct�membership�of�over�7800�organisations�from�the�private�as

well�as�public�sectors,�including�SMEs�and�MNCs,�and�an�indirect

membership�of�over�90,000�companies�from�around�385�national�and

regional�sectoral�associations.�

CII�catalyses�change�by�working�closely�with�government�on�policy

issues,�enhancing�efficiency,�competitiveness�and�expanding�business

opportunities�for�industry�through�a�range�of�specialised�services�and

global�linkages.�It�also�provides�a�platform�for�sectoral�consensus�building

and�networking.�Major�emphasis�is�laid�on�projecting�a�positive�image�of

business,�assisting�industry�to�identify�and�execute�corporate�citizenship

programmes.�Partnerships�with�over�120�NGOs�across�the�country�carry

forward�our�initiatives�in�integrated�and�inclusive�development,�which

include�health,�education,�livelihood,�diversity�management,�skill

development�and�water,�to�name�a�few.�

Complementing�this�vision,�CII’s�theme�for�2009-10�is�‘India@75:

Economy,�Infrastructure�and�Governance.’�Within�the�overarching�agenda

to�facilitate�India’s�transformation�into�an�economically�vital,

technologically�innovative,�socially�and�ethically�vibrant�global�leader�by

year�2022,�CII’s�focus�this�year�is�on�revival�of�the�Economy,�fast�tracking

Infrastructure�and�improved�Governance.�

With�64�offices�in�India,�9�overseas�in�Australia,�Austria,�China,�France,

Germany,�Japan,�Singapore,�UK,�and�USA,�and�institutional�partnerships

with�213�counterpart�organisations�in�88�countries,�CII�serves�as�a

reference�point�for�Indian�industry�and�the�international�business

community.

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

Confederation of Indian Industry (CII)

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

AcknowledgementsWe express our sincere gratitude to Mr U K Sinha, Chairman – CII National Committee on Mutual Funds and Chairman & ManagingDirector, UTI Asset Management Company Limited for his guidance in preparation of this report.

We are also grateful to Mr A P Kurian, Chairman, AMFI for sharing his perspective and supporting us with data as required.

We would sincerely like to acknowledge and thank the following industry leaders for providing their valuable views for this report (inalphabetical order):

• Mr Achal Kumar Gupta, Managing Director, SBI Funds Management Private Limited

• Ms Ashu Suyash, Managing Director and Country Head, Fidelity Fund Management

• Mr Harshendu Bindal, President, Franklin Templeton Asset Management (India) Private Limited

• Mr John Mathews, Senior Vice President and Head - Client Servicing, HDFC Asset Management Company Limited

• Mr Navin Suri, Chief Executive Officer, ING Investment Management (India) Private Limited

• Mr Nilesh Shah, Deputy Managing Director, ICICI Prudential Asset Management Company Limited

• Mr Nitin Jain, Director – Personal Financial Services, Religare Finvest Limited

• Mr N P Ghanekar, Managing Director and Chief Executive Officer, JM Financial Asset Management Private Limited

• Mr Paul Armstrong, Advisor, ING Investment Management (India) Private Limited

• Mr Rajiv Deep Bajaj, Vice Chairman & Managing Director, Bajaj Capital Limited

• Mr R S Srinivas Jain, Senior Vice President, Chief Marketing Officer, SBI Funds Management Private Limited

• Mr Sandesh Kirkire, Chief Executive Officer, Kotak Mahindra Asset Management Company Limited

• Mr Sanjay Parikh, Chief Operations Officer, Taurus Asset Management Company Limited

• Mr Sanjiv Shah, Executive Director, Benchmark Asset Management Company Private Limited

• Mr Sundeep Sikka, Chief Executive Officer, Reliance Capital Asset Management Limited

• Mr Suresh Babu V, Senior Vice President and Head - Operations, HDFC Asset Management Company Limited

• Mr Ved Prakash Chaturvedi, Managing Director, Tata Asset Management Limited

• Mr Vikramaaditya, Chief Executive Officer, HSBC Asset Management (India) Private Limited

• Mr Vivek Kudva, Managing Director - India & CEEMEA, Franklin Templeton Investments

• Mr Vipul Jhaveri, Chief Operating Officer, 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 ofCustomer” survey conducted by KPMG.

This report has been written by P S Deepa and Vikas Arora with support from the KPMG team comprising Divya Arora, Kunal Jain, TasneemLakdawalla, Kunal Pande, Vinit Mehta, Shruti Rustagi, Aashutosh Chaudhari, Vikash Madhogaria, Sundar Ramaswamy, Vishnu Pillai, VinayGarodiya, Sowmya Anantharaman, Sneha Rohekar, Pranav Desai and Nisha Fernandes.

Page 41: Mutual fund-web

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The�information�contained�herein�is�of�a�general�nature�and�is�not�intended�to�address�the�circumstances�of�any�particular�individualor�entity.�Although�we�endeavor�to�provide�accurate�and�timely�information,�there�can�be�no�guarantee�that�such�information�isaccurate�as�of�the�date�it�is�received�or�that�it�will�continue�to�be�accurate�in�the�future.�No�one�should�act�on�such�informationwithout�appropriate�professional�advice�after�a�thorough�examination�of�the�particular�situation.

KPMG�in�India

Pradip KanakiaExecutive DirectorHead - Marketse-Mail: [email protected]: +91 80 3980 6100

Abizer DiwanjiExecutive DirectorHead - Financial Servicese-Mail: [email protected]: +91 22 3983 5301

Naresh MakhijaniExecutive DirectorHead - Fundse-Mail: [email protected]: +91 22 3983 5703

Manoj Kumar VijaiExecutive DirectorFinancial Servicese-Mail: [email protected]: +91 22 3983 5121

Ravi TrivedyExecutive DirectorBusiness Advisorye-Mail: [email protected]: +91 22 3983 6202

P S DeepaAssociate DirectorBusiness Advisorye-Mail: [email protected]: +91 22 3983 6293

Vikas AroraAssociate DirectorCorporate Financee-Mail: [email protected]: +91 22 3983 5321

KPMG�Contacts

Marut Sen GuptaSenior Directore-Mail: [email protected]

Abha SethDirectore-Mail: [email protected]

N V N SudhaDeputy Directore-Mail: [email protected]

CII�Head�Office

Confederation of Indian Industry23 Institutional AreaLodi RoadNew Delhi - 110 023 Tel:91-11-24629994-7 (4 lines) Fax: 91-11-24626419/24615693 Website:www.cii.in

CII�Contacts