industry report on mutual funds
TRANSCRIPT
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SUMMER INTERNSHIP PROJECT
REPORT ON
MUTUAL FUND INDUSTRY
SUBMITTED TO SUBMITTED BY
Prof. M.V.S. Kameshwar Rao P.TEJEESH CHANDRA
Associate Professor, Roll no: 1226113139
Chairperson-CEP.
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SUMMARY
The Indian mutual fund industry has shown relatively slow growth in the period FY 10-13 growing at a CAGR of approximately 3.2 per cent. Average (AUM) stood at INR 8,140 billion as of September 2013. However, AUM increased to INR 8,800 billion as of December 2013. In comparison to global markets, India’s AUM penetration as a per cent of GDP is between 5-6 per cent while it is around 77 per cent for the U.S., 40 per cent for Brazil and 31 per cent for South Africa. Now the government is also making changes in the policies related to mutual fund industry to increase the performance of asset management industry which will in turn boost the mutual funds. Mutual fund industry is growing and SEBI is also making its own efforts to increase the performance of mutual funds along with government.
STRUCTURE OF THE MUTUAL FUND INDUSTRY:
SEBI (Mutual Fund) Regulations, 1996 as amended till date define “mutual fund” as a fund
established in the form of a trust to raise money through the sale of units to the public or a
section of the public under one or more schemes for investing in securities including money
market instruments or gold or gold related instruments or real estate assets.
The structure, which has inherent checks and balances to protect the investors, can be briefly
described as follows:
• Mutual funds are constituted as Trusts.
• The mutual fund trust is created by one or more Sponsors, who are the main persons behind the
mutual fund business.
• Every trust has beneficiaries. The beneficiaries, in the case of a mutual fund trust, are the
investors who invest in various schemes of the mutual fund.
• The operations of the mutual fund trust are governed by a Trust Deed, which is executed by the
sponsors. SEBI has laid down various clauses that need to be part of the Trust Deed.
• The Trust acts through its trustees. Therefore, the role of protecting the beneficiaries (investors)
is that of the Trustees. The first trustees are named in the Trust Deed, which also prescribes the
procedure for change in Trustees. In order to perform the trusteeship role, either individuals may
be appointed as trustees or a Trustee company may be appointed. When individuals are
appointed trustees, they are jointly referred to as Board of Trustees. A trustee company functions
through its Board of Directors. Day to day management of the schemes is handled by an Asset
Management Company (AMC). The AMC is appointed by the sponsor or the Trustees. The
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trustees execute an investment management agreement with the AMC, setting out its
responsibilities. Although the AMC manages the schemes, custody of the assets of the scheme
(securities, gold, gold-related instruments & real estate assets) is with a Custodian, who is
appointed by the Trustees. Investors invest in various schemes of the mutual fund. The record of
investors and their unit-holding may be maintained by the AMC itself, or it can appoint a
Registrar & Transfer Agent (RTA).
GOVERNMENT POLICIES:
The Securities & Exchange Board of India and the government are working on changes
to the policy on mutual funds that could see them gain access to a substantial amount of money
from the state-administered provident fund and other retirement programmes, a move that could
lift the fortunes of the asset management industry.
The long-term mutual fund policy will also feature proposals on tax breaks and incentives
besides obliging asset managers to reach out to investors. The policy will also propose the
scrapping of differential tax treatment for mutual funds in relation to pension funds and
insurance plans. The regulator is of the view that, as with other sectors of the economy, a long-
term policy for mutual funds is critical to mobilising domestic savings for economic expansion
and achieving inclusive growth. Over 50% of household savings are currently parked in bank
deposits as investors prefer products that protect their principal and ensure assured returns.
The capital market regulator is in talks with the finance ministry to allow mutual funds to
manage long-term funds such as retirement savings as it proposes to introduce mutual fund-
linked retirement plans in line with similar schemes overseas, such as the US 401(k). Since
policy is the domain of the government, the finance ministry is also involved in the process and
is part of a committee working on the draft. The first-ever long term policy for over Rs 9-trillion
mutual fund industry, regulator Securities and Exchange Board of India on Thursday proposed
tax incentives for investors to help channelize household savings into these investment products.
At the same time, SEBI also sought to bring in greater seriousness among fund houses in
running mutual fund schemes by asking them to contribute their own money in form of 'seed
capital' amounting to 1 per cent of amount raised, while minimum net worth requirement would
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also be increased from Rs 10 crore to Rs 50 crore to weed out non-serious players. Sebi wants
the government to enhance the limit under Section 80-C of the Income Tax Act from Rs 1 lakh to
Rs 2 lakh to help make various mutual fund schemes eligible for such tax benefits. One
important point on the long term mutual fund policy which government is going to introduce is
that the minimum capital requirement for Asset Management Companies (AMCs) will be
increased from Rs 10 crore to Rs 50 crore.
MAJOR PLAYERS IN MUTUAL FUNDS:
Investors all over the world are making fast money from mutual fund investments. Mutual funds are volatile in nature and its return is subjected to market risk. If any individual is a smart investor and is also quite aware of the well-performing MF in the market, then investment not only becomes easy but also profitable and risk free. Here is the list of top 10 mutual funds in which one would like to invest in 2013, as they were top performing MF in the last 12 months, as stated by Mutual Funds India.
1. ICICI Prudential Banking and Financial Services Fund – Retail
2. Reliance Media & Entertainment
3. SBI Magnum Sector Funds Umbrella - FMCG4. SBI Magnum Sector Funds Umbrella - Emerg Buss Fund5. Reliance Banking Fund - Regular – Growth6. Religare Banking7. GS Bank8. Principal Emerging Blue-chip9. HDFC10. UTI
CURRENT ISSUES IN MUTUAL FUND INDUSTRY IN INDIA :-
1. The Indian mutual fund industry is one of the fastest growing and most competitive segments
of the financial sector. As of August 2013, the total AUM stood at Rs. 7.66 trillion. However,
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growth rates of AMCs have come down from the peak levels seen in the early 2000s. One of the
biggest reasons behind this is the lack of healthy participation from a large part of the country.
2. This lack of penetration can be due to two reasons:
a. Low demand of mutual funds from the public outside the major (T-15) cities. This low
demand in turn could be caused by low levels of financial literacy, cultural attitudes towards
savings and investments etc.
b. Low supply of mutual funds from AMCs outside the major cities. The low supply could be
due to perceived lack of demand from the general retail investor or due to lack of available
manpower in these areas.
3. The study first documents how Assets under Management (AUM) are unevenly distributed
across the country and then proceed to scrutinize the reasons behind this uneven penetration. It
focuses on the AMCs distribution networks using proxies such as the distribution of independent
financial agents (IFAs) across the country, sales made by IFAs, distributional efficiency of
AMCs etc.
4. A survey of fund houses was carried out to gain a better understanding of the causes holding
them back from expanding beyond T-15 cities.
5. The study found that low number of agents (per capita) in sub-urban and rural areas and the
slow growth rates in mutual fund sales in the corresponding areas are closely associated with
each other.
6. Distribution of mutual fund products is one of the critical components in the entire value
chain of the asset management industry. More so, where investment is highly underpenetrated.
For example, the north eastern region holds tremendous potential on account of its very low
penetration and awareness about investments. The region has 2.5 per cent of total bank branches
which accounts for 1.3 per cent of banking business but only 0.3 per cent of AUM . People save
their money in banks rather than investing it in the market. The investment advisors could help
in serving this underserved region by making them aware of the financial products.
The Indian mutual fund industry finds itself in an economic landscape which has
undergone rapid changes over the past three years. The industry achieved a high water mark
when it doubled its AUM from Rs. 3.6 trillion in FY2007 to Rs. 6.13 trillion in FY2010 –
clocking an impressive growth rate of 16.2% per year. Since then the Indian economy (coupled
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with the emerging economies) has faced a slowdown – the most severe of which are happening
as this report is being written. From an average GDP growth rate of 8-9% during the 2008-2011
years, the Indian economy is now growing at a lackluster 4.8% growth rate in Q2 2013. Coupled
with a steep decline in the value of the Indian rupee, the mutual fund industry now finds itself in
a capricious global economic environment. However, there is strong reason to believe that the
Indian mutual fund industry has not yet seen its global peak and if proper measures are taken,
the industry could get back on its former growth path.
One of the biggest challenges that the mutual fund industry faces is the lack of healthy
participation from a large part of the country. The AUM/GDP ratio is one of the best indicators
of how much of the yearly income in a given district is being invested into mutual funds.
According to 2012 World Bank Global Findex, only 35.23% of respondents in India have an
account (either self or together with someone else) at a bank or some other formal financial
institution. Even in savings indicators at formal or informal institutions, India continues to be a
laggard. Even Bangladesh with a 47% lower per-capita Gross Domestic Product (GDP) based on
purchasing power parity performs better in financial inclusion parameters.
FUTURE OF MUTUAL FUND INDUSTRY
While the long-term outlook for the asset management industry in India seems to be positive,
the stance on short to medium term outlook is moderate. This can be attributed to the existing
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performance in financial markets and the evolving market and regulatory landscape. Equity
markets haven’t performed since the global financial crisis. The broad equity stock index NSE
has grown only by 2 per cent y-o-y and was below the 3 year mark as of Sept 2013 . This was
well reflected in the equity AUM growth, which has undergone a negative growth in AUM base
at 10 per cent and 20 per cent over the same time period . The investors have redeemed their
investments and moved to products with stable yields. The performance of equity markets will
continue to reflect in the Equity AUM till the equity markets stabilize. HNIs have emerged as
the fastest growing investor class in the debt oriented products. In particular, Fixed Maturity
Plan (FMPs) continue to remain a popular product and have consistently given better
performance and tax advantage over Bank FDs. Debt oriented products are slowly gaining
recognition among the retail investors. Retail investments increased from INR 228.3 billion in
Sept 2010 to INR 331.6 billion in Sept 2013 . But they still have a long way to go and capture
the small ticket market.
KEY CHALLANGES:
• Lack of financial education and awareness
Financial literacy is one of the most fundamental factors impeding the growth of penetration of
any financial products in the smaller cities and towns. Investors need to be made aware of their
financial goals and the means to achieve the same. AMFI and SEBI along with the Industry are
making efforts for investor awareness campaign. Fund houses are also mandated by regulation
to invest 2 bps from scheme expenses towards, investor education and awareness campaigns but
India has a long way to go.
• Limited Distribution network
The second critical issue for fund houses to distribute their products in smaller cities is the
availability of quality distribution infrastructure. Fund houses need infrastructure like branches,
adequate number of relationship managers and sales service staff in these locations to be able to
increase their sales volume coming from these geographies.
• Distribution cost
Cost of establishing a distribution network in B-15 cities is quite high. It is the cost per
transaction or the low sales volume that makes the pursuit economically unviable or at the least
challenging. Although, additional TER can be levied to extend of inflows from these cities (up
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to 30 bps); entering these markets have a long gestation period and requires a capital investment
for distributors.
• Cultural bias towards physical assets
As of FY13, 46 per cent of total individual wealth in India is invested in physical assets (gold
and real estate) . Although, in the past few decades, the investors have increasingly relied on
financial assets to invest their savings; the contribution of MFs in the asset portfolio is very
low. Insurance products constitute 17 per cent of the individual savings in financial assets,
whereas the share of mutual funds is much lower at 3.2 per cent
REGULATIONS CHANGE BY SEBI
In mid 2012, SEBI took note of the fact there is a lack of penetration of mutual fund products,
inadequate distribution network, regulation of distributors, investor protection, etc. To address
these issues, SEBI announced slew of measures to develop a long term policy including
financial inclusion to achieve sustainable growth of the mutual fund industry. While the
measures are positive steps to increase the foot print of the mutual fund industry, certain other
emerging issues may need to be addressed separately.
Feet-on-Street distribution
Postal agents, retired officials of government, retired teachers, retired bank officers etc. who
have been in service for atleast 10 years were allowed to sell simple products so as to increase
the distribution base for mutual fund. To take this initiative further, AMFI decided to include
Intermediaries/Agents engaged in distribution of financial products e.g. insurance agent, FD
agent, National Savings Scheme products, PPF, etc. registered with any other Financial
Services Regulator within the ambit of mutual fund distributors. To incentivise this new force to
undertake mutual fund selling, AMFI has waived off registration fees for all first time
registrations and new cadre of distributors subject to fulfillment of prescribed conditions. While
the measure could boost the foot print of AMC, there is increasing need to be cautious of the
risk of mis-selling due to lack of knowledge on the investors part.
Fungibility of TER
In an attempt to increase mutual fund foot print, AMCs are allowed to charge an additional
TER10 upto 30 bps, if 30 per cent of their net sales or 15 per cent of their AUM (whichever is
higher) originates from places beyond top 15 cities B-15. If inflow from B-15 is less than 30 per
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cent of net sales or 15 per cent of AUM, the proportionate amount will be allowed as additional
TER. While this step has the effect of reducing the investors returns in short term, it may give
AMCs more scope to incentivise distributors to expand their geographical reach.
Penetration
SEBI has also permitted small investors (who may not be tax payers and also do no not have
PAN/Bank Account) such as farmers, small traders/businessmen/workers to make a cash
investment upto Rs. 20,000 in mutual fund schemes. While there in no requirement for the
investors to have a PAN/ Bank account, it is unclear how the redemption proceeds would be
paid to such investors since it is mandated that any repayment should be credited to the bank
account of the investors. The distributor could find this mode of investment unattractive as
handling of cash requires higher safeguards. As also, cash investments could also give rise to
opportunity for money laundering, frauds and meddling by tax officials. Considering the cost
involved in handling cash investments coupled with other complexities, this measure may have
several difficulties in implementation.
Self Regulatory Organisation (SRO)
Presently, distributors have to obtain certification from National Institute of Securities Market
(NISM) and registration with AMFI. Apart from the code of conduct prescribed by SEBI and
AMFI, there are no such regulations governing distributors. In order to avoid mis-selling and to
protect investors interest, SEBI plans to appoint a SRO which would regulate the distributors of
mutual fund products, portfolio management products etc. SRO will form rules and regulations
for distributors, hear investor complaints against distributors among many others. The SRO
should aid SEBI to ensure a cordial relationship between mutual fund houses and distributors and
broadbasing the MF industry.
Overseas distributor
In order to encourage the growth prospects of the Indian mutual fund industry in the international
market, SEBI recently prescribed that overseas distributor would neither be required to obtain
certification from NISM nor would require AMFI registration. The sole requirement is to comply
with the extant laws, rules and regulations applicable in their jurisdictions. Despite SEBI
guidelines, the AMFI Registration Number committee has suggested that overseas distributors
may register with AMFI for tracking and MIS purpose. The AMC’s are bestowed with the
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responsibility to carry out due diligence of overseas distributor. This measure will remove entry
barriers and bolster NRI investment in Indian mutual fund.
Members of stock exchange
SEBI permitted Mutual Fund Distributors and Independent Financial Advisor (IFA) registered
with AMFI to become members of stock exchanges to leverage the stock exchange network and
infrastructure so that they can augment their reach and distribution. Distributors and IFA can
purchase and redeem mutual fund units on behalf of client from fund houses using the stock
exchanges trading platform. Till date, SEBI registered stock-brokers and clearing members were
allowed to transact in mutual fund’s leaving the distributor/IFA behind in race. Considering the
fact that major chunk of mutual fund’s are sold through this medium, the change will give an
impetus to the distributor. With this new circular, the investor can inform his/her distributor/IFA
to purchase units on stock exchange and the payment for the same will be made directly by
investors to the recognized clearing corporation. However, the additional financial and
compliance burden may create a deterrent for the distributor from seeking membership.
THE WAY FORWARD
The Mutual fund industry needs to have an ‘outside-in’ perspective as compared to
‘inside-out’ perspective. Understanding investors’ needs should be followed by a product
channel alignment.
A number of change catalysts discussed in the previous section like technology,
investment in B-15 cities, investment adviser etc. would be required to help ensure the overall
objective of prudent growth and profitability. Increasing financial literacy will be the key to
unlock the doors to B-15 and also to remove the perception that equates mutual fund to only
equity. Investor awareness campaigns should be conducted to increase the AUM in smaller
cities which would help industry to progress in a holistic manner. AMC, distributors and IFAs
are all doing their bit but AMFI and SEBI should also play a major role in creating awareness.
Knowledge about mutual fund industry should be included in educational curriculum. The
mantra should be—to catch them young. Fund houses may need to find and partner with the right
distributor to make the products available to investors in smaller cities. Therefore, Banks and
IFAs could play a pivotal role in reaching the investor base. Also, distributors should be
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incentivised enough to ensure that they project mutual funds as a long-term investment for
fulfilling financial goals. For future growth, tax could act as an enabler as tax benefits can be a
pull factor for investors. For example, fund of funds does not get the required tax benefit from
the government. May be, government could look at such funds and few offshore funds from
India for tax benefits. Technology can act as a key enabler and help the fund houses reach
investors at a low cost and more efficient manner. AMCs need to make the relevant investments
in technology to help reach investors to help ensure transactions on the channels of their choice.
The future potential of Investment Advisors could be decided by Investors and the regulators.
Presence of an unbiased advisor could build investor trust on the one hand and reward
performing products on the other.
These measures should help the industry on the path to better growth. However, we need
all stakeholders viz. asset management companies, distributors, regulators to work together to
help ensure the common goal of growth along with profitability is achieved.
ICICI PRUDENTIAL MUTUAL FUND:
ICICI Prudential Asset Management Company Ltd. (IPAMC/ the Company) is the joint venture
between ICICI Bank, a well-known and trusted name in financial services in India and Prudential
Plc, one of UK’s largest players in the financial services sectors. IPAMC was incorporated in the
year 1993. The Company in a span of over 18 years since inception and just over 13 years of the
Joint Venture, has forged a position of pre-eminence in the Indian Mutual Fund industry as the
third largest asset management company in the country, contributing significantly to the growth
of the Indian mutual fund industry.
The Company manages significant Mutual Fund Asset Under Management (AUM), in addition
to Portfolio Management Services and International Advisory Mandates for clients across
international markets in asset classes like Debt, Equity and Real Estate with primary focus on
risk adjusted returns.
IPAMC has witnessed substantial growth in scale. From merely 2 locations and 6 employees
during inception to the current strength of over 700 employees with reach across around 150
locations, the growth momentum of the Company has been exponential. The organization today
is an ideal mix of investment expertise, resource bandwidth & process orientation. IPAMC’s
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Endeavour is to bridge the gap between savings & investments to help create long term wealth
and value for investors through innovation, consistency and sustained risk adjusted performance
SPONSERS:
ICICI Bank is India's largest private sector bank with total assets of Rs. 5,367.95 billion
(US$ 99 billion) at March 31, 2013 and profit after tax Rs. 83.25 billion (US$ 1,533 million) for
the year ended March 31, 2013. The Bank has a network of 3,611 branches and 11,162 ATMs in
India, and has a presence in 19 countries, including India .ICICI Bank offers a wide range of
banking products and financial services to corporate and retail customers through a variety of
delivery channels and through its specialised subsidiaries in the areas of investment banking, life
and non-life insurance, venture capital and asset management.
Prudential plc is an international financial services group with significant operations in
Asia, the US and the UK. We serve more than 23 million insurance customers and have £427
billion of assets under management.
ICICI Prudential Trust Limited (the Trust Company), a company incorporated under the
Companies Act, 1956, is the Trustee to the Fund. ICICI Prudential Asset Management Company
Ltd (the AMC), a company incorporated under the Companies Act, 1956, is the Investment
Manager to the Fund. ICICI Bank Ltd and Prudential Plc (acting through its wholly owned
subsidiary namely Prudential Corporation Holdings Ltd) are the promoters of the AMC and the
Trust Company.
Mutual Fund ICICI Prudential Mutual FundSetup Date Oct-13-1993Incorporation Date Jun-22-1993Sponsor Prudential Plc and ICICI Bank Ltd.Trustee ICICI Prudential Trust Ltd.Chairman Ms. Chanda KochharCEO / MD Mr. Nimesh ShahCIO Mr. S NarenCompliance Officer Ms. Supriya SapreInvestor Service Officer Mr. Yatin SuvarnaAssets Managed Rs. 106821.93 crore (Mar-31-2014)
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