Download Limitations of a Mutual Fund

INTRODUCTION OF THE STUDY
Historians are uncertain of origin of investment funds some cite the closed-end
investment companies launched in the Netherlands in 1822 by King William I as
the first mutual funds, while others point to a Dutch merchant named Adriaan van
Ketwich whose investment trust created in 1774 may have given the king the idea.
Ketwich probably theorized that diversification would increase the appeal .The
next wave of near-mutual funds included an investment trust launched in
Switzerland in 1849, followed by similar vehicles created in Scotland in the
1880s.
The idea of pooling resources and spreading risk using closed-end investments
soon took root in Great Britain and France, making its way to the United States in
the 1890s. The Boston Personal Property Trust, formed in 1893, was the
first closed-end fund in the U.S. The creation of the Alexander Fund in
Philadelphia in 1907 was an important step in the evolution toward what we know
as the modern mutual fund. The Alexander Fund featured semi-annual issues and
allowed investors to make withdrawals on demand.
The Arrival of the Contemporary Mutual Fund
The creation of the Massachusetts Investors' Trust in Boston, Massachusetts,
heralded the arrival of the modern mutual fund in 1924. The fund went public in
1928, eventually spawning the mutual fund firm known today as MFS Investment
Management. State Street Investors' Trust was the custodian of the Massachusetts
Investors' Trust. Later, State Street Investors started its own fund in 1924 with
Richard Paine, Richard Saltonstall and Paul Cabot at the helm. Saltonstall was
also affiliated with Scudder, Stevens and Clark, an outfit that would launch the
first no-load fund in 1928. A momentous year in the history of the mutual fund,
1928 also saw the launch of the Wellington Fund, which was the first mutual fund
to include stocks and bonds, as opposed to direct merchant bank style of
investments in business and trade.
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Chronology of Regulatory provision for Mutual Fund world wide
By 1929, there were 19 open-ended mutual funds competing with nearly 700
closed-end funds. With the stock market crash of 1929, the dynamic began to
change as highly-leveraged closed-end funds were wiped out and small open-end
funds managed to survive.
Government regulators also began to take notice of the fledgling mutual fund
industry. The creation of the Securities and Exchange Commission (SEC), the
passage of the Securities Act of 1933 and the enactment of the Securities
Exchange Act of 1934 put in place safeguards to protect investors: mutual funds
were required to register with the SEC and to provide disclosure in the form of a
prospectus. The Investment Company Act of 1940 put in place additional
regulations that required more disclosures and sought to minimize conflicts of
interest.
The mutual fund industry continued to expand. At the beginning of the 1950s, the
number of open-end funds topped 100. In 1954, the financial markets overcame
their 1929 peak, and the mutual fund industry began to grow in earnest, adding
some 50 new funds over the course of the decade. The 1960s saw the rise of
aggressive growth funds, with more than 100 new funds established and billions
of dollars in new asset inflows.
Hundreds of new funds were launched throughout the 1960s until the bear market
of 1969 cooled the public appetite for mutual funds. Money flowed out of mutual
funds as quickly as investors could redeem their shares, but the industry's growth
later resumed.
In 1971, William Fouse and John McQuown of Wells Fargo Bank established the
first index fund, a concept that John Bogle would use as a foundation on which to
build The Vanguard Group, a mutual fund powerhouse renowned for low-cost
index funds. The 1970s also saw the rise of the no-load fund. This new way of
doing business had an enormous impact on the way mutual funds were sold and
would make a major contribution to the industry's success.
With the 1980s and '90s came bull market mania and previously obscure fund
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managers became superstars; Max Heine, Michael Price and Peter Lynch, the
mutual fund industry's top gunslingers, became household names and money
poured into the retail investment industry at a stunning pace.
U.S. Mutual Fund Assets
The U.S. mutual fund market, with $9.6 trillion in assets under management as of
year-end 2008, remained the largest in the world, accounting for 51 percent of the
$19.0 trillion in mutual fund assets worldwide (Figure 1.1).
Investor demand for mutual funds is influenced by a variety of factors, not least of
which is funds’ ability to assist investors in achieving a wide variety of investment
objectives. In particular, U.S. households’ reliance on stock, bond, and hybrid
mutual funds reflects investor desire to meet long-term personal financial
objectives such as preparing for retirement. Furthermore, U.S. households,
businesses, and other institutional investors use money market funds as cash
management tools because they provide a high degree of liquidity and
competitive, short-term yields.
Fig 1.1
Total Worldwide mutual fund Assets
5%
11%
United States
Europe
Africa and Asia/Pacific
Other Americas
51%
33%
Source: ICI Fact Book, 2009
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Total World Wide Mutual Fund Asset
Figure 1.2 : U.S. Had the World's Largest Mutual Fund Market
Percentage of total net assets, year-end 2008
Total worldwide mutual fund assets
$19.0 trillion
United States
51
Europe
33
Africa and Asia/Pacific
11
Other Americas
5
Total U.S. mutual fund assets
$9.6 trillion
Domestic stock funds
30
International stock funds
9
Bond funds
16
Money market funds
40
Hybrid funds
5
Source : ICI Fact Book, 2009
Mutual Fund in India
The Evolution
The formation of Unit Trust of India marked the evolution of the Indian mutual
fund industry in the year 1963. The primary objective at that time was to attract
the small investors and it was made possible through the collective efforts of the
Government of India and the Reserve Bank of India. The history of mutual fund
industry in India can be better understood divided into following phases:
Phase 1. Establishment and Growth of Unit Trust of India - 1964-87
Unit Trust of India enjoyed complete monopoly when it was established in the
year 1963 by an act of Parliament. UTI was set up by the Reserve Bank of India
and it continued to operate under the regulatory control of the RBI until the two
were de-linked in 1978 and the entire control was transferred in the hands of
Industrial Development Bank of India (IDBI). UTI launched its first scheme in
1964, named as Unit Scheme 1964 (US-64), which attracted the largest number of
investors in any single investment scheme over the years.
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UTI launched more innovative schemes in 1970s and 80s to suit the needs of
different investors. It launched ULIP in 1971, six more schemes between 1981-84,
Children's Gift Growth Fund and India Fund (India's first offshore fund) in 1986,
Mastershare (India's first equity diversified scheme) in 1987 and Monthly Income
Schemes (offering assured returns) during 1990s. By the end of 1987, UTI's assets
under management grew ten times to Rs 6700 crores.
Phase II. Entry of Public Sector Funds - 1987-1993
The Indian mutual fund industry witnessed a number of public sector players
entering the market in the year 1987. In November 1987, SBI Mutual Fund from
the State Bank of India became the first non-UTI mutual fund in India. SBI
Mutual Fund was later followed by Canbank Mutual Fund, LIC Mutual Fund,
Indian Bank Mutual Fund, Bank of India Mutual Fund, GIC Mutual Fund and
PNB Mutual Fund. By 1993, the assets under management of the industry
increased seven times to Rs. 47,004 crores. However, UTI remained to be the
leader with about 80% market share.
Status of Mutual Fund Industry – Pre Liberalization Era
Fig 1.3
Amount
Mobilised
Assets Under
Management
Mobilisation as %
of gross Domestic
Savings
UTI
11,057
38,247
5.2%
Public Sector
1,964
8,757
0.9%
Total
13,021
47,004
6.1%
1992-93
Source:AMFI
Phase III. Emergence of Private Sector Funds - 1993-96
The permission given to private sector funds including foreign fund management
companies (most of them entering through joint ventures with Indian promoters)
to enter the mutual fund industry in 1993, provided a wide range of choice to
investors and more competition in the industry. Private funds introduced
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innovative products, investment techniques and investor-servicing technology. By
1994-95, about 11 private sector funds had launched their schemes.
Phase IV. Growth and SEBI Regulation - 1996-2004
The mutual fund industry witnessed robust growth and stricter regulation from the
SEBI after the year 1996. The mobilisation of funds and the number of players
operating in the industry reached new heights as investors started showing more
interest in mutual funds.
Investors' interests were safeguarded by SEBI and the Government offered tax
benefits to the investors in order to encourage them. SEBI (Mutual Funds)
Regulations, 1996 was introduced by SEBI that set uniform standards for all
mutual funds in India. The Union Budget in 1999 exempted all dividend incomes
in the hands of investors from income tax. Various Investor Awareness
Programmes were launched during this phase, both by SEBI and AMFI, with an
objective to educate investors and make them informed about the mutual fund
industry.
In February 2003, the UTI Act was repealed and UTI was stripped of its Special
legal status as a trust formed by an Act of Parliament. The primary objective
behind this was to bring all mutual fund players on the same level. UTI was reorganised into two parts: 1. The Specified Undertaking, 2. The UTI Mutual Fund
Presently Unit Trust of India operates under the name of UTI Mutual Fund and its
past schemes (like US-64, Assured Return Schemes) are being gradually wound
up. However, UTI Mutual Fund is still the largest player in the industry. In 1999,
there was a significant growth in mobilisation of funds from investors and assets
under management which is supported by the following data:
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Growth of Mutual Fund Industry till 2004
Fig 1.4
GROSS FUND MOBILISATION (RS. CRORES)
PUBLIC
PRIVATE
SECTOR
SECTOR
11,679
1,732
7,966
21,377
31-March-00
13,536
4,039
42,173
59,748
01-April-00
31-March-01
12,413
6,192
74,352
92,957
01-April-01
31-March-02
4,643
13,613
1,46,267
1,64,523
01-April-02
31-Jan-03
5,505
22,923
2,20,551
2,48,979
01-Feb.-03
31-March-03
*
7,259*
58,435
65,694
01-April-03
31-March-04
-
68,558
5,21,632
5,90,190
01-April-04
31-March-05
-
1,03,246
7,36,416
8,39,662
01-April-05
31-March-06
-
1,83,446
9,14,712
10,98,158
FROM
TO
UTI
01-April-98
31-March-99
01-April-99
TOTAL
Source: AMFI website
Phase V. Growth and Consolidation - 2004 Onwards
The industry has also witnessed several mergers and acquisitions recently,
examples of which are acquisition of schemes of Alliance Mutual Fund by Birla
Sun Life, Sun F&C Mutual Fund and PNB Mutual Fund by Principal Mutual
Fund. Simultaneously, more international mutual fund players have entered India
like Fidelity, Franklin Templeton Mutual Fund etc. There were 29 funds as at the
end of March 2006. This is a continuing phase of growth of the industry through
consolidation and entry of new international and private sector players.
Organisational Structure of Mutual Fund In India
Mutual Funds in India follow a 3-tier structure. There is a Sponsor (the First
tier), who thinks of starting a mutual fund. The Sponsor approaches the Securities
& Exchange Board of India (SEBI), which is the market regulator and also the
regulator for mutual funds. Not everyone can start a mutual fund. SEBI checks
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whether the person is of integrity, whether he has enough experience in the
financial sector, his networth etc. Once SEBI is convinced, the sponsor creates a
Public Trust (the Second tier) as per the Indian Trusts Act, 1882. Trusts have no
legal identity in India and cannot enter into contracts, hence the Trustees are the
people authorized to act on behalf of the Trust. Contracts are entered into in the
name of the Trustees. Once the Trust is created, it is registered with SEBI after
which this trust is known as the mutual fund. It is the Trust which is the
Mutual Fund. The Trustees role is not to manage the money. Their job is only
to see, whether the money is being managed as per stated objectives. Trustees may
be seen as the internal regulators of a mutual fund.
Role of the Asset Management Company (the Third tier).
Trustees appoint the Asset Management Company (AMC), to manage investor’s
money. The AMC in return charges a fee for the services provided and this fee is
borne by the investors as it is deducted from the money collected from them. The
AMC’s Board of Directors must have at least 50% of Directors who are
independent directors. The AMC has to be approved by SEBI. The AMC functions
under the supervision of it’s Board of Directors, and also under the direction of the
Trustees and SEBI. It is the AMC, which in the name of the Trust, floats new
schemes and manage these schemes by buying and selling securities. In order to
do this the AMC needs to follow all rules and regulations prescribed by SEBI
and as per the Investment Management Agreement it signs with the Trustees.
If any fund manager, analyst intends to buy/ sell some securities, the permission of
the Compliance Officer is a must. A compliance Officer is one of the most
important persons in the AMC. Whenever the fund intends to launch a new
scheme, the AMC has to submit a Draft Offer Document to SEBI. This draft offer
document, after getting SEBI approval becomes the offer document of the scheme.
The Offer Document (OD) is a legal document and investors rely upon the
information provided in the OD for investing in the mutual fund scheme. The
Compliance Officer has to sign the Due Diligence Certificate in the OD. This
certificate says that all the information provided inside the OD is true and correct.
This ensures that there is accountability and somebody is responsible for the OD.
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In case there is no compliance officer, then senior executives like CEO, Chairman
of the AMC has to sign the due diligence certificate. The certificate ensures that
the AMC takes responsibility of the OD and its contents.
A custodian’s role is safe keeping of physical securities and also keeping a tab
on the corporate actions like rights, bonus and dividends declared by the
companies in which the fund has invested. The Custodian is appointed by the
Board of Trustees. The custodian also participates in a clearing and settlement
system through approved depository companies on behalf of mutual funds, in case
of dematerialized securities. In India today, securities (and units of mutual funds)
are no longer held in physical form but mostly in dematerialized form with the
Depositories. The holdings are held in the
Depository through Depository Participants (DPs). Only the physical securities are
held by the Custodian. The deliveries and receipt of units of a mutual fund are
done by the custodian or a depository participant at the instruction of the AMC
and under the overall direction and responsibility of the Trustees. Regulations
provide that the Sponsor and the Custodian must be separate entities
The role of the AMC is to manage investor’s money on a day to day basis.
Thus it is imperative that people with the highest integrity are involved with this
activity. The AMC cannot deal with a single broker beyond a certain limit of
transactions. The AMC cannot act as a Trustee for some other Mutual Fund.
The responsibility of preparing the OD lies with the AMC. Appointments of
intermediaries like independent financial advisors (IFAs), national and regional
distributors, banks, etc. is also done by the AMC. Finally, it is the AMC which is
responsible for the acts of its employees and service providers.
As can be seen, it is the AMC that does all the operations. All activities by the
AMC are done under the name of the Trust, i.e. the mutual fund. The AMC
charges a fee for providing its services. SEBI has prescribed limits for this.
This fee is borne by the investor as the fee is charged to the scheme, in fact, the
fee is charged as a percentage of the scheme’s net assets. An important point to
note here is that this fee is included in the overall expenses permitted by SEBI.
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There is a maximum limit to the amount that can be charged as expense to the
scheme, and this fee has to be within that limit. Thus regulations ensure that
beyond a certain limit, investor’s money is not used for meeting expenses.
Registrars and Transfer Agents (RTAs) perform the important role of
maintaining investor records. All the New Fund Offer (NFO) forms, redemption
forms (i.e. when an investor wants to exit from a scheme, it requests for
redemption) go to the RTA’s office where the information is converted from
physical to electronic form. How many units will the investor get, at what price,
what is the applicable NAV, what is the entry load, how much money will he get
in case of redemption, exit loads, folio number, etc. is all taken care of by the
RTA.
Role of Mutual Funds for different constituencies
Their primary role is to assist investors in earning an income or building their
wealth, by participating in the opportunities available in various securities and
markets. It is possible for mutual funds to structure a scheme for any kind of
investment objective. Thus, the mutual fund structure, through its various
schemes, makes it possible to tap a large corpus of money from diverse investors.
(Therefore, the mutual fund offers schemes. In the industry, the words ‘fund’ and
‘scheme’ are used interchangeably.)
The money that is raised from investors, ultimately benefits governments,
companies or other entities, directly or indirectly, to raise moneys to invest in
various projects or pay for various expenses.
As a large investor, the mutual funds can keep a check on the operations of the
investee company, and their corporate governance and ethical standards.
The projects that are facilitated through such financing, offer employment to
people; the income they earn helps the employees buy goods and services offered
by other companies, thus supporting projects of these goods and services
companies. Thus, overall economic development is promoted.
The mutual fund industry itself, offers livelihood to a large number of employees
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of mutual funds, distributors, registrars and various other service providers.
Higher employment, income and output in the economy boost the revenue
collection of the government through taxes and other means. When these are spent
prudently, it promotes further economic development and nation building.
Mutual funds are therefore viewed as a key participant in the capital market of any
economy.
Mutual Fund Schemes
Mutual funds seek to mobilize money from all possible investors. Various
investors have different investment preferences. In order to accommodate these
preferences, mutual funds mobilize different pools of money. Each such pool of
money is called a mutual fund scheme.
Every scheme has a pre‐announced investment objective. When investors invest in
a mutual fund scheme, they are effectively buying into its investment objective.
Operation of Mutual Fund Scheme
Mutual fund schemes announce their investment objective and seek investments
from the public. Depending on how the scheme is structured, it may be open to
accept money from investors, either during a limited period only, or at any time.
The investment that an investor makes in a scheme is translated into a certain
number of ‘Units’ in the scheme.
Thus, an investor in a scheme is issued units of the scheme. Under the law, every
unit has a face value of Rs10. (However, older schemes in the market may have a
different face value). The face value is relevant from an accounting perspective.
The number of units multiplied by its face value
(Rs10) is the capital of the scheme – its Unit Capital. The scheme earns interest
income or dividend income on the investments it holds. Further, when it purchases
and sells investments, it earns capital gains or incurs capital losses. These are
called realized capital gains or realized capital losses as the case may be.
Investments owned by the scheme may be quoted in the market at higher than the
cost paid. Such gains in values on securities held are called valuation gains.
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Similarly, there can be valuation losses when securities are quoted in the market at
a price below the cost at which the scheme acquired them. Running the scheme
leads to its share of operating expenses
Measurement of Profitability Metric for Mutual Fund
Investments can be said to have been handled profitably, if the following
profitability metric is positive:
(A) Interest income
(B) + Dividend income
(C) + Realized capital gains
(D) + Valuation gains
(E) – Realized capital losses
(F) – Valuation losses
(G) – Scheme expenses
When the investment activity is profitable, the true worth of a unit goes up; when
there are losses, the true worth of a unit goes down. The true worth of a unit of the
scheme is otherwise called Net Asset Value (NAV) of the scheme.
When a scheme is first made available for investment, it is called a ‘New Fund
Offer’ (NFO). During the NFO, investors may have the chance of buying the units
at their face value.
Post‐NFO, when they buy into a scheme, they need to pay a price that is linked to
its NAV.
The money mobilized from investors is invested by the scheme as per the
investment objective committed. Profits or losses, as the case might be, belong to
the investors. The investor does not however bear a loss higher than the amount
invested by him.
Various investors subscribing to an investment objective might have different
expectations on how the profits are to be handled. Some may like it to be paid off
regularly as dividends. Others might like the money to grow in the scheme.
Mutual funds address such differential expectations between investors within a
scheme, by offering various options, such as dividend payout option, dividend
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reinvestment option and growth option. An investor buying into a scheme gets to
select the preferred option also.
The relative size of mutual fund companies is assessed by their assets under
management (AUM). When a scheme is first launched, assets under management
would be the amount mobilized from investors. Thereafter, if the scheme has a
positive profitability metric, its AUM goes up; a negative profitability metric will
pull it down.
Further, if the scheme is open to receiving money from investors even post NFO,
then such contributions from investors boost the AUM. Conversely, if the scheme
pays any money to the investors, either as dividend or as consideration for buying
back the units of investors, the AUM falls.
The AUM thus captures the impact of the profitability metric and the flow of unit
holder money to or from the scheme.
Advantages of Mutual Funds for Investors
Professional Management of Investor's Money
Mutual funds offer investors the opportunity to earn an income or build their
wealth through professional management of their investible funds. There are
several aspects to such professional management viz. investing in line with the
investment objective, investing based on adequate research, and ensuring that
prudent investment processes are followed.
Portfolio Diversification
Units of a scheme give investors exposure to a range of securities held in the
investment portfolio of the scheme. Thus, even a small investment of Rs 5,000 in
a mutual fund scheme can give investors a diversified investment portfolio.
Consequently, the investor is less likely to lose money on all the investments at
the same time. Thus, diversification helps reduce the risk in investment. In order
to achieve the same diversification as a mutual fund scheme, investors will need to
set apart several lakh of rupees. Instead, they can achieve the diversification
through an investment of a few thousand rupees in a mutual fund scheme.
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Achievement of Economies of Scale
The pooling of large sums of money from so many investors makes it possible for
the mutual fund to engage professional managers to manage the investment.
Individual investors with small amounts to invest cannot, by themselves, afford to
engage such professional management.
Large investment corpus leads to various other economies of scale. For instance,
costs related to investment research and office space get spread across investors.
Further, the higher transaction volume makes it possible to negotiate better terms
with brokers, bankers and other service providers.
Availability of Liquidity of Investment
At times, investors in financial markets are stuck with a security for which they
can’t find a buyer – worse, at times they can’t find the company they invested in!
Such investments become illiquid investments, which can end in a complete loss
for investors. Investors in a mutual fund scheme can recover the value of the
moneys invested, from the mutual fund itself. Depending on the structure of the
mutual fund scheme, this would be possible, either at any time, or during specific
intervals, or only on closure of the scheme. Schemes where the money can be
recovered from the mutual fund only on closure of the scheme, are listed in a
stock exchange. In such schemes, the investor can sell the units in the stock
exchange to recover the prevailing value of the investment.
Tax Benefit for Retail Investor
Mutual funds are not liable to pay tax on the income they earn. If the same income
were to be earned by the investor directly, then tax may have to be paid in the
same financial year.
Mutual funds offer options, whereby the investor can let the moneys grow in the
scheme for several years. By selecting such options, it is possible for the investor
to defer the tax liability. This helps investors to legally build their wealth faster
than would have been the case, if they were to pay tax on the income each year.
Specific schemes of mutual funds (Equity Linked Savings Schemes) give investors
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the benefit of deduction of the amount invested, from their income that is liable to
tax. This reduces their taxable income, and therefore the tax liability. Further, the
dividend that the investor receives from the scheme, is tax‐free in his hands.
Availability of Convenient Investment Options
The options offered under a scheme allow investors to structure their investments
in line with their liquidity preference and tax position.
Hassle Free Investment Process
Once an investment is made with a mutual fund, they make it convenient for the
investor to make further purchases with very little documentation. This simplifies
subsequent investment activity.
Investment Regulation by Government Agencies
The regulator, Securities & Exchange Board of India (SEBI) has mandated strict
checks and balances in the structure of mutual funds and their activities. These are
detailed in the subsequent units. Mutual fund investors benefit from such
protection.
Systematic approach to investments
Mutual funds also offer facilities that help investor invest amounts regularly
through a Systematic Investment Plan (SIP); or withdraw amounts regularly
through a Systematic Withdrawal Plan (SWP); or move moneys between different
kinds of schemes through a Systematic Transfer Plan (STP).
Such systematic approaches promote an investment discipline, which is useful in
long term wealth creation and protection.
Limitations of a Mutual Fund
Lack of portfolio customization
Some securities houses offer Portfolio Management Schemes (PMS) to large
investors. In a PMS, the investor has better control over what securities are bought
and sold on his behalf.
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On the other hand, a unit‐holder is just one of several thousand investors in a
scheme. Once a unit‐holder has bought into the scheme, investment management
is left to the fund manager (within the broad parameters of the investment
objective). Thus, the unit‐holder cannot influence what securities or investments
the scheme would buy.
Large sections of investors lack the time or the knowledge to be able to make
portfolio choices. Therefore, lack of portfolio customization is not a serious
limitation in most cases.
Choice overload
Over 800 mutual fund schemes offered by 38 mutual funds – and multiple options
within those schemes – make it difficult for investors to choose between them.
Greater dissemination of industry information through various media and
availability of professional advisors in the market should help investors handle
this overload.
Types of Funds
Open Ended Funds, Close Ended Funds and Interval Funds
Open ended funds are open for investors to enter or exit at any time, even after
the NFO.
When existing investors buy additional units or new investors buy units of the
open ended scheme, it is called a sale transaction. It happens at a sale price, which
is equal to the NAV.
When investors choose to return any of their units to the scheme and get back
their equivalent value, it is called a repurchase transaction. This happens at a
re‐purchase price that is linked to the NAV.
Although some unit‐holders may exit from the scheme, wholly or partly, the
scheme continues operations with the remaining investors. The scheme does not
have any kind of time frame in which it is to be closed. The ongoing entry and exit
of investors implies that the unit capital in an open ended fund would keep
changing on a regular basis.
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Close ended funds have a fixed maturity. Investors can buy units of a close‐ended
scheme, from the fund, only during its NFO. The fund makes arrangements for the
units to be traded, post‐NFO in a stock exchange. This is done through a listing of
the scheme in a stock exchange. Such listing is compulsory for close‐ended
schemes. Therefore, after the NFO, investors who want to buy Units will have to
find a seller for those units in the stock exchange. Similarly, investors who want to
sell Units will have to find a buyer for those units in the stock exchange. Since
post‐NFO, sale and purchase of units happen to or from a counter‐party in the
stock exchange – and not to or from the mutual fund – the unit capital of the
scheme remains stable.
Interval funds combine features of both open‐ended and close‐ended schemes.
They are largely close‐ended, but become open‐ended at pre‐specified intervals.
For instance, an interval scheme might become open‐ended between January 1 to
15, and July 1 to 15, each year. The benefit for investors is that, unlike in a purely
close‐ended scheme, they are not completely dependent on the stock exchange to
be able to buy or sell units of the interval fund.
Actively Managed Funds and Passive Funds
Actively managed funds are funds where the fund manager has the flexibility to
choose the investment portfolio, within the broad parameters of the investment
objective of the scheme. Since this increases the role of the fund manager, the
expenses for running the fund turn out to be higher.
Investors expect actively managed funds to perform better than the market.
Passive funds invest on the basis of a specified index, whose performance it seeks
to track. Thus, a passive fund tracking the BSE Sensex would buy only the shares
that are part of the composition of the BSE Sensex. The proportion of each share
in the scheme’s portfolio would also be the same as the weightage assigned to the
share in the computation of the BSE Sensex. Thus, the performance of these funds
tends to mirror the concerned index. They are not designed to perform better than
the market. Such schemes are also called index schemes. Since the portfolio is
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determined by the index itself, the fund manager has no role in deciding on
investments. Therefore, these schemes have low running costs.
1.
Debt, Equity and Hybrid Funds
A scheme might have an investment objective to invest largely in equity shares
and equity‐related investments like convertible debentures. Such schemes are
called equity schemes.
Schemes with an investment objective that limits them to investments in debt
securities like Treasury Bills, Government Securities, Bonds and Debentures are
called debt funds.
Hybrid funds have an investment charter that provides for a reasonable level of
investment in both debt and equity.
Types of Debt Funds
Gilt funds invest in only treasury bills and government securities, which do not
have a credit risk (i.e. the risk that the issuer of the security defaults).
Diversified debt funds on the other hand, invest in a mix of government and
non‐government debt securities.
Junk bond schemes or high yield bond schemes invest in companies that are of
poor credit quality. Such schemes operate on the premise that the attractive returns
offered by the investee companies makes up for the losses arising out of a few
companies defaulting.
Fixed maturity plans are a kind of debt fund where the investment portfolio is
closely aligned to the maturity of the scheme. AMCs tend to structure the scheme
around pre identified investments. Further, like close‐ended schemes, they do not
accept moneys post‐NFO. Thanks to these characteristics, the fund manager has
little ongoing role in deciding on the investment options.
Such a portfolio construction gives more clarity to investors on the likely returns
if they stay invested in the scheme until its maturity. This helps them compare the
returns with alternative investments like bank deposits.
19
Floating rate funds invest largely in floating rate debt securities i.e. debt
securities where the interest rate payable by the issuer changes in line with the
market. For example, a debt security where interest payable is described as ‘5‐year
Government Security yield plus 1%’, will pay interest rate of 7%, when the 5‐year
Government Security yield is 6%; if 5 year Government Security yield goes down
to 3%, then only 4% interest will be payable on that debt security. The NAVs of
such schemes fluctuate lesser than debt funds that invest more in debt securities
offering a fixed rate of interest.
Liquid schemes or money market schemes are a variant of debt schemes that
invest only in debt securities where the moneys will be repaid within 91days.
Types of Equity Funds
Diversified equity fund is a category of funds that invest in a diverse mix of
securities that cut across sectors.
Sector funds however invest in only a specific sector. For example, a banking
sector fund will invest in only shares of banking companies. Gold sector fund will
invest in only shares of gold‐related companies.
Thematic funds invest in line with an investment theme. For example, an
infrastructure thematic fund might invest in shares of companies that are into
infrastructure construction, infrastructure toll‐collection, cement, steel, telecom,
power etc. The investment is thus more broad‐based than a sector fund; but
narrower than a diversified equity fund.
Equity Linked Savings Schemes (ELSS), as seen earlier, offer tax benefits to
investors. However, the investor is expected to retain the Units for at least 3 years.
Equity Income / Dividend Yield Schemes invest in securities whose shares
fluctuate less, and therefore, dividend represents a larger proportion of the returns
on those shares. The NAV of such equity schemes are expected to fluctuate lesser
than other categories of equity schemes.
20
Arbitrage Funds take contrary positions in different markets / securities, such that
the risk is neutralized, but a return is earned. For instance, by buying a share in
BSE, and simultaneously selling the same share in the NSE at a higher price. Most
arbitrage funds take contrary positions between the equity market and the futures
and options market.(‘Futures’ and ‘Options’ are commonly referred to as
derivatives. These are designed to help investors to take positions or protect their
risk in some other security, such as an equity share. They are traded in exchanges
like the NSE and the BSE. Unit 10 provides an example of futures contract that is
linked to gold).
Types of Hybrid Funds
Monthly Income Plan seeks to declare a dividend every month. It therefore
invests largely in debt securities. However, a small percentage is invested in
equity shares to improve the scheme’s yield.
Capital Protected Schemes are close ended schemes, which are structured to
ensure that investors get their principal back, irrespective of what happens to the
market. This is ideally done by investing in Zero Coupon Government Securities
whose maturity is aligned to the scheme’s maturity. (Zero coupon securities are
securities that do not pay a regular interest, but accumulate the interest, and pay it
along with the principal when the security matures).
As detailed in the following example, the investment is structured, such that the
principal amount invested in the zero coupon security, together with the interest
that accumulates during the period of the scheme would grow to the amount that
the investor invested at the start.
Suppose an investor invested Rs 10,000 in a capital protected scheme of 5 years.
If 5‐year government securities yield 7% at that time, then an amount of Rs
7,129.86 invested in 5‐year zero coupon government securities would mature to
Rs 10,000 in 5 years. Thus, by investing Rs 7,129.86 in the 5 year zero coupon
government security, the scheme ensures that it will have Rs 10,000 to repay to
the investor in 5 years.
21
After investing in the government security, Rs 2,870.14 is left over (Rs 10,000
invested by the investor, less Rs 7129.86 invested in government securities). This
amount is invested in riskier securities like equities. Even if the risky
investment becomes completely worthless (a rare possibility), the investor is
assured of getting back the principal invested, out of the maturity moneys received
on the government security.
Some of these schemes are structured with a minor difference – the investment is
made in good quality debt securities issued by companies, rather than Central
Government Securities. Since any borrower other than the government can
default, it would be appropriate to view these alternate structures as Capital
Protection Oriented Schemes rather than Capital Protected Schemes.
It may be noted that capital protection can also be offered through a guarantee
from a guarantor, who has the financial strength to offer the guarantee. Such
schemes are however not prevalent in the market.
Gold Funds
These funds invest in gold and gold related securities. They can be structured in
either of the following formats:
Gold Exchange Traded Fund, which is like an index fund that invests in gold.
The NAV of such funds moves in line with gold prices in the market.
Gold Sector Funds i.e. the fund will invest in shares of companies engaged in
gold mining and processing. Though gold prices influence these shares, the prices
of these shares are more closely linked to the profitability and gold reserves of the
companies. Therefore, NAV of these funds do not closely mirror gold prices.
Real Estate Funds
They take exposure to real estate. Such funds make it possible for small investors
to take exposure to real estate as an asset class. Although permitted by law, real
estate mutual funds are yet to hit the market in India.
22
Commodity Funds
Commodities, as an asset class, include:
•
food crops like wheat and chana
•
spices like pepper and turmeric
•
fibres
•
industrial metals like copper and aluminum
•
energy products like oil and natural gas
•
precious metals (bullion) like gold and silver
The investment objective of commodity funds would specify which of these
commodities it proposes to invest in. As with gold, such funds can be structured as
Commodity ETF or Commodity Sector Funds. In India, mutual fund schemes are
not permitted to invest in commodities. Therefore, the commodity funds in the
market are in the nature of Commodity Sector Funds, i.e. funds that invest in
shares of companies that are into commodities. Like Gold Sector Funds,
Commodity Sector Funds too are a kind of equity fund.
International Funds
These are funds that invest outside the country. For instance, a mutual fund may
offer a scheme to investors in India, with an investment objective to invest abroad.
One way for the fund to manage the investment is to hire the requisite people who
will manage the fund. Since their salaries would add to the fixed costs of
managing the fund, it can be justified only if a large corpus of funds is available
for such investment.
An alternative route would be to tie up with a foreign fund (called the host fund).
If an Indian mutual fund sees potential in China, it will tie up with a Chinese fund.
In India, it will launch what is called a feeder fund. Investors in India will invest in
the feeder fund. The moneys collected in the feeder fund would be invested in the
Chinese host fund. Thus, when the Chinese market does well, the Chinese host
fund would do well, and the feeder fund in India will follow suit.
Such feeder funds can be used for any kind of international investment. The
23
investment could be specific to a country (like the China fund) or diversified
across countries. A feeder fund can be aligned to any host fund with any
investment objective in any part of the world, subject to legal restrictions of India
and the other country.
Fund of Funds
The feeder fund was an example of a fund that invests in another fund. Similarly,
funds can be structured to invest in various other funds, whether in India or
abroad. Such funds are called fund of funds. These ‘fund of funds’ pre specify
the mutual funds whose schemes they will buy and / or the kind of schemes they
will invest in. They are designed to help investors get over the trouble of choosing
between multiple schemes and their variants in the market.
Thus, an investor invests in a fund of funds, which in turn will manage the
investments in various schemes and options in the market.
Exchange Traded Funds
Exchange Traded funds (ETF) are open ended index funds that are traded in a
stock exchange.
A feature of open ended funds, which allows investors to buy and sell units from
the mutual fund, is made available only to very large investors in an ETF.
Other investors will have to buy and sell units of the ETF in the stock exchange.
In order to facilitate such transactions in the stock market, the mutual fund
appoints some intermediaries as market makers, whose job is to offer a price quote
for buying and selling units at all times.
If more investors in the stock exchange want to buy units of the ETF, then their
moneys would be due to the market maker. The market maker would use the
moneys to buy a basket of securities that is in line with the investment objective of
the scheme, and exchange the same for chapters of the scheme from the mutual
fund. Thus, the market maker can offer the units to the investors.
If there is more selling interest in the stock exchange, then the market maker will
end up with units, against which he needs to make payment to the investors. When
these units are offered to the mutual fund for extinguishment, corresponding
24
securities will be released from the investment portfolio of the scheme. Sale of the
released securities will generate the liquidity to pay the unit holders for the units
sold by them.
In a regular open ended mutual fund, all the purchases of units by investors on a
day happen at a single price. Similarly, all the sales of units by investors on a day
happen at a single price. The market however keeps fluctuating during the day.
A key benefit of an ETF is that investors can buy and sell their units in the stock
exchange, at various prices during the day that closely track the market at that
time. Further, the unique structure of ETFs, make them more cost effective than
normal index funds, although the investor would bear a brokerage cost when he
transacts with the market maker.
Trends of Mutual fund in India Post 2004
The Asset Under Management(AUM) have grown at a rapid pace over the past
few years at a growth rate of 32.27% for the last six years(2004-2010). Over the
past 10 years from 1999 to 2009 encompassing varied economic cycles the
industry growth at 22% CAGR. This growth despite two falls in the AUM- the
first being after 2001 with the burst of dot com bubble and the second in 2008
consequent to the global economic crises
Fig 1.5
Avg Asset Under Management
(Rs in Crores)
747525
538508
493285
359097
231862
139616
149554
Mar 31, 04
Mar 31, 05
Source : SEBI
Mar 31, 06
Mar 31, 07
Mar 31, 08
Mar 31, 09
Mar 31, 10
25
India 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
percent
Over this period, the mutual fund industry in mature markets like the US and
France grew at 4percent,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 USD18.97trillion as of December2008.
Fig 1.6
Asset Under Management Growth rate in Select Countries
CAGR for 2004-2008
63
29
21
11
China
Brazil
Russia
10
Japan
4
4
France
USA
2
3
4
UK
Europe
World
India
Source: ICI Factbook, 2009
Asset Under Management to Gross Domestic Product Ratio
The ratio of AUM to India’s GDP, gradually increased from 6percent in 2005 to
11percent in 2009. Despite this however ,this continues to be significantly lower
than the ratio in developed countries, where the AUM accounts for 20-70percent
of the GDP.
26
Fig 1.7
AUM to GDP ratio For India
15%
11%
10%
8%
6%
2005
2006
2007
2008
2009
Source: AMFI data,CSO
Share of Mutual Funds in Household Financial Savings
Investment in mutual funds in India comprised 7.7percent of the gross house hold
Financial Saving 2008,a significant increase from1.2percent in FY 2004.The
households in India continue to hold 55percent of their savings in fixed deposits
with banks,18 percent in insurance and 10percent in currency as of FY2008.
In 2008, the UK had more than thrice the investments into mutual funds as a
factor of total household savings (26percent),than India had in the same time
period. As of December2008,UK house hold share of 61percent of the total
savings in bank deposits,11.6percent in equities and 1pecen t in bonds.
Fig 1.8
Share of Mutual funds in Households’ Gross Financial Saving in India
7.70%
4.80%
3.80%
1.20%
0.40%
2004
Source: RBI data
2005
2006
2007
2008
27
The Indian Mutual Fund Industry – Key Characteristics & Critical
Variables
Customers
The Indian mutual fund industry has significantly high ownership from the
institutional investors. Retail investors comprising 96.86percent in number terms
held approximately 37 percent of the total industry AUM as at the end of
March2008,significantly lower than the retail participation in the US at 82 percent
of AUM as at December 2008
Out of a total population of 1.15billion ,the total number of mutual fund investor
accounts in India as of 31March2008 was 42million(the actual number of
investors is estimated to be lower as investors hold multiple folios).
Fig 1.9
Indian Mutual Fund Industry-Investor Mix
120.00%
100.00%
80.00%
42.30%
36.93%
Individual
Corporate/Institution
NRI's
FII
60.00%
40.00%
49.90%
56.55%
20.00%
0.00%
Source: SEBI
5.30%
2.40%
4.86%
1.65%
FY 2007
FY 2008
28
Fig 1.10
In the US,an estimated 92million individual investors owned mutual funds out of
a total population of 305million 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 we are 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 work force with annual house hold income less
than INR90,000 was 0.1 percent.
In the last few years, there tail investor participation, in particular, in Tier 2 and
Tier 3 towns, has been on the rise aided by the buoyant equity markets.
Investor contribution remains skewed towards the corporate sector
Inspite of India offering an exciting retail environment, with abundant growth
opportunities participation from the segment of retail investors continues to
remain at deplorably low levels. As of March 31, 2010, the participation from the
retail segment was 26.6%, a marginal increase from 21.3% as on March 31, 2009.
The rationale behind institutional sales claiming such a large chunk of the AUM
pie is the benefit of tax arbitrage and lack of short term investment options. When
29
compared with economies like US and China, investments channelized through
corporates, comprise only around 15% and 30% of the assets under management
(AUM), respectively.
Overall, the assets under management recorded an impressive growth of 47%, as
of March 2010 which was predominantly driven by the corporate sector, posting
the same level of growth. In the same period, the retail sector also managed to
report a strong growth of 84% in its assets under management, followed by the
HNI segment growing 24%. It has been observed of late, that the HNI segment
especially in Tier 2 &Tier 3 cities has expanded creating a pool of investible
surplus at the disposal of the mutual fund industry
Current Mutual Fund 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 December2008, 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 49percent of the total industry
AUM as of FY2009,while the equity and liquid funds comprised 26percent and
22percent 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 40,39,16and5 percent of the total AUM respectively.
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 16ETFs (0.3percent of total AUM) while
the US had a total of 728 ETFs as of December 2008.
Industry Concentration
While the mutual fund industry in India continues to be metro and urban centric,
the mutual funds are beginning to tap Tier2 and Tier3 towns as a vital component
of their growth strategy. The contribution of the Top 10 cities of total AUM has
30
gradually declined from approximately 92 percent in 2005 to approximately 80
percent currently
Distribution Channels of Mutual Fund
As of March 2009,the mutual fund industry had 92,499 registered distributors as
compared to approximately 2.5 million insurance agents. The Independent
Financial Advisors(IFAs) or Individual distributors, corporate employees and
corporate comprised73,21 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 30percent 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 income
Structure of Mutual Fund Industry
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.
The public sector has gradually ceded market share to the private sector. Public
sector mutual funds comprised 21percent of the AUM in 2009 as against
72percent AUM share in 2001
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
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
31
•
Players having niche focus on a new 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 net worth required to venture into mutual fund business, existence of a
strong local brand and a wide and deep distribution foot print 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 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 frame work 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 December 2008, as part of the risk management practices and
32
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 net worth and capital adequacy, investor protection
and education through disclosure norms for more information to investors,
distribution relate deregulations 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.
Regulatory Changes in Mutual Fund Industry in India
At the start of the mutual fund industry in the early 1960's, there was one
government owned firm, the Unit Trust of India (UTI). Along with several other
sectors rest of the Financial sector, this industry was liberalised in 1993, opening
up to other asset management companies (AMC), resulting in a slew of choices in
mutual fund products for the Indian investor. As on March 2013 the industry
stands with 44 asset management companies that manage Rs. 8.1 trillion (USD
160 billion) of Assets under Management (AUM) raised from around 470 million
accounts.
Since the economic liberalisation of the early nineties, mutual funds have been
regulated by the securities market regulator, Securities and Exchanges Board of
India (SEBI), which was itself a very new regulator in the early nineties. At the
time, like all the other parts of the financial sector, the industry was lightly
regulated with low levels of transparency about the management of funds. It was
only in 1998, after a spectacular episode of market misconduct by the CRB group
33
of companies that there was a sea-change in the regulation and supervision of the
mutual fund industry.
The regulator focused on the production end of the mutual fund industry. This
resulted in very high disclosure and transparency of the assets under management
and improving the governance of the AMCs, setting it apart from the rest of the
fund management industry in India. This path towards greater transparency
became the industry norm when UTI, the only AMC that was exempt from full
transparency on certain products, developed problems in fulfilling obligations to
customers. As part of the government bailout package in 2001, the AMC was
broken up into two funds. One had a fixed mandate of winding down upon
completing the obligations of the original UTI schemes (primarily US-64) to
existing customers. The other was a company where the government was one of
other shareholders, that would follow all the regulation of the other mutual fund
companies. With this, the mutual fund industry became the only fund management
industry in India with a minimal presence of public sector ownership.
Since then, there have continued to be changes in the regulation of mutual funds,
but largely driven by developments in the broader securities markets. The rulesdriven regulatory framework in India has meant that innovation in the securities
markets often drives changes in the rules on how mutual funds can access these
innovation in offering new products to their customers. However, regulations
governing the fund management process has been more or less stable, albeit
conservative.
However, there does remain a certain amount of public sector ownership in the
mutual fund industry, primarily through the mutual fund subsidiaries of public
sector banks and insurance companies. There is a dominance of large Indian
business houses in the mutual fund industry. According to the August 2010
numbers in the CMIE Prowess database, around 24% of the AMCs fall under the
category of business groups (including banks like SBI), and these firms managed
around 46% of the mutual fund AUM.
The recent changes in regulation that have been the cause of much controversy
has been in the area of the distribution of these products, and how the cost of
34
distribution is attributed to the customer. This has been one of the major aspects of
regulatory focus on the mutual industry since 2005.
1.1 Regulations pertaining to distribution and costs of mutual funds
There are various expenses incurred in a typical mutual fund product, some of
which are listed below:
•
Indirect costs - These costs are charged to the scheme and are accounted for in
the computation of Net asset value (NAV).

Initial issue expense: These costs include sales and distribution fees.
e.g. marketing, advertising, registration, printing, bank charges etc
pertaining to the new fund offer (NFO).

Annual scheme recurring expenses: These are operating charges of the
scheme.

Includes management and advisory fees (charged by AMC), registrar
and transfer agents' fee, marketing and selling costs etc.
•
Direct costs - These costs are directly paid by the investors and are over and
above NAV. These include:
 { Entry load
 { Exit load
 { Securities transaction tax
 { Income tax
SEBI regulations controls the expenses that can be charged to the customer in two
ways:
a) Setting a list of the expenses that cannot be charged, and b) setting limits on
some other expenses. There have been various changes that SEBI has made the to
the latter over the last decade. As expected, each of these regulatory changes has
engendered a reaction in the behaviour of industry.
Based on the major regulatory changes that have taken place with regards to costs
charged by the mutual fund industry, we list the following regulatory regimes":
35
Pre-2006 :
Both open and closed end funds were allowed to charge maximum of 6% as initial
issue expense as well as entry and exit loads.
The regulatory limit for loads was 7%. In reality, a fund could charge upto 7% of
NAV, provided the repurchase price was not lower than 93% of the sale price.
Recurring expense ratio had the maximum of 2.5% which remained unchanged
until 2010. For many mutual funds it has remained a standard entry load of 2.25%.
Industry practice was to charge a maximum load of 2.5% on equity funds whereas
entry loads on debt funds were virtually non-existent.
2006 - 2008 :
From April 2006 onwards till the start of 2008. The features of the change were as
follows:

Initial issue expenses was only permitted for closed-ended schemes, with a
maximum limit at 6% subject to amortization provisions. This required that
any exiting investor should pay up the portion of load chargeable to him when
exiting the fund so the existing investors do not bear a disproportionate part of
the initial issue expense.

Since open ended schemes were not permitted these expenses, they were
stipulated to meet all expenses connected with sales and distribution of
schemes from the entry load (maximum 6%).

Since closed-ended schemes are allowed to charge initial issue expenses, they

were not permitted to charge entry load.
2008 :
In January 2008, initial issue expense (and related amortization) was no longer
permitted. Mutual fund schemes had to adjust expenses connected with sales and
distribution of schemes from the entry load.
2009, Phase I :
August 2009, the entry load was removed from all types of mutual fund schemes
36
and exit load was made uniform across all fund categories, subject to a maximum
of 1%.
2009, Phase II :
November 2009, all mutual funds were made tradeable { both for entry as well as
exit through the stock exchanges trading platform.
Fig 1.11 : Maximum charges allowed across open-end and closedend mutual funds(%)
Upto April
2006
Initial Issue
Expense
Entry Load
April 06 – Jan
08
Jan 08- Aug
09
Clos
Open
e
Open
Close
Open
Close
6
6
0
6
0
6
6
6
0
6
Aug 09 – March
10
Open
Close
0
0
0
6
0
0
Exit Load
6
6
6
6
6
6
1
1
Expense
ratio
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
The values are reported for equity funds. Debt funds could charge upto 2.25%
and that actual expenses charged were lower than this limit. For example the
expenses charged to a liquid fund is only 0.25%
Source : SEBI
Regulation pertaining to transparency of mutual fund products
Since the 1993 liberalization and the entry of new AMCs, there has been a spate of
product innovation in the mutual fund product space. There has been a new age of
retail focus through SIP and ELSS, between April 2006 and January 2008. Today,
41 AMCs over a total of 918 schemes. This inevitably leads to fairly large
overlaps between the features of the schemes covered even by the same AMC, and
fairly subtle nuances differentiating one scheme from the other. This would also
amplify the effect of shrouding" that Anagol and Kim (2010) refers to: given the
complexity involved in the features of the mutual fund products, SEBI's regulation
on MF costs are not readily accessible enough to be useful indicators for investors.
Despite this, there has been little by way of regulation regarding the need for more
clarity and transparency on product definition and differentiation
37
(One exception to this rule was when SEBI mandated that the fine print about
returns on mutual fund products being subject to market risk, needing to be of a
larger font size in marketing hardcopies, and spoken at a lower speed in audiovisual advertisements.)
Regulation pertaining to transparency of mutual fund product
distribution
The two recent and significant regulatory changes, that have been the cause of
much controversy, have been:
1. The removal of entry loads on all schemes, and an explicit disclosure of
payment of commissions to distributors.
2. Facilitating the process for an investor to change between distributors by
eliminating the no objection certificate in December 2009.
Mutual fund products in India are today largely distributed by national and
regional distributors, private banks, Independent Financial Advisors (IFAs), public
sector banks to a smaller extent, and some distribution takes place directly by the
AMCs themselves. Shah et al. (2010) attributes distribution as follows:
 Private distributors, both national and regional: 36%,
 Private Banks: 25%,
 IFAs: 29%,
 Public sector banks: 4%,
 Own distribution: 6%
Until the recent changes, there has been little clarity on how much of the fees
charged by the AMC has been paid for distribution. However, these regulatory
changes both force the investor awareness of the size of the distribution
commission as well as facilitate the ease of funds transfer from one product to
another, or one AMC to another.
The Shahetal. (2010) report documents that since these regulatory changes there
has been six time increase in the number of transfer requests and an increase in
38
transfer AUM of nearly 2.5 times higher than previously observed. However, other
reports are that they have been accompanied by a drop in the AUM in the mutual
fund products.
No Additional Management Fees on schemes launched on “no load” basis
SEBI has scrapped the additional management fee of 1% charged by AMCs on
schemes launched on a no load basis leading to a further squeeze in margins
earned by the AMC.
Direct Tax Code
With the Direct Tax Code (‘DTC’) on the anvil, taxability of income from mutual
funds, at the hands of investors will also have a bearing on the growth of the
mutual fund industry. Unlike the extant tax provisions, DTC does not provide for
any benefit for investment in equity linked savings scheme, and also proposes to
increase the compliance in the hands of MFs by widening the scope of deduction
of tax to include payments made to residents. The code has also created an
anomaly on the taxability of the MF investors. It is unclear whether the income
earned will be exempt or taxed in the hands of the investors on accrual basis, as
stated in the Discussion Paper on the DTC.
Documentation
In December 2009, SEBI had made it mandatory for all AMCs to maintain a copy
of full investor documentation including Know Your Customer i.e. KYC details.
Such documentation was earlier maintained by the respective MF distributors who
have now been asked to give a copy of the same to the fund houses.
Disclosure of Investor Complaints in the Annual Report
In order to improve the transparency in the ‘grievance redressal mechanism’,
SEBI has recently issued a Circular that requires MFs to include details of
investor complaints in their Annual Report as part of the Report of the Trustees,
beginning with the annual report for the year 2009-10. MFs provide abridged
booklets of the Annual Reports to all the unit holders.
39
Practices in Other Global Economies
In the light of evolving regulatory frameworks, it is worthwhile to adjudge
India’s place with respect to other global economies. A few specific criteria have
been considered as points of discussion, throwing light on the key developments
which have taken place across the world.
Entry Load
India
Recently in India, the industry regulator, SEBI has instructed that no entry load be
charged for all MF schemes launched on or after August 1, 2009. Distributors
receive commission from the investors based on investor’s assessment of various
factors including service rendered. Exit loads may or may not be charged to the
investors and it varies depending on the period they stay invested in the scheme.
UK
In UK, there exists a concept of front end charge of about 5% of the net assets and
distributors are paid commission (typically 3%) out of this by the Mfs. They are
further entitled to receive trail commission of around 0.5% of the net assets
annually over the period the investor stays invested in the scheme. Exit fees are
also being charged by few fund houses to investors on redemption on MF units.
US
Similarly, in the case of US, both entry and exit loads are charged to investors of
open-ended MF schemes. No such loads are charged in the case of close-ended
schemes. For close-ended schemes, the investor pays commission directly to the
distributor of the MF scheme.
China
In China, fund houses charge both entry and exit loads from MF investors. Thus,
commission to distributors are ultimately borne by the investors as the MFs pay
distributors from the loads charged to the investors in the scheme.
40
Australia
Australia does not have a concept of entry and exit load that is charged by the MF
to the investors. Here, the distributors are paid commission by the Mfs. Further,
they may also receive fees from the investor for the advice rendered to them.
Management Fees to the Asset Management Company
India
In India, there exist statutory limits defined by SEBI for payment of management
or advisory fees to the AMC.
The advisory fees payable are capped at 1.25% where the net assets outstanding
do not exceed Rs. 100 crores and at 1% over the net assets above the threshold of
Rs. 100 crores. However, in case of index funds, the advisory fees payable to
AMCs are capped 0.75% of the net assets in the scheme.
UK
In the UK, there exists no cap on the management fees to the AMC other than
those stipulated in each fund’s scheme prospectus. Typically fees vary on the type
of fund and are usually about 1.5% of the net assets or an actively managed equity
fund. Recently, new entrants in the UK market are charging lower annual
management in an attempt to gain a higher market share.
US
Similar to the UK, no statutory limits are prescribed by regulatory authority in the
US but it is ensured that the AMC does not earn an unfair profit from the advisory
contract. AMC fees typically range between 0.50% to 1.75% of the net assets
depending on the type of the fund.
China
In China, statutory caps are fixed for advisory fees payable to the AMCs
depending on the type of fund. For equity-based funds, the AMC fees are capped
at 1.5% of the net assets while for index funds, debt-based funds and money
market funds, fees are capped at 0.5- 0.7%, 0.6-1.2% and 0.33% respectively.
41
Australia
There are no pre-defined statutory caps on the fees payable to AMCs.The fees
payable vary, inter alia, depending on the type of the fund.
Regulation of Distributors
India
In India, the distributors of the MF units are not separately regulated by SEBI or
any other regulatory authority. Currently, distributors are required to take a simple
test. However, there have been instances of distributors rendering professional
advice to investors without the requisite qualifications and information about the
MF schemes. SEBI is in discussions to introduce a more stringent certification
programme for all distributors of MF schemes.
UK
Unlike in India, distributors in UK are regulated by the Financial Services
Authority. In the UK there is a regulation being proposed that will require
distributors of MF units to undertake certain examinations.
US
Distributors in the US are regulated by the Securities Industry and Financial
Markets Association and are required to pass the securities broker-dealer exams in
order to sell units of MFs.
China
MF distributors are regulated and authorized by China Security Regulatory
Commission, the major regulator of the MF Industry.
Australia
The Australian Securities and Investments Commission regulates the distributors
in Australia. No specified certificate is required to be obtained by distributors in
Australia to entitle them to provide professional advice to investors in MF
schemes.
42
Taxation of the Mutual Fund
India
In India, MFs are treated as a pass-through entity and hence are not liable to tax.
UK
In the hands of the MF, capital gains are tax exempt. Non-UK dividend income is
taxed to the extent that it is not covered by chargeable expenses. Interest income
received in case of bond funds are not liable to tax in the hands of the MF if the
income is distributed to the investors in the scheme as an interest distribution.
US
Funds are pass-through entities and only the investor pays tax upon receipt of
income or capital gain distributions by the fund. MFs only pay foreign source
taxes or US taxes if they fail to distribute the majority of income earned in the tax
year (ie > 90%).
China
In order to promote MF industry, the tax authority in China gives nearly full tax
exemptions to MF and investors. Currently, both MF and investors are not subject
to any turnover or income taxes except for the institutional investors who
redeem/sell the fund units. Also, dividends declared by MF are tax free.
Australia
In Australia, MFs are treated as a pass-through entity and hence are not liable to
tax.
Global Front: Regulatory Changes anticipated around the corner
Introduction of Retail Distribution Review
The key driver of change will be the retail distribution review (RDR) in the UK,
which was proposed in March 2010 and will be effective in the year 2011. On
account of RDR, independent financial advisers (‘IFAs’) i.e. distributors will
move to a fee-based advice model.
Post implementation of the RDR, IFAs will not be able to accept payment via
commission from product providers and shall be remunerated directly by
43
investors. Thus, investors would know up front how much the advice is going to
cost and how they will pay for it.
Further, the RDR would also require IFAs to be qualified (this qualification is
expected to be equivalent to the first year of a degree). It is expected that
implementation of the RDR would result in a reduction of the number of
distributors and only larger players would remain. Further, the RDR, though
specific to UK, is expected to spread to other European countries as well.
Alternative Investment Funds Directive
The draft legislation on Alternative Investment Funds Directive seeks to establish
a harmonized framework for monitoring and supervising the risks that alternative
investment funds (including venture capital funds, hedge funds, investment trusts,
commodity funds, property funds and private equity funds) pose to investors,
counter parties, other market participants and to financial stability, and to lay
down the requirements for alternative investment fund managers (‘AIFM’) to
provide services and market European market (‘EU’) funds throughout the EU.
It is expected that introduction of this directive would lead to an increase in the
operational cost of MF houses and also custodians of the MF’s assets.
The directive also contains “third country rules,” which deal with access by nonEU AIFMs to EU markets. Non- EU AIFMs who wish to sell products in the EU
would now be required to be subjected to similar regulations as an EU-based
AIFM. Thus, they would be subjected to appropriate cooperation arrangements
between the authorities in the EU and those of the non-EU AIFM for the purpose
of systemic risk oversight.
The US (where a significant proportion of EU-based funds raise capital) and the
UK (where a significant proportion of EU-based funds are managed) share
concerns about the likely effect of the Directive, particularly in relation to the
third-country rules. In a letter to the Commission in March, US Treasury Secretary
Timothy Geithner mentioned that the proposals could cause a rift between the US
and the EU by discriminating against US groups in preventing them from getting a
“passport” to market to EU investors.
44
Background and Need for the Study :
It is widely believed that MF is a retail product designed to target small investors,
salaried people and others who are intimidated by the stock market but,
nevertheless, like to reap the benefits of stock market investing. At the retail level,
investors are unique and are a highly heterogeneous group. Hence, designing a
general product and expecting a good response will be futile, though UTI could do
this nearly for three decades (1964-1987) due to its monopoly in the industry. In
the second phase of oligopolistic competition (1987-1992), the public sector banks
and financial institutions entered the field, but with the then existing boom
condition, it was a smooth sailing for the industry.
Further, the globalisation and liberalization measures announced by the
government led to a paradigm shift in the mind set of investors and the capital
market environment became more unfriendly to retail investors. They had no other
choice but to turn to MFs to reap the benefits of stock market investing. Hence,
the need to be innovative in designing the product was not felt and investors had
to choose from among the limited schemes offered. During the third phase (1992
hence) the industry was thrown open to the private sector and the stage got set for
competition.
Currently (as on 31/3/2010) there are 3894 schemes (Source : Mutual Fund
India. com, ) with varied objectives and AMCs compete against one another by
launching new products or repositioning old ones.
In the future, MF industry has to face competition not only from within the
industry but also from other financial products that may provide many of the same
economic functions as mutual funds but are not strictly MFs. For example, in US,
one savings institution has patented a product that promises to deliver consumers a
pay off indexed to college tuition costs, thus attempting to meet a common
consumer requirement [Ellen Schultz (1992)]. This product is structured as a
certificate of deposit but it could have been set up as a Mutual Fund. All this, in
aggregate, heightens the consumer confusion in his selection of the product. He is
confused as to how to sift the grain from the chaff? Unless the MF schemes are
tailored to his changing needs, and unless the AMCs understand the fund
45
selection/switching behavior of the investors, survival of funds will be difficult in
future. More recently ULIPs ,NPS have brought about a new challenge in Mutual
Fund Business
While the Indian Mutual Fund Industry has gown at an impressive rate in the last
few years, the recent developments , triggered with global economic crises have
impacted the fortunes of Industry resulting in AUM decline, adversely impacting
the revenue and profitability
Challenges & Issues of Mutual Industry in India
While the Indian Mutual Fund Industry has grown at an impressive rate in the last
few years, the recent development of the past few months triggered by the global
financial crises have impacted the fortunes of industry relating to AUM decline
adversely impacting the revenue and profitability
Low Levels of Customer Awareness
Low customer awareness levels and financial literacy pose the biggest challenge
to channelizing house hold savings into mutual funds. IIMS Data works data
released in 2007establishes that low awareness levels among retail investors has a
direct bearing on the low mutual fund off take in the retail segment.
The general lack of understanding of mutual fund products amongst Indian
investors is pervasive in metros and Tier2 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, as set allocation and portfolio diversification concepts.
Low awareness of SIP s in India has resulted in a majority of the customers
investing in a lump sum manner.
Limited Focus on Increasing Retail Penetration
The Indian mutual fund industry had limited focus on building retail AUM and
has only recently stepped up efforts to augment branch presence in Tier2 and Tier3
towns. Players have historically garnered AUM by targeting the institutional
segment that comprises 63percent AUM share as at March2008.
46
Large ticket size, tax arbitrage available to corporates on investing in money
market mutual funds, easy accessibility to institutional customers concentrated in
Tier1 cities are the factors instrumental in mutual fund houses focusing on the
institutional segment. Building retail AUM requires significant distribution
capability and a wide foot print to be able to penetrate into Tier2 and Tier3 towns,
which AMC s 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
20cities.Cities beyond Top 20 only comprise approximately 10 percent of the
industry AUM as per industry practitioners. The retail population residing in Tier2
and Tier3 towns, even if aware and willing, are unable to investing mutual fund
sowing to limited access to suitable distribution channels and invest or servicing.
The distribution network of most mutual fund houses largely focused on the Top
20 cities given the high cost associated with deeper penetration into Tier2 and
Tier3 towns. However, some of the mutual fund houses have begun focusing on
cities beyond the Top20 by building their branch presence and strengthening
distribution reach through non-branch channels.
Limited Innovation in Product Offerings
The Indian mutual fund industry has largely been product-led and not sufficiently
customer focused. The popularity of NFO's 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, there by catering to the limited
need soft he 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
introducedin2008,the market is still awaiting the first REMF launch. Further,
relatively ascent product categories viz. multi-manager funds that are among the
47
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 Structures
The fee structure in the Indian mutual fund industry enjoys little flexibility unlike
developed markets where the level of management fees depend on a variety of
factors such as the investment objective of the fund, 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 .
Regard less of the quality of advice and service provided, the commission payable
by the mutual fund customer to the distributors is fixed.
Limited Customer Engagement
Mutual fund distributors have been facing question on their competence , degree
of engagement with customer and the value provided to the customer. In the
absence of a frame work to regulate distributors, both the distributors and the
mutual fund houses have exhibited limited interesting continuously engaging with
customers post closure of sale as the commissions and incentives had been largely
in the form of up front fees from product sales (although trail commissions have
also been paid in limited instances regard less 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 Mutual
Funds
Public sector banks with a large captive customer base, significant reach
48
beyondtheTop20citiesinsemi-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 AMC sonly; further most of the post offices selling mutual
funds are located in Tier1andTier2 cities which are already been catered to, by
national level and other distributors .India Post with its customer base of
170million account holders and branch network of over 154,000 branches,
doubling the size of all bank branches put together is a for mid able channel which
has been underutilized to date for mutual fund distribution .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 Nationalized Banks, Regional Rural Banks
and Cooperative Banks in the rural hinter land has not been fully leveraged to
target the retail segment.
Multiple Regulatory Frameworks Governing Financial Services Sector
Verticals
The 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 frame work 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 with in the financial
services sector.
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 and from January 1st, 2010
compulsory KYC (Know your Customer) formality will hamper the flow of funds
in AMC's
On the other hand, ULIP s which are deemed to be competing products do not
have the mandatory PAN requirement. While the payment for investment into
49
mutual fund scan be made only through banking facilities, the purchase of ULIP s
can be under taken through cash.
The recently introduced NPS regulations requiring the AMC s 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 INR80billion by insurance
companies is not permitted and thus restricts an additional revenue opportunity for
the mutual fund industry.
Going forward for regulations impact
The SEBI rationale for regulating such dramatic changes recently for the mutual
fund industry has been that lower costs and increased transparency ought to create
lower barriers to retail participation. Part of the SEBI rationale for explicit
disclosure of distribution commission has been in reaction to the abuse of such
practices in other areas of financial fund management in India, at the expense of
the investor. Also, SEBI's regulations (to trade MF products on exchange, make
transparent distribution costs) seem to be on track with respect to the larger global
trend is towards greater transparency. All of these is being done to achieve an
increased retail participation in mutual fund products over the medium and long
term horizons.
However, increased retail participation is not driven by lower costs of
participation alone.
An illustrative example from within India is the New Pension System (NPS). The
NPS was designed with the explicit aim of providing a transparent and low cost
pension product to any citizen in India. While the end system has evolved
differently from the original design, the NPS does adhere to being one of the
lowest cost fund management systems available in India. However, the
participation in this is very low as of the current time.
The largest cause that the market attributes to this low growth is that the NPS
design did not explicitly factor in the cost of investor awareness and education
about NPS. Thus, cost is probably just one important determinant to increasing the
50
retail participation in the mutual fund industry.
Some of the important issues that come to the fore on the question of how to
increase retail participation are:

One the greatest bottleneck perceived is that of a lack of investor awareness. If
this is true, then how can investor awareness about the mutual fund products
be improved?
In this, what is the role of the (a) regulator and (b) the mutual fund industry
to promote this need?
1. Presently, it is the distribution agents that make investors aware of products
available in the Financial sector, be it mutual funds or others like insurance.
However, the services they provide range from high valued Financial advisory for
high net worth individuals to agents that are only responsible for the collection of
cheques from customer for delivery to the AMC. There is no standardisation of the
role specification of the distributor. They have no accountability with regards to
the services they provide to the investor, or to the AMC. This had led to widespread incidence of misselling of products across all Financial products, across all
countries, where the objective of the sale has been to maximise the revenues from
the sale rather than to ensure a match between the needs of the investor and the
product offered by the AMC.
That context raises the following questions:

Can the existing set of distributors play a greater role in improving investor
awareness towards using mutual fund products (or indeed, any financial
product) for financial planning?

Can the creation of a financial advisory channel/transition of the exist-ing
distribution agents towards financial advisory services be done by the financial
companies themselves?

What is the role of regulation in the creation of such a channel?

Since the financial advisory channel must ideally span different financial
products (which currently are under different regulators in India today) what is
51
the optimal regulatory involvement to govern the creation and regulation of
the financial advisory channel?
Another bottleneck is that of better investor access. One easy way to visualise this
problem is the minimum amount that is required before an individual investor can
save using mutual fund products. What is the role of the (a) regulator and (b) the
mutual fund industry to promote access to mutual fund products?
A couple of issues fall under the question of access:
1. Account opening procedures { for instance, the recent KYC requirements for
the investors can be onerous to the small retail investor.
2. Minimum size of investment { several products have minimum investment
sizes that place them out of the reach of small investors.}
Developments like the UIDAI with their target of a comprehensive coverage of
the population is in the right direction to reducing barriers to access. Others
remain in the domain of the regulator and the AMCs.

How much of the poor retail participation in mutual funds is caused by the
lack of a level playing field between different fund management choices
available to the Indian investor today?

What role can the foreign fund management industry play in this process of
developing the fund management industry in India?
In the past two decades since the start of the economic liberalization, foreign
participation has played a significant role in the development of the finance
industry, either through example, or by providing competition to the domestic
industry.
The fund management industry all over the world is going through a series of
reforms similar to the Indian industry. This is particularly true in the area of
evolving different business models that frontally attack the issues of improving
investor awareness and more transparent distribution of products through the
development of a range of financial advisory services.
How can we open up the space of foreign participation in the fund management
52
industry to achieve the objective of better domestic retail participation in mutual
fund products?
Distribution channels
The primary distribution channels for mutual funds in India are (1) banks
(approximately 80), (2) national and regional distributors (approximately 3000),
and (3) independent financial advisers (approximately 40,000).
Intermediaries play a pivotal role in promoting sale of mutual fund schemes.
AMFI has therefore taken the initiative of developing a cadre of trained
professional intermediaries. As the first step AMFI launched the certification
programme in association with NSE's Certification in Financial Markets (NCFM)
in July 2000 and SEBI has made AMFI Certification compulsory in a phased
manner which was replaced by NISM exam on June 2010.
Banks are one of the primary distribution channels for mutual funds, given their
access to a nationwide network of branches.
Independent financial advisers (IFAs) do not belong to any particular financial
institution, and many of them apparently work out of private offices to serve a
local and familiar clientele. Many IFAs in India started out as either sales agents
for the state-run insurance company or as employees of a securities firm. To that
extent, they have a similar presence to that of IFAs in the UK. Compared with the
banks and the national and regional distributors, IFAs are more likely to use a fee
schedule based on the amount of assets, and therefore appear to be the preferred
route for attracting funds from longer-term investors, particularly by the
traditional domestically capitalized asset management companies. One large
domestically capitalized asset management company, for example, gives desk
space, as well as access to company resources such as PCs and fax machines, to
its top selling IFAs.
In addition, India's post offices have also begun selling mutual funds in some
cases. India Post, which runs India's largest domestic bank, the Post Office
Savings Bank, began selling mutual funds in January 2001, and currently
distributes mutual funds for UTI, ICICI Prudential, and SBI. Although no official
53
data exists, mutual fund sales by the post office are said to be on a very small
scale. Some view the post office's nationwide network as having substantial sales
potential, however, and this makes it a sales channel that may bear watching in the
future.
The rough division of labor among sales channels appears to be that the banks and
the national distributors target wealthy and corporate clients, while the regional
distributors, IFAs, and India Post primarily target regular retail investors.
Agents selling mutual funds (MFs) aren’t too different from door-to-door
salesmen peddling room fresheners: The higher the manufacturers’ commission,
the larger is the effort put in and, consequently, the higher are the sales.
Market regulator, the Securities & Exchange Board of India (SEBI), put an end to
the dubious practice of asset management companies (AMCs) paying high
commissions to agents to increase their share of assets managed. SEBI has
abolished the entry load, a fee that is deducted from the money an investor puts in
an MF scheme. Funds are allowed to charge up to 2.5 per cent of the initial
investment as an entry load. That 2.5 per cent is reimbursed by the AMC to the
distributor as his commission.
Till now, it has been a cosy relationship between AMCs and distributors: The
former kept launching new schemes and the latter kept pocketing fees that were
often as high as 4 per cent (the balance 1.5 per cent coming out of the AMC’s
coffers). A recent CII-KPMG survey on the MF industry highlights some of the
concerns of investors in the top 10 cities. “He is not driven by interest and needs.
He acts in favour of the fund house,” the survey quotes an investor.
With the new fee structure, SEBI has addressed this investor concern. Distributors
and AMCs, however, are the ones who appear concerned now. But as then SEBI
Chairman, C.B. Bhave put it: “We have to look into the interest of the investors
first.” It’s indeed advantage investor now, as he or she will now decide how much
to pay the agent. The agent, meantime, will have to disclose the trail fee that’s
coming from the AMC.
Whilst investors will doubtless be thrilled, those in the industry argue that the
54
move will impact retail penetration— which is abysmal at only 1.6 per cent of
salaried people—as distributors and agents will be discouraged from selling funds.
The head of the distribution business at a large broking firm asks that if agents
make a 40 per cent commission by selling insurance, why would they be
interested in earning a paltry 0.50 per cent through trail fee in funds.
While the AMC will have to educate the distributors on how to advise, the
distributor will have to provide advice and better services to investors
“If the mutual fund industry wants diversity, importance of non-corporate
investors should be realised. It is in the interest of the industry to have increased
investor participation,” said Mr. Bhave. He was speaking at the Fifth CII Mutual
Fund Summit-2009 on “Indian mutual fund industry — the future in a dynamic
environment” organised by Confederation of Indian Industry (CII)
The SEBI chief said though the mutual fund industry had passed unscathed in the
recent global crisis, there were certain issues, particularly in the way liquid
schemes of mutual funds were structured, which need to be tackled. He said that
in the case of fixed maturity plan schemes, mutual fund houses should refrain
from offering securities which were fixed but whose underlying assets were
beyond the tenure of those securities. While replying to the industry’s concern on
the issue of KYC norms, Mr. Bhave said that KYC was not difficult but a
requirement in the interest of the investor and the industry as a whole. He said that
while distribution commission on insurance products was larger than on mutual
fund products, it was
It’s a valid argument but other distributors foresee operational hiccups. Many feel
it will be a mammoth task to collect two cheques (one for investment and another
for the fees) from his 8 lakh MF customers.
Financial products are invisible—they cannot be tasted, smelled, sat in, worn or
perceived by the senses in any other way. A car can be driven before it is bought.
A music system can be physically examined to see what it does. A garment can be
tried on to see if it fits. But because a financial product is invisible, it needs to be
described by the person selling it. And because the moment of truth of a financial
55
product is 1-20 years away from the point of sale, its actual face will only be seen
sometime in the future
These two attributes (invisibility and distant moment of truth) of a financial
product make the point of sale an extremely important link to the entire product
chain. Unless the sales person is able to correctly describe the product and its role
in the portfolio of an investor, the product is likely to ‘explode’
This importance can prove to be potentially harmful for customers, who rely on
the verbal communication of the sales person to describe the product, its costs, its
risk, return and flexibility to them. The written communication, as it exists today,
is lengthy and leans towards checklist’ compliance. The offer documents and
communication with customers lie within the letter of the law, but leaves them
with very little idea of what it is that they have bought. There are notable
exceptions in the industry that do try to bridge the gap, but this is not the industry
standard.
Consumers lose faith if they have a bad financial outcome due to an ill-fitting
financial product. This can happen in two ways. One, a badly constructed product
being sold in the market. Two, a product that does not fit the risk-return profile of
the consumer, and has the potential to ‘explode’.
India has good product manufacturer regulations in place and the instances of
products that are designed to mislead are few. However, the manner of their sales
leaves much to be desired.
Consider a zero-risk individual, who wants a tiny part of her portfolio invested in
equity. She is sold an equity unit-linked insurance plan that soaks up all her
investible surplus or a sector mutual fund that sits at the high end of the risk-return
curve. Who has misled the consumer in this case: the insurance company or
mutual fund, or the seller who sold it?
The Committee on Investor Awareness and protection recommends tighter norms
for financial advisers in India. There are two arguments that previous committees
have flagged to prefer status quo instead of more order in the marketplace. One,
the insurance and mutual fund agent is already a regulated entity and the Reserve
56
Bank of India (RBI) regulates the bank officers who sell financial products. Two,
while the agent is regulated, it is the adviser who is not under regulation, and may
hence need action at a future date.
But examining the IOSCO (the International Organization of Securities
Commissions, which is the global meeting place for securities markets regulators)
guidelines, and the code of conduct of insurance associations and regulators,
shows a regulated entity is one that faces:
 A set of compliance exams
 A system of continuing education
 A process of registration
 A process of regulatory filings
 An ongoing system of monitoring
 A system of compliance that the adviser will follow
 Well-defined enforcement procedures
 Punitive action
Clearly, the current sellers of financial products cannot be called ‘regulated’ by
any global standard. Agents are, at best, passing a threshold exam. Two, the
distinction between adviser and agent is fictitious when the agent is selling a loadbearing product. A load-bearing product has advice embedded in it.
The US is grappling with the creeping transformation of broker-dealers to
advisers, as they sell load-bearing products. The UK will do away with this
conflict of interest by making all products go no-load from 2012. Australia
favours the fee-for model over the commission-based model. The key question
here is: whose agent are they—the consumer’s, the producer’s or their own?
And if they are the agent of the consumer, surely the consumer should directly
compensate them to ensure service.
The Insurance Experience
It is apparent from the ground reality in India that the lack of fear of punitive
action or responsibility nudges the bulk of the sales force to use incentives on
financial products as the driving force to sell products. If this were not so, the
lapsation rates of insurance policies would not be so high. Data for 2007-08 shows
57
that lapsation rates range between 4 per cent and a shocking 80 per cent. The
lapsation rate for half of the 16 companies was more than 20 percent. Only three
insurers had a rate of less than 10 per cent.
While no single factor can be isolated for such a situation, the distributor has a
huge role to play in this regard. There is agreement in the insurance regulatory
system that high lapsations that occur during the first few years of the policy are
caused “by mis-selling—intentional or otherwise, and selling under duress. For
instance, in consideration of a loan sanctioned by a bank or any other nature of
‘favour’ done by the insurance salesman to the policyholder, or under ‘obligation’
to a relative or a friend.”
The chief cause of misselling is the incentive structure that induces agents to look
after their own interest rather than that of the customer. With an industry
commission expense ratio (commission expenses as a percentage of total
premium) of 16.25 per cent and total commissions paid at Rs 14,704 crore in
2007-0816, the reason for sharp selling practices is obvious.
The life insurance incentive structure is currently under change, with a 300 basis
cost cap between gross and net yield. Still, the underlying issue of front-loading
(pushing the cost applicable over the life of a product into the entry point of the
product—or to recover upfront, the cost across many years) the product with
commissions that are due over the lifetime of a product makes harmful sales a
foregone conclusion.
The high front-loading of commissions is allowed by The Insurance Act, 1938.
The commission for the first can be a maximum of 40 per cent of the premium. In
years two and three, the caps are 7.5 per cent, and 5 per cent thereafter. These are
the maximum caps and serve as a ceiling rather than a floor.
Any Act or regulation needs to keep pace with changing markets, as its aim is to
ensure a fair deal for all parts of the market, not just one. When the high front-load
was envisaged in the Insurance Act originally, the premise was that the agent
would service the policy owner over the policy life of 10, 15 or more years. The
customer then would be indifferent towards paying the cost upfront or distributed
58
evenly over the life of the product.
It must be remembered that the logic of such an incentive structure worked in
1938, when a single-player industry was envisaged and consumers had few other
options for long-term investments. The year 2009 is a different time and place in
terms of number of players, products, consumers and their needs. Arguably, the
Insurance Act needs to keep pace and take notice of a changed world.
Now, with multiple players, each time an agent switches companies, or a new
agent approaches a policyholder of some other company, they can potentially get
those customers to churn—sell their old policy and buy a new one. Churning a
product that has a cost structure where the customer has paid in advance the
service fee for the next 10 to 50 years in the first three years is a harmful trade
practice. With no system in place to refund the commission paid for the years
foregone, the consumer ends up losing not just money, but also faith in the
financial system.
The Mutual Fund Experience
The mutual fund experience shows that it is indeed the incentive structure
that tilts sales towards particular funds. The change in incentives from 2006 till
2009 is a story of the regulator gradually tightening the regulation to contain
motivated product manufacture and sale.
In 2004 and 2005, as the stock market was rising, it came to the notice of the
regulator that some banks and large distributors were churning mutual fund
investors from one new fund offer (NFO) to another. At stake was the 6 per cent
cost that each NFO was allowed to charge investors, plus the upfront load of 2.25
per cent.
Under SEBI (Mutual Fund) Regulations 1996, initial issue expenses up to 6 per
cent of the amount raised by the scheme was permitted to be amortized over a
period of five years. This meant that 6 per cent of whatever an NFO collected
during the NFO period could be charged to the scheme, apportioned over five
years. So, an NFO gathering Rs 1,000 crore could charge the scheme’s investors
Rs 60 crore from their assets or Rs 12 crore a year.
59
Meant to take care of the advertising and marketing costs, most of this money was
routed to distributors as their commission, in the form of cash and as a percentage
of the amount raised.
The use of the initial issue expenses to compensate distributors become so
widespread that no new fund could enter the market without promising the large
distribution chains 7-8 per cent commissions.
The practice became so widespread that it came into the regulatory radar. In April
2006, amortisation charges were banned in open-ended funds. Fund houses, right
away, began launching closed-end schemes that were exactly like an open-ended
scheme, with a regular redemption window. In 2007, 42 closed-end schemes were
launched, compared to nil in the few years preceding that. In January 2008, this
window was shut down as well, with closed-end funds not being allowed to
charge the 6 per cent amortisation cost.
However, questions over the 2.25 per cent front load being used to push new funds
continued.
To do away with this problem, Sebi has taken a significant step forward by
making advisers the agents of customers, rather than that of the company
whose products they sell. Mutual funds have gone no-load from 1 August
2009.
This follows the New Pension System (NPS) example, where there are no entry or
exit loads from inception. It is up to customers to compensate the agent and
adviser according to the service they receive. It is early days yet after the change
over to a no-load world in mutual funds. While no system can deal with an errant
jaywalker dashing across a busy road or a speeding driver jumping a red light and
hurting someone, on the whole, there is a greater obvious display of order. The
inherent contradiction in the system has been addressed.
Role of Intermediaries in the Indian Mutual Fund Industry
1.
The mutual fund industry in India started in 1964 with the formation of the
Unit Trust of India (UTI). In 1987, other public sector institutions entered
60
this business, and it was in 1993 that the first of the private sector
participants commenced its operations
2.
From the beginning, UTI and other mutual funds have relied extensively
on intermediaries to market their schemes to investors. It would be
accurate to say that without intermediaries, the mutual fund industry would
not have achieved the depth and breadth of coverage amongst investors
that it enjoys today. Intermediaries have played a pivotal and valuable role
in popularizing the concept of mutual funds across India. They make the
forms available to clients, explain the schemes and provide administrative
and paperwork support to investors, making it easy and convenient for the
clients to invest
3.
Intermediation itself has undergone a change over the past few decades.
While individual agents provided the foundation for growth in the early
years, institutional agents, distribution companies and national brokers
soon started to play an active role in promoting mutual funds. Recently,
banks, finance companies, secondary market brokers and even post offices
have also begun to market mutual funds to their existing and potential
client bases.
4.
It is, thus clear that all types of intermediaries are required for the growth
of the industry, and their wellbeing, quality orientation and ways of doing
business will have a significant impact on how the mutual fund industry in
India evolves in the future.
2. Guidelines for Selling and Marketing Mutual Funds
Background
1.
Investors can purchase and sell mutual fund units through various types of
intermediaries - individual agents, distribution companies, national/
regional brokers, banks, post offices etc. as well as directly from Asset
Management Companies (AMCs), including the Unit Trust of India
2.
Investors of Mutual Funds can be broadly classified into 3 categories:
Those who want product information, advice on financial planning and
61
investment strategies.
i.
Those who require only a basic level of service and execution
support i.e. delivering and collecting application forms and
cheques, and other basic paperwork and post sale activities
ii.
Those that prefer to do it all themselves, including choice of
investments as well as the process/paperwork related to
investments.
3.
To cater to different types of investors, the Mutual Fund industry
comprising of AMCs and intermediaries at present offers the following
two levels of services:
i. Value added services
This includes product information and advice on financial planning and
investment strategies. The advice encompasses analyzing an investor's financial
goals depending upon the segment of investor, assessing his/her resources,
determining his/her risk bearing capacity/preference and then using this
information to recommend an asset allocation/specific investment/s that are in
tandem with the investor's needs. Investors may also receive information on
taxation, estate planning and portfolio rebalancing to remain aware about the
changes/developments in market conditions and adjust the portfolios from time to
time according to their needs. In such advisory services, the emphasis is on
building an ongoing relationship with the investor/s. In India, given that mutual
funds are relatively new, there is a low level of awareness amongst investors about
the working and benefits of Mutual Funds. Also, very few investors take an
organized approach to financial planning. Therefore, it is clear that the vast
majority of investors would benefit significantly from the value-added services
enumerated above. (b) Basic services:ii. Basic Services
This includes product information and advice on financial planning and
investment strategies. The advice encompasses analyzing an investor's financial
goals depending upon the segment of investor, assessing his/her resources,
62
determining his/her risk bearing capacity/preference and then using this
information to recommend an asset allocation/specific investment/s that are in
tandem with the investor's needs. Investors may also receive information on
taxation, estate planning and portfolio rebalancing to remain aware about the
changes/developments in market conditions and adjust the portfolios from time to
time according to their needs. In such advisory services, the emphasis is on
building an ongoing relationship with the investor/s. In India, given that mutual
funds are relatively new, there is a low level of awareness amongst investors about
the working and benefits of Mutual Funds. Also, very few investors take an
organized approach to financial planning. Therefore, it is clear that the vast
majority of investors would benefit significantly from the value-added services
enumerated above. (b) Basic services:4.
While institutions can continue to be serviced by AMCs and
intermediaries, it is proposed that AMCs and the intermediary community
focus more on individual investors and take every effort to:
i.
Provide high quality advice and product information to such
customers.
ii.
Explain and position this service in such a way that clients
recognize it as a specialized and value added service, a task which
may be difficult to accomplish on their own.
iii.
Convince investors that the transaction and intermediation cost they
are paying is justified in lieu of the long-term benefits accruing
from such counseling and guidance.
5.
The Mutual Fund industry has to now take the more difficult but long-term
sustainable route of gathering assets from individual investors by
providing them value added, financial planning services and ensuring that
Mutual Funds are an integral part of their overall portfolio. Only if this
happens will AMCs and intermediaries command higher margins and
levels of profitability, and not suffer from the low margins associated with
dispensing only basic types of service/s.
63
6.
While doing this, the mutual fund industry in India should take care to
ensure that:
i.
Each investor, institutional or individual, receives the exact level of
service they choose and correct advice based on clear and concrete
facts and figures. Correspondingly, the intermediation and transaction
cost investors incur should reflect the value of the service and advice
they receive.
ii. Mutual Funds are accurately represented and appropriately positioned
to investors, whichever channel or mode they choose to invest in. The
industry should safeguard the investor's right towards correct
description of the product, good service, transparency and ability to
take informed decisions.
iii. Mutual Funds are accurately represented and appropriately positioned
to investors, whichever channel or mode they choose to invest in. The
industry should safeguard the investor's right towards correct
description of the product, good service, transparency and ability to
take informed decisions.
7.
The AMFI Certification is designed to be a professional qualification that
provides intermediaries with a thorough understanding of mutual funds
and how to present them appropriately to clients. The AMFI certification is
needed both for individuals and corporate distributors. The certification is
required for all individuals selling and representing mutual funds to
clients, whether they are employees of an intermediary organization or
they are an individual financial planner/agent.
3. Code of Conduct For Intermediaries
Take necessary steps to ensure that the clients' interest is protected.
1.
Adhere to SEBI Mutual Fund Regulations and guidelines related to selling,
distribution and advertising practices. Be fully conversant with the key
provisions of the offer document as well as the operational requirements of
various schemes.
64
2.
Provide full and latest information of schemes to investors in the form of
offer documents, performance reports, fact sheets, portfolio disclosures
and brochures, and recommend schemes appropriate for the client's
situation and needs.
3.
Highlight risk factors of each scheme, avoid misrepresentation and
exaggeration, and urge investors to go through offer documents/key
information memorandum before deciding to make investments.
4.
Disclose all material information related to the schemes/plans while
canvassing for business.
5.
Abstain from indicating or assuring returns in any type of scheme, unless
the offer document is explicit in this regard.
6.
Maintain necessary infrastructure to support the AMCs in maintaining high
service standards to investors, and ensure that critical operations such as
forwarding forms and cheques to AMCs/registrars and dispatch of
statement of account and redemption cheques to investors are done within
the time frame prescribed in the offer document and SEBI Mutual Fund
Regulations.
7.
Avoid colluding with clients in faulty business practices such as bouncing
cheques, wrong claiming of dividend/redemption cheques, etc.
8.
Avoid commission driven malpractices such as:
I) Recommending inappropriate products solely because the intermediary
is getting higher commissions there from.
i. Encouraging over transacting and churning of mutual fund investments
to earn higher commissions, even if they mean higher transaction costs
and tax for investors.
9.
Avoid making negative statements about any AMC or scheme and ensure
that comparisons if any, are made with similar and comparable products.
3.11 Ensure that all investor related statutory communications (such as
changes in fundamental attributes, exit/entry load, exit options, and other
65
material aspects) are sent to investors reliably and on time.
10.
Maintain confidentiality of all investor deals and transactions.
11.
When marketing various schemes, remember that a client's interest and
suitability to their financial needs is paramount, and that extra commission
or incentive earned should never form the basis for recommending a
scheme to the client.
12.
When marketing various schemes, remember that a client's interest and
suitability to their financial needs is paramount, and that extra commission
or incentive earned should never form the basis for recommending a
scheme to the client.
13.
Intermediaries will not rebate commission back to investors and avoid
attracting clients through temptation of rebate/gifts etc.
14.
A focus on financial planning and advisory services ensures correct
selling, and also reduces the trend towards investors asking for pass back
of commission.
15.
All employees engaged in sales and marketing should obtain AMFI
certification. Employees in other functional areas should also be
encouraged to obtain the same certification.
Sequence of steps in the Event of Breach of Above "Code of Conduct"
By the Intermediary
If any breach of the above Code of Conduct for intermediary is reported to
AMFI by either an investor or an AMC in writing, then AMFI will initiate
the following steps:
16.
Write to the intermediary (enclosing copies of the complaint and other
documentary evidence) and ask for an explanation within a time limit of 3
weeks.
17.
In case an explanation is not received within the time limit, or the
explanation is not satisfactory, AMFI will issue a warning letter indicating
that any subsequent violation will result in cancellation of AMFI
66
Registration.
18.
If there is a proved second violation by the intermediary, the registration
will be cancelled and an intimation sent to all AMCs.
The intermediary will have a right of appeal to AMFI.
Future Growth of Mutual fund Industry
Celent, a Boston-based financial research and consulting firm, too estimates that
the industry will grow at a higher rate of 29% in the next five years. Even as per a
latest CII-KPMG report, the Indian MF industry may grow at the rate of 22-25%
in the period from 2010 to 2015, resulting in AUM of Rs.16-18 trillion in
2015.The increase in revenue and profitability of fund houses has not been
proportionate to the AUM growth in India in the last five years. Low share of
global AUM, low penetration levels, limited share of MFs in the household
financial savings and the climbing growth rates in the last few years that are
amongst the highest in the world, all point to the future potential of the Indian MF
industry. Meanwhile, as research reports suggest, the retail segment is expected to
be the largest contributor to the growth of the asset management industry in India
and is expected to grow at a CAGR of 35%-42% in the next five years. In fact,
during this period AMCs could see an addition of nearly nine million first time
retail customers.
But then one should not forget the MF industry is poised to face tough
competition from the insurance sector in the near future. Insurance companies in
India have developed innovative products which link mutual funds and insurance,
like unit linked insurance plans. Thus, innovation in terms of product offerings
customised for these new target segments will be essential if MFs want to compete
with these innovative insurance offerings. For instance, UTI’s plan to sell products
through the postal channel targeting the retired population is a move in that
direction. No doubt, the recent turmoil in stock markets has shaken investor
confidence, and investors are apprehensive about investing in equity or
instruments linked to equity but then niche products linked to infrastructure and
real estate funds providing superior returns are likely to appeal to urban investors.
67
Similarly, new products like daily savings plans are likely to become popular
among the rural micro-saving segment.
Most importantly, with banks, independent financial advisors and national
distributors all playing their roles, AMCs have to be very careful in choosing their
distribution partners. Because those partners will actually be the vehicles riding
whom the AMCs can penetrate deeper into the retail segment.
Industry is facing challenges– in this regard– It is difficult to strategise a new
business model in the current situation; it will entail higher costs

Partnering with banks may be a possible solution to improve distribution, but
banks lack the expertise to offer investment advice

It is advisable to explore open architecture platforms or aggregator models for
conducting business

It may help to have a guideline into that of priority sector lending to provide
continued push under financial inclusion

The market should be given enough time to respond and adapt to changes in
regulation ; such changes should be in stages
Escalating costs have been quite persistent, and are still on the higher side ––
Distributors should be given an opportunity to earn incentives by the sale of
mutual funds
Assets collectively managed by Indian mutual fund houses have breached the 6
lakh crore mark, in March 2012, and plunged to Rs 5,87,217 crore. This shrinkage
in assets under management, or AUM, of over 8.5 per cent, from Rs 6,41,937
crore in September 2011, is not the only bad news plaguing the industry.
Data on total investor folios, which enumerates distinct investors' population
catered to by asset management companies, or AMCs, has also registered a 1.5 per
cent decline between September last year and March 2012.
In absolute terms, investor folios registered a decline of 7.2 lakh over these six
months, according to data released by the mutual fund industry body - Association
of Mutual Funds in India, or AMFI.
68
And within investor categories, which include corporates, banks, financial
institutions, foreign institutional investors, high net-worth investors and retail, the
later showed shrinkage of 1.7 per cent owing to a fall in folio numbers by 7.6
lakh.
Blame bouts of volatility in markets, or lack of innovation among the AMCs, the
Indian asset management industry defies its international image - that of largely
catering to retail investors.
The structural flaws that the industry has built over the years, continue to get
showcased in the mix of investors and their investments. Corporate investors
account for less than one per cent of the mutual fund investor population. And
despite a 15.5 per cent fall in their AUM over six months, their share of total
AUM stands at 43.1 per cent in March 2012, compared to 47.3 per cent in
September 2011.
Again, high net-worth individuals accounted for 1.76 per cent of the investor
population in March 2012, yet their share of AUM was 26.6 per cent, compared to
23.7 per cent in September 2011. But retail investors, who make up 97.3 per cent
of the investor population, accounted for a mere 27.4 per cent of the industry's
AUM in March 2012, compared to 23.6 per cent in September last year.
The silver lining however is the fact that out of the Rs 1,34,091 crore of retail
investment in equity mutual funds, Rs 82,577 crore, or 61.58 per cent, stayed
invested for over 24 months.
High net-worth investors with Rs 42,588 crore invested in equity funds displayed
patience as nearly 40 per cent of their investments stayed invested for over 24
months according to AMFI data for March 2012. In September 2011, only 35.35
per cent of their investment stayed for more than 24 months. Volatility propelled
by uncertainty, both on the domestic and global front, is the key reason why these
investors have not churned their investments frequently.
Having seen a sharp downturn in equity markets in 2011, and with the higher
interest environment, retail investors were attracted by debt oriented funds, which
include gilt and liquid schemes.
69
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. From the above review it can be inferred that Mutual Fund
as an investment vehicle is capturing the attention of various segments of the
society, like academicians, industrialists, financial intermediaries, investors and
regulators for varied reasons and deserves an in depth study.
Objective of the Study
The study was conducted for achieving the following objectives
1.
To study about the structure and mechanism of Mutual fund Industry in India
and the changes which have taken place in it.
2.
To study the impact of abolishment of entry Load in Mutual Fund
distribution
3.
To identify various distribution channels for Mutual fund
4.
To study the impact of market recession in Mutual Fund
5.
To assess the fund/ scheme preference of investors and factors effecting it
6.
To identify the information sources influencing the scheme selection
decision of investors.
7.
To identify the risk return tolerance of an investor in Mutual Fund
8.
To identify the most popular Mutual Funds among individual investors.
9.
To study the performance of mutual schemes during the period
10.
To identify various measures through which Mutual Fund distribution
business can be increased
Sub Objective
In pursuance of the above mentioned objectives the study also was able to achieve
following objectives
1.
To identify sustainable business model for AMC 's
2.
To study about the customer's view over payment of separate advisory fees
in mutual fund
70
Fig 1.12
World Wide Mutual Fund AUM
COUNTRY
2008
2009
2010
2011
2012
World
Americas
18,920,057
10,581,988
3,867
479,321
416,031
17,587
1,098
60,435
9,603,649
6,231,116
93,269
105,057
226
5,260
65,182
22,945,623
12,578,593
4,470
783,970
565,156
34,227
1,309
70,659
5,832
11,112,970
7,545,535
99,628
106,721
256
5,436
83,024
24,710,398
13,598,071
5,179
980,448
636,947
38,243
1,470
98,094
5,812
11,831,878
7,903,389
94,670
96,288
302
5,508
89,800
23,796,672
13,530,122
6,808
1,008,928
753,606
33,425
1,266
92,743
5,989
11,627,357
7,220,298
81,038
81,505
291
4,445
84,891
26,837,407
15,139,998
9,185
1,070,998
856,504
37,900
1,484
112,201
6,505
13,045,221
8,230,061
89,125
81,651
324
5,001
103,506
48,750
1,591,082
237,986
12,189
9,188
720,486
263,588
20,489
1,860,763
66,131
1,805,641
317,543
12,434
11,052
860,515
279,474
30,329
2,293,973
71,210
1,617,176
333,713
8,627
11,532
1,014,104
234,313
35,387
2,512,874
77,379
41,157
17,782
13,572
326
2,026
3,841
2,067
270,983
113,331
135,052
95,512
71,170
23,025
15,808
1,134
3,182
4,222
2,610
269,611
170,277
168,260
85,924
84,505
25,595
11,004
1,713
3,917
4,349
2,663
216,915
205,449
261,893
62,193
1,382,068
293,011
5,213
7,193
1,061,051
180,754
32,606
2,277,465
2,132
69,156
79,999
18,463
7,321
2,388
3,072
3,191
2,279
195,220
179,707
273,061
73,985
1,473,085
327,640
6,011
8,570
1,276,601
181,720
31,951
2,641,964
3,033
76,145
98,723
25,883
7,509
2,613
Argentina
Brazil
Canada
Chile
Costa Rica
Mexico
Trinidad & Tobago
United States
Europe
Austria
Belgium
Bulgaria
Czech Republic
Denmark
Finland
France
Germany
Greece
Hungary
Ireland
Italy
Liechtenstein
Luxembourg
Malta
Netherlands
Norway
Poland
Portugal
Romania
Russia
Slovakia
Slovenia
Spain
Sweden
Switzerland
2,952
2,370
191,284
205,733
310,686
Turkey
15,404
19,426
19,545
14,048
16,478
United Kingdom
504,681
729,141
854,413
816,537
985,517
Asia and Pacific
2,037,536
2,715,234
3,067,323
2,921,276
3,322,198
Australia
841,133
1,198,838
1,455,850
1,440,128
1,667,128
China
276,303
381,207
364,985
339,037
437,449
India
62,805
130,284
111,421
87,519
114,489
Japan
575,327
660,666
785,504
745,383
738,488
Korea, Rep. of
221,992
264,573
266,495
226,716
267,582
New Zealand
10,612
17,657
19,562
23,709
31,145
Pakistan
1,985
2,224
2,290
2,984
3,159
Philippines
1,263
1,488
2,184
2,363
3,566
Taiwan
46,116
58,297
59,032
53,437
59,192
Africa
69,417
106,261
141,615
124,976
145,150
South Africa
69,417
106,261
141,615
124,976
145,150
Note: Components may not sum to total because of rounding.
Source: National mutual fund associations; European Fund and Asset Management Association (EFAMA) provides data
for all European countries except Russia.
1
Funds of funds are not included, except for France, Germany, Italy, and Luxembourg. Home-domiciled funds, except for
Hong Kong, New Zealand and Trinidad & Tobago, which include home- and foreign-domiciled funds.
71
Fig 1.13
Average Assets under Management (AAUM) for the quarter of
January - March 2013
Sr No Mutual Fund Name
1
Axis Mutual Fund
2
Baroda Pioneer Mutual Fund
3
Birla Sun Life Mutual Fund
4
BNP Paribas Mutual Fund
5
BOI AXA Mutual Fund
6
Canara Robeco Mutual Fund
7
Daiwa Mutual Fund
8
Deutsche Mutual Fund
9
DSP BlackRock Mutual Fund
10 Edelweiss Mutual Fund
11 Escorts Mutual Fund
12 Franklin Templeton Mutual Fund
13 Goldman Sachs Mutual Fund
14 HDFC Mutual Fund
15 HSBC Mutual Fund
16 ICICI Prudential Mutual Fund
17 IDBI Mutual Fund
18 IDFC Mutual Fund
19 IIFL Mutual Fund
20 Indiabulls Mutual Fund
21 ING Mutual Fund
22 JM Financial Mutual Fund
23 JPMorgan Mutual Fund
24 Kotak Mahindra Mutual Fund
25 L&T Mutual Fund
26 LIC NOMURA Mutual Fund
27 Mirae Asset Mutual Fund
28 Morgan Stanley Mutual Fund
29 Motilal Oswal Mutual Fund
30 Peerless Mutual Fund
31 PineBridge Mutual Fund
32 PPFAS Mutual Fund
33 Pramerica Mutual Fund
34 PRINCIPAL Mutual Fund
35 Quantum Mutual Fund
36 Reliance Mutual Fund
37 Religare Mutual Fund
38 Sahara Mutual Fund
39 SBI Mutual Fund
40 Sundaram Mutual Fund
41 Tata Mutual Fund
42 Taurus Mutual Fund
43 Union KBC Mutual Fund
44 UTI Mutual Fund
Grand Total
(Rs in Lakhs)
Average AUM
Excluding Fund of Funds Fund Of Funds Domestic but including
Domestic
Fund of Funds - Overseas
1211433.78
14135.92
730311.98
0
7704643.21
9785.77
372604.32
0
110398.31
0
885094.72
9310.53
26612.79
0
1811417.61
0
3234232.57
0
25870.75
0
25541.25
0
4156426.37
133227.16
479972.65
0
10172027.59
37553.75
522976.63
0
8783507.47
13292.37
624890.09
10115.39
3288599.23
18237.21
20969.89
0
263905.08
0
99258.98
33242.52
741147.09
0
1585570.15
0
3536135.09
58329.01
1116937.85
0
718472.6
0
53989.69
0
266036.68
0
53853.3
0
487452.26
0
109905.16
0
N/A
N/A
259228.22
0
557346.12
0
27976.18
1277.76
9458019.07
227071.91
1420202.5
2747.09
25383.24
0
5490544.4
85483.43
1487126.93
0
1989709.46
0
473149.5
0
311795.31
0
6945039.72
0
81665715.79
653809.82
72
References

Anagol S, Kim H (2010). \The Impact of Shrouded Fees: Evidence from a
Natural Ex-periment in the Indian Mutual Funds Market." Technical
report, The Wharton School,University of Pennsylvania.

CII-PWC Mutual Fund Summit 2010

Consultation Paper on Minimum Common Satandard on Financial Advisor
and Financial Education

Fink, Matthew P. (2008). The Rise of Mutual Funds. Oxford University
Press.

IIMS Dataworks, 2007

Improving Financial Literacy: Analysis of Issues and Policies. OECD 2005

Irda Annual Report 2007-08

J Hari Narayan, Chairman, Irda, Irda Journal, Lapsation in Life Insurance,
August 2008

Lapsation of life insurance policies, Irda Annual Report 2007-08

Pozen, Robert; Hamacher, Theresa (2011). The Fund Industry: How Your
Money is Managed. John Wiley & Sons.

Purandare J, Mehra G (2010). \Indian mutual fund industry - Towards
2015. Technical report, Mutual Fund Summit, CII and PWC

Rouwenhorst, K. Geert, "The Origins of Mutual Funds," Yale ICF Working
Paper No. 04-48 (December 12, 2004).

SEBI Rules & Regulation 1996

Shah A, Garg A, Radhakrishna K, Prasad KN (2010). \Equity mutual funds
{Charting your course with a Campass." Technical report, Boston
Consulting Group and CAMS

Rouwenhorst, K. Geert, "The Origins of Mutual Funds," Yale ICF Working
Paper No. 04-48 (December 12, 2004).

"U.S. Securities and Exchange Commission Information on Mutual
Funds". U.S. Securities and Exchange Commission (SEC). Retrieved
2011-04-06.
-------:0:-------
REVIEW OF LITERATURE
In financial markets, “expectations” of the investors play a vital role. They
influence the price of the securities, the volume traded and determine quite a lot
of things in actual practice. These ‘expectations’ of the investors are influenced by
their “perception” and humans generally relate perception to action. The beliefs
and actions of many investors are influenced by the dissonance effect and
endowment effect.
The tendency to adjust beliefs to justify past actions is an example of the
psychological phenomenon termed by Festinger (1957) as cognitive dissonance.
Festinger's theory asserts that individuals are distressed by conflicting cognitive
elements, such as a discrepancy between empirical evidence and past choices and
thus they alter their beliefs to reduce this discomfort.
The key feature of dissonance is that individual beliefs are altered to conform to
their past actions. In the
context of investment decision-making,
cognitive
dissonance can be thought of as a psychological cost that investors may seek to
reduce through adjustments in beliefs about the efficacy of past investment
choices. We find ample proof for the wide prevalence of such a psychological
state among Mutual Fund (MF) investors in India. For instance, UTI had a
glorious past and had always been perceived as a safe, high yield investment
vehicle with the added tax benefit. Many UTI account holders had justified their
beliefs by staying invested in UTI schemes even after the 1999 bail out and many
have still not lost faith in UTI, even after the July 2001 episode.
“Endowment Effect” is explained by Thaler Kahneman and Knetsch (1992) as
“People are more likely to believe that something they own is better than
something they do not own”.
Much of economic and financial theory is based on the notion that individuals act
rationally and consider all available information in the decision-making process.
However, researchers have uncovered a surprisingly large amount of evidence that
this is frequently not the case. Dozens of examples of irrational behavior and
74
repeated errors in judgement have been documented in academic studies. Peter L.
Bernstein in Against The Gods states that the evidence "reveals repeated patterns
of irrationality, inconsistency, and incompetence in the ways human beings arrive
at decisions and choices when faced with uncertainty."
Tversky and Kahneman originally described "Prospect Theory" in 1979. They
found that contrary to expected utility theory, people placed different weights on
gains and losses and on different ranges of probability. They found that
individuals are much more distressed by prospective losses than they are happy by
equivalent gains. Some economists have concluded that investors typically
consider the loss of $1 dollar twice as painful as the pleasure received from a $1
gain. They also found that individuals will respond differently to equivalent
situations depending on whether it is presented in the context of losses or gains.
Researchers have also found that people are willing to take more risks to avoid
losses than to realize gains. Faced with sure gain, most investors are risk-averse,
but faced with sure loss, investors become risk-takers.
"Psychographics" describe psychological characteristics of people and are
particularly relevant to each individual investor's strategy and risk tolerance. An
investors background and past experiences can play a significant role in the
decisions an individual makes during the investment process. For instance, women
tend to be more risk averse than men and passive investors have typically became
wealthy without much risk while active investors have typically become wealthy
by earning it themselves. The Bailard, Biehl & Kaiser Five-Way Model divides
investors into five categories. "Adventurers" are risk takers and are particularly
difficult to advise. "Celebrities" like to be where the action is and make easy prey
for fast-talking brokers. "Individualists" tend to avoid extreme risk, do their own
research, and act rationally. "Guardians" are typically older, more careful, and
more risk averse."Straight Arrows" fall in between the other four personalities and
are typically very balanced.
We have evidence for the influence of this effect also among Indian MF investors,
for, how else can we explain the reason for the existence of many poor performing
funds without investors staying invested with them?
75
However, in the financial literature, there are no models which explain the
influence of these “perceptions” and “beliefs” on “Expectations” and “Decision
Making”. Because of our own inability to understand the sources of motivations
and the basis of these expectations we tend to ignore it. No doubt, reality is so
complex that trying to fit an individual investor’s beliefs into a model is
impossible.
But, to a certain extent, we can borrow concepts from social psychology where
behavioral patterns, rational or irrational, are developed and empirically tested. On
the same lines, we can develop certain models to test the financial behavior, to the
extent of the availability of the explanatory variables.
Such models can help to understand the Why? and How? aspect of investor
behavior, which can have managerial implications for policy makers
The existing “Behavioral Finance” studies are very few and very little information
is available about investor's perceptions, preferences, attitudes and behavior. All
efforts in this direction are fragmented. Ippolito (1992) says that fund/scheme
selection by investors is based on past performance of the funds and money flows
into winning funds more rapidly than they flow out of losing funds. Goetzman
(1997) states that there is evidence that investor psychology affects fund/scheme
selection and switching.
De Bondt and Thaler (1985) while investigating the possible psychological basis
for investor behaviour, argue that mean reversion in stock prices is an evidence of
investor over reaction where investors over emphasis recent firm performance in
forming future expectations.
In India, one of the earliest attempts was made by NCAER in 1964 when a survey
of households was undertaken to understand the attitude towards and motivation
for saving of individuals. Another NCAER study in 1996 analysed the structure of
the capital market and presented the views and attitudes of individual
shareholders. SEBI – NCAER Survey (2000) was carried out to estimate the
number of households and the population of individual investors, their economic
and demographic profile, portfolio size, investment preference for equity as well
76
as other savings instruments. This is a unique and comprehensive study of Indian
Investors, for, data was collected from 3,00,0000 geographically dispersed rural
and urban households.
Some of the relevant findings of the study are :
Households preference for instruments match their risk perception; Bank Deposit
has an appeal across all income class; 43% of the non-investor households
equivalent to around 60 million households (estimated) apparently lack awareness
about stock markets; and, compared with low income groups, the higher income
groups have higher share of investments in Mutual Funds (MFs) signifying that
MFs have still not become truly the investment vehicle for small investors.
Nevertheless, the study predicts that in the next two years (i.e., 2000 hence) the
investment of households in MFs is likely to increase.
Gupta (1994) made a household investor survey with the objective to provide
data on the investor preferences on MFs and other financial assets. The findings of
the study were more appropriate, at that time, to the policy makers and mutual
funds to design the financial products for the future. Kulshreshta (1994) offers
certain guidelines to the investors in selecting the mutual fund schemes.
Shanmugham (2000) conducted a survey of 201 individual investors to study the
information sourcing by investors, their perceptions of various investment strategy
dimensions and the factors motivating share investment decisions, and reports that
among the various factors, psychological and sociological factors dominated the
economic factors in share investment decisions.
Madhusudhan V Jambodekar (1996) conducted a study to assess the awareness
of MFs among investors, to identify the information sources influencing the
buying decision and the factors influencing the choice of a particular fund. The
study reveals among other things that Income Schemes and Open Ended Schemes
are more preferred than Growth Schemes and Close Ended Schemes during the
then prevalent market conditions. Investors look for safety of Principal, Liquidity
and Capital appreciation in the order of importance;
Newspapers and Magazines are the first source of information through which
77
investors get to know about MFs/Schemes and investor service is a major
differentiating factor in the selection of Mutual Fund Schemes. Sujit Sikidar and
Amrit Pal Singh (1996) carried out a survey with an objective to understand the
behavioural aspects of the investors of the North Eastern region towards equity
and mutual funds investment portfolio.
The survey revealed that the salaried and self employed formed the major
investors in mutual fund primarily due to tax concessions. UTI and SBI schemes
were popular in that part of the country then and other funds had not proved to be
a big hit during the time when survey was done. Syama Sunder (1998) conducted
a survey to get an insight into the mutual fund operations of private institutions
with special reference to Kothari Pioneer. The survey revealed that awareness
about Mutual Fund concept was poor during that time in small cities like
Visakapatnam. Agents play a vital role in spreading the Mutual Fund culture;
open-end schemes were much preferred then; age and income are the two
important determinants in the selection of the fund/scheme; brand image and
return are the prime considerations while investing in any Mutual Fund.
Anjan Chakarabarti and Harsh Rungta (2000) stressed the importance of
brand effect in determining the competitive position of the AMCs. Their study
reveals that brand image factor, though cannot be easily captured by computable
performance measures, influences the investor’s perception and hence his
fund/scheme selection. Shankar (1996) points out that the Indian investors do
view Mutual Funds as commodity products and AMCs, to capture the market
should follow the consumer product distribution model.
Since 1986, a number of articles and brief essays have been published in financial
dailies, periodicals, professional and research journals, explaining the basic
concept of Mutual Funds and highlight their importance in the Indian capital
market environment. They touch upon varied aspects like Regulation of Mutual
Funds, Investor expectations, Investor protection, Trend in growth of Mutual
Funds and some are critical views on the performance and functioning of Mutual
Funds. A few among them are Vidyashankar (1990), Sarkar (1991), Agarwal
(1992), Sadhak (1991), Sharma C. Lall (1991), Samir K. Barua et al.,
78
(1991),Sandeep Bamzai (2001), Atmaramani (1995), Atmaramani (1996),
Subramanyam (1999), Krishnan (1999), Ajay Srinivsasn (1999). Segmentation
of investors on the basis of their characteristics was highlighted by Raja Rajan
(1997). Investor’s characteristics on the basis of their investment size Raja Rajan
(1997), and the relationship between stage in life cycle of the investors and their
investment pattern was studied Raja Rajan (1998).
Shankar (1996) points out that the Indian investors do view Mutual Funds as
commodity products and AMCs, to capture the market should follow the
consumer product distribution model. Jambodekar (1996) conducted a study to
assess the awareness of MFs among investors, to identify the information sources
influencing the buying decision and the factors influencing the choice of a
particular fund. The study reveals among other things that Income Schemes and
Open Ended Schemes are more preferred than Growth Schemes and Close Ended
Schemes during the then prevalent market conditions. Sikidar and Singh (1996)
carried out a survey with an objective to understand the behavioral aspects of the
investors of the North Eastern region towards mutual funds investment portfolio.
The survey revealed that the salaried and self-employed formed the major
investors in mutual fund primarily due to tax concessions.
Lynch and Musto (2003) were of opinion that this decade will belong to mutual
funds because the ordinary investor does not have the time, experience and
patience to take independent investment decisions on his own. Goetzman and
Peles (1997) established that there is evidence of investor psychology affecting
fund/scheme selection and switching. Sundar (1998) conducted a survey to get an
insight into the mutual fund operations of private institutions with special
reference to Kothari Pioneer. The survey revealed that agents play a vital role in
spreading the Mutual Fund culture; open-end schemes were much preferred then
age and income are the two important determinants in the selection of the
fund/scheme; brand image and return are the prime considerations while investing
in any Mutual Fund. Khorana and Servaes (1999) had experimented that the
decision to introduce a new type of fund is affected by a number of variables,
including investor demand for the fund’s attributes. Chakarabarti and Rungta
79
(2000) stressed the importance of brand effect in determining the competitive
position of the AMCs. Their study reveals that brand image factor, though cannot
be easily captured by computable performance measures, influences the investor’s
perception and hence his fund/scheme selection. Shanmugham (2000) conducted a
survey of 201 individual investors to study the information sourcing by investors,
their perceptions of various investment strategy dimensions and the factors
motivating share investment decisions, and reports that among the various factors,
psychological and sociological factors dominate the economic factors in
investment decisions. In his study “Are Retail Investors Better off Today?” Black
(2004) observed that in recent years, investors' attitudes towards the securities
industry plummeted, in reaction to both the conflicted research and the mutual
fund scandals. He concluded that the most optimistic assessment is that the SEC
has plenty of unfinished business to attend to. Keli (2005) is of opinion that Past
performance and Fund’s Investment Strategy continued to be the top two drivers
in the selection of a new fund manager. Rajeswari and Moorthy (2005) observed
that investors demand inter-temporal wealth shifting as they progress through the
life cycle. Alinvi & Babri (2007) are of view that customers’ preferences change
on a constant basis, and organizations adjust in order to meet these changes to
remain competitive and profitable.
Rajeshwari TR and Rama moorthy VE (2002) studied the financial behaviour
and factors influencing fund/scheme selection of retail investors by conducting
factor analysis using principal component analysis, to identify the investors
underlying fund scheme selection criteria, so as to group them into specific market
segment for designing of the appropriate marketing strategy.
Although majority of investors who invest in mutual fund themselves are not clear
with the objective and constraints of their investment but in addition to this most
important critical gap that exist in this process is lack of awareness about presence
of risk elements in mutual fund investment. The new marketing philosophy and
strategies place special emphasis on recognition of customer needs in an effort to
provide high level of quality services (Harrison, 2000).
Mostafa Soleimanzadeh in his article, “Learn how to invest in Mutual Funds” had
80
discussed about the risk and return in mutual funds. He stated that the risk and
return depend each other, the greater the risk, the higher the potential return; the
lower the risk, the lower the expected return. Mutual funds try to reduce their risk
by investing in a diversified group of individual stocks, bonds, or other securities.
He concluded that the investment in stocks can get more return than mutual funds
but investment in mutual funds the risk is lower. Mutual funds are great for
funding retirement plans and investors that don't have the time or energy to
consider individual stocks. (June 2006).
Kum Martin in his article, “Basics about Mutual Funds” had discussed about
different types of mutual funds. He stated that the equity funds involve just
common stock investments. They are extremely risky but can end up earning a lot
of money. Fixed income funds are government and corporate securities. Fixed
income funds offer fixed returns and the risk associated with these funds is very
low. Balanced mutual funds are a combination of bonds and stocks. He concluded
that the low risk in investment will not earn a lot of returns. (October 2007).
Mutual fund managers have to use various investment styles depending upon
investor’s requirement. Most of the empirical evidences have shown that mutual
fund investor’s purchase decision is influenced by past performance (Patel, et al.
1992). Research study by (Jones et al, 2007) has proved that a negative correlation
exists between advertisement and fund quality. A common investor may expect
that mutual fund should opt strategies that have been documented to produce
superior returns in the past instead they follow to select portfolios that don’t
deviate markedly from market benchmarks (Lokonishok, Shleifer and Vishny,
1997).
Elmiger and Kim (2003) elucidate risk as the trade-off that every investor has to
make between the higher rewards that potentially come with the opportunity and
the higher risk that has to be borne as a consequence of the danger.
Although different literature available on risk define it variedly but in common the
word risk refers to situations in which a decision is made whose consequences
depend on the outcomes of future events having known probabilities(Lopes,1987).
Risk from a strategic management perspective has been defined as one that is
81
often taken as manager’s subjective judgment of the personal or organizational
consequences and it may result from a specific decision or action. Beta has been
accepted as most appropriate measure of risk that describe the slope of any
regression line .i.e it reveals the volatility of a stock relative to a market
benchmark (Sharpe 1966).
Although majority of investors who invest in mutual fund themselves are not clear
with the objective and constraints of their investment but in addition to this most
important critical gap that exist in this process is lack of awareness about presence
of risk elements in mutual fund investment. The new marketing philosophy and
strategies place special emphasis on recognition of customer needs in an effort to
provide high level of quality services (Harrison, 2000). Study by Laukkanen
(2006) explains that varied attributes present in a product or service facilitate
customer’s achievement of desired end-state and the indicative facts of study show
that electronic services create value for customers in service consumption.
Return ambiguity and changes in risk perception of individual investor affect
action taken in risky financial market. In a more complex situation taking rational
decision is undoubtedly difficult but certainly not impossible. Computational
complexities are not only the reason why rationality assumption is challenged
rather challenges also come from cognitive reasoning (Anderson 1991) where
question is how optima human beings are. A more realistic notion of rationality is
bounded rationality defined by Simon (Simon 1957) that property of an agent who
behaves in a manner that is nearly as optimal with respect to its goals as resource
will allow.
Michael C. Jensen (1967) derived a risk-adjusted measure of portfolio
performance (Jensen’s alpha) that estimates how much a manager’s forecasting
ability contributes to fund’s returns.
Sharpe, William F.(1994) suggested the ‘Sharp- Ratio technique for the
measurement for the performance measurement of the MF.
Michael K. Berkowitz et, (1997), supports the argument& states that, past fund
performance influences individual investment decisions along with implying
82
strong incentives for managers increase the performance of Mutual funds.
Mishra et, al (2000) measured MF performance using lower partial moment Risk
from the lower partial moment is measured by taking into account only those
states in which return is below a pre-specified “target rate” like risk-free rate.
Graciela L. Kaminsky, el,al,(2001), Due to large redemptions and injections,
funds' flows are not stable. Withdrawals from emerging markets during recent
crises were large, which is consistent with the evidence on financial contagion.
Bala Ramasamy et,(2003), agreed that Three elements consistent past
performance, size of funds & cost of transaction effects the performance.
Prof. S. Rao, evaluated performance in a bear market through Relative
Performance Management index & risk – return analysis.
Sharad Panwar et (2005). uses Residual Variance (RV) as the measure of MF
portfolio diversification. RV has a direct impact on shape fund performance
measure.
Marcin T. Kacperczyk,et,al (2005)demonstrated that unabsorbed information
create values for some funds. Return gap helps to predict future fund performance
& investors should use additional measures to evaluate the performance.
Bijan Roy, used conditional performance evaluation on a sample of 89 Indian MF
schemes measuring with both unconditional and conditional form of CAPM
model. The results suggest that the use of conditioning lagged information
variables improves the performance of mutual fund schemes, causing alphas to
shift towards right and reducing the number of negative timing coefficients.
Other Important Studies
Some of the other important studies in India on the performance evaluation of
mutual funds were by M Jayadev (1996), S. A. Dave (1998), Susan Thomas
(1998), Vivek Kulkarni (1998), Julie Hudson (1998), Anjan Chakrabarti and
Harsha Rungta (2000), Amitab Gupta (2001), M S Narasimhan and S
Vijayalakshmi (2001), Prof. M S Turan, Dr. B S Bodla and Sh. Sushil Kumar
Mehta (2001), Biswadeep Mishra (2002), Ramesh Chander (2002).
83
Jayadev (1996) evaluated the performance of 62 mutual funds schemes using
NAV data for varying period between 1987 and 1995. He reported superior
performance for bulk (30 out of 44) of the sample schemes when total risk was
considered. However, in terms of systematic risk only 24 out of 44 schemes
outperformed the benchmark portfolio. He also found that Indian mutual funds
were not properly diversified. Further, in terms of Fama’s measure, he did not find
selectivity ability of the fund manager. S. A. Dave (1998) discussed the
performance of the mutual funds industry and then reviewed the performance of
individual funds. Susan Thomas (1998)studied the performance of Mastershare
and MSGF for the period 1994-95 using market prices and NAV respectively. She
used Jenson measure for evaluation performance appraisal. Vivek Kulkarni
(1998), in his article provided basic answers to the questions related to the
performance evaluation. The article explains framework for good performance
evaluation, criteria for selection of benchmark, methodology of CRISIL’s in
measuring risk in evaluating portfolio performance and influence of fund
management fees in a performance evaluation etc. Julie Hudson (1998), the article
provides idea about selection of benchmark, using of Sharpe and Treynor’s
measure for evaluation of portfolio performance, method of calculation of
tracking Error etc. The study concludes that the most important need for the
progress of the mutual fund industry in India is a well-established reporting
standard. Chakrabarti and Harsha Rungta (2000) their study attempts to identify
and evaluate the performance of mutual funds with focus on private sector equity
funds. It studies the risk-return characteristics of selected major equity-based
private mutual funds companies. The inference of the study reveals that there is no
one-to-one correspondence between performance by return and performance by
risk-adjusted returns. Amitab Gupta (2001) in his study, the selected schemes were
evaluated with respect to the broad based BSE National Index to find out whether
the schemes were able o beat the market. It also examined whether the returns
were commensurate with the risk undertaken by the fund mangers. It used three
risk adjusted performance. The study also tested the market timing abilities of the
fund managers. The results indicate that 38 schemes (52%) earned higher returns
in comparison to the market return while the remaining 35 schemes (48%)
84
generated lower returns than that of the market. The results pertaining to market
timing abilities of fund managers in terms of both the two models, Treynor and
Mazuy and Henriksson and Merton do not lend support to the hypothesis that the
India fund managers are able to time the market correctly. M S Narasimhan and S
Vijayalakshmi (2001), made an empirical evaluation of diversification and timing
performance of 76 mutual fund schemes of around 25 fund houses. The study
employed two alternative methods to examine this issue. In the first case, the
portfolio return and risk and correlation between the stocks in the portfolio of each
scheme can be computed and compared with each other. The second methodology
is to examine the correlation between the frequently appearing stocks in the
portfolio. The study when compared the average returns, standard deviation and
co-efficient of variation of these stocks, it is found that in almost all cases the risk
level is high compared to the returns. The study also examines the fund managers
ability to identify and invest in stocks that are expected to perform both currently
as well as in near future. These portfolios of funds are compared with the top 100
performers of the relevant period for this purpose. The results show that there is a
general shift in the investment strategy of holding a diversified portfolio and in
optimizing the risk-return of investments to investing in predictive winners of the
period.
M S Turan, Dr. B S Bodla and Sh. Sushil Kumar Mehta (2001) analyzed the
performance of 54 listed schemes of mutual funds on the basis of weekly data on
NAVs. For this purpose, besides risk and return analysis, the risk adjusted
performance measures have been employed. The study reveals that a considerably
low level of risk is associated with the selected schemes, irrespective of the sector
concerned. Biswadeep Mishra (2002) the research paper attempts to evaluate the
timing and selectivity skills of mutual funds. It also tries to test the non-stationary
of mutual fun betas and finds out the causes of non-stationary beta. The study
utilizes the Chen and Stockum (1986) model that uses a generalized varying
parameters regression procedure to examine mutual fund’s selectivity, beta
instability, and timing skills simultaneously. Since the model removes the
limitations of traditionally utilized Jensen’s measure, it has been applied to Indian
mutual funds to find out beta instability and their selectivity and timing skills. It
85
was concluded that the selected mutual fund schemes had no timing ability, even
though at individual level some of the schemes had timing skills. The generalized
varying parameter (GVP) estimates also revealed that the systematic risk of Indian
mutual funds did not remain stable over time. Ramesh Chander (2002), in his
study appraised the performance of mutual funds in India as suggested by Sharpe,
Treynor and Jenson. The study also examined the portfolio management practices
of mutual fund managers with respect to portfolio construction, portfolio
management, portfolio evaluation and disclosure practices.
Barua and Verma (1991) provided empirical evidence of equity mutual fund
performance in India. They studied the investment performance of India’s first 7year close-end equity mutual fund, Mastershare. They concluded that the fund
performed satisfactory for large investor in terms of rate of return.
Vaid (1994) looked at the performance in terms of the ability of the mutual fund
to attract more investors and higher fund mobilization. It shows the popularity of
the mutual fund as it is perceived to pay superior returns to the investors. She
concludes that even for equity-oriented funds, investment is more in fixed income
securities rather than in equities, which is a distortion.
Sarkar and Majumdar (1995) evaluated financial performance of five closeended growth funds for the period February 1991 to August 1993, concluded that
the performance was below average in terms of alpha values (all negative and
statistically not significant) and funds possessed high risk. No reference was
provided about the timing parameters in their study.
Sahadevan and Raju (1996) focused on data presentation on expenses and other
related aspects, which are generally covered in annually reports of the mutual
funds without going into the details of financial performance evaluation of the
funds.
Gupta and Sehgal (1997) evaluated mutual fund performance over a four year
period, 1992-96. The sample consisted of 80 mutual fund schemes. They
concluded that mutual fund industry performed well during the period of study.
The performance was evaluated in terms of benchmark comparison, performance
86
from one period to the next and their risk-return characteristics.
Mishra (2001) evaluated performance over a period, April 1992 to December
1996. The sample size was 24 public sector sponsored mutual funds. The
performance was evaluated in terms of rate of return, Treynor, Sharpe and
Jensen’s measures of performance. The study also addressed beta’s instability
issues. The study concluded dismal performance of PSU mutual funds in India, in
general, during the period, 1992-96.
Singh and Meera (2001) in their book presented a framework for conducting
critical appraisal of mutual fund performance in the Indian context reviewed the
performance of Unit Trust of India (UTI), private and money market mutual
funds.
Narayan and Ravindran (2003) studied the performance of Indian Mutual Funds
in a bear market using relative performance index, risk-return analysis, Treynor’s
ratio, and measures of Sharpe, Jensen and Fama.
Sadhak (2003) in his book suggested several improvements in the strategic and
operational practices of mutual funds are suggested keeping in mind the
mechanisms used by fund managers in developed economies.
Sondhi (2004), studied the financial performance evaluation of equity oriented
mutual funds on the basis of type, size and ownership of mutual funds using the
measures of absolute rate of return, comparison with benchmarks (BSE100) and
the return on 364 days T-bills and risk adjusted performance measures (Sharpe,
Treynor, Jensen’s Alpha and Fama).
Riepe, James S., (1989)13 studied a comparison being done between the
consumer goods and mutual funds (a product) with their marketing procedure. In
this, some of the techniques used to market mutual funds are not so different from
those used in distributing consumer goods, have been explained. Stating that an
important difference between a mutual fund and a typical consumer product is that
the benefits accruing to the buyer are variable. The survey also compared
characteristics of customers who buy funds sold directly to investors with those
who buy from a salesperson. Concluded that, virtually all providers of goods and
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services want to deliver good quality. Mutual fund managers are no different.
Tapan K Panda & Nalini Prana Tripathy (2000)30 conducted a study with
reference to customer orientation involvement in designing mutual funds products.
Prioritization, preference building and close monitoring of mutual funds are
essentials for fund managers to make this the strongest and most preferred
instrument in Indian Capital Market for the coming years. Putting emphasis over
the involvement of small investors, they are providing cheque facility on money
market mutual funds to make them more exciting and quilt funds for the risk
averse
Jaspal Singh and Subhash Chander (2002)36 an attempt has been made to read
the back of the mind of general investor as regards their expectations from mutual
funds, taking into considerations their age group and the occupation they are in.
Therefore, the need of the hour is to know what characteristics mutual funds
should possess as expected by general investors. The characteristics like past
record of the organization, repurchase of the units by the funds, easy
transferability and return provided on investments by the fund has been rated an
important because the money earned and saved is too precious and the investors
do not want to compromise as regard to safety of their invested money along with
receiving reasonably good returns over it. Active investors were taken into
consideration and questionnaires were distributed/mailed to 400 investors in major
cities of Punjab, Delhi and Mumbai, 273 responses were of business category
which has given maximum weight age to the option of “repurchase of the units”
by the fund followed by “easy transferability” option. Respondents in the salaries
category gives highest importance to the return provided on investment by the
fund to be the best criteria of performance appraisal of a fund.
Kainth, singh Gursharan and Kaur Manpinder (2009)76 in this article an
attempt towards the perception of investors in jalandhar city has been undertaken
to examine the confidence level of the investors in mutual funds. Analysis of
micro factors influencing mutual funds reveals that one-third (highest) of the
investors depends upon the recommendation of their friends and relatives, macro
factors safety of investment is the major factor (27%) which influence their
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investment. Results concluded that awareness of the industry is the major factor
for pushing the growth of industry.
The literature review revealed that performance measures of mutual funds include
rate of return, benchmark comparison, risk-adjusted returns (Treynor and Sharpe’s
indices), ‘stock selectivity’ abilities and ‘market timing’ skills of the fund
managers.
Post August 2010 with SEBI’s much-hyped entry load waiver for direct mutual
fund (MF) applications seems to be having some positive impact, as investors are
cashing in on the load-free route to apply for MFs however there have been
downfall in the distribution business as the earnings of IFA's have been drastically
impacted.
According to a survey done by IIMS Dataworks on mutual fund retail sales and
distribution practices, 33 per cent of independent financial advisors (IFAs) have
admitted to a significant impact of the zero load on their business volumes.
An interesting finding of the survey is that individual agents are planning to form
a ‘chain’ sales channel. A chain channel means organising themselves into a
‘union’ of sorts to increase their bargaining power with asset management
companies (AMCs). More than 80 agents in super metros see their future in the
chain sales channel.
The IFA survey also shows that expensive brand and product advertising by
companies is having some impact, but not to the extent of growing MF customer
base to mass market size. The asset management firms need to come together to
devise strategies to educate both existing and potential investors.
IFAs, in the survey, report that most of their new customers are referred by their
existing MF investors. In other words, most new customers are acquired by
existing customers ‘talking up’ the market.
Rough weather in markets and high inflation have resulted in a slowdown of
business for many IFAs. Consequently, the IFA community is under some stress
and is willing to consider adjusting traditional business practices, according to the
survey. An indicator of this is that many financial advisors are now willing to
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consider educed financial incentives.
The data clarifies that preferential sales issue for IFAs selling both mutual funds
and life insurance products is reasonably benign as IFAs overwhelmingly report
that mutual funds are easier to sell than the most popular insurance product at the
moment (ULIPs) for various reasons.
The reasons for the claim, investors say, are because mutual fund returns are more
attractive. The fact that MF investments do not involve investment lock-in and a
long-term premium commitment makes the product more investor-friendly, the
survey says.
The independent financial advisors (IFAs) are in favour of regulations if it raises
the standards of financial advisory business. According to Cafemutual.com study,
95% of the independent financial advisors (IFAs) are okay with being regulated as
long as it increases the standards of business.
IFAs, who are essentially MF distributors, felt a regulatory body for distributors
will create a better business environment in the form of clear rules and
regulations. Around 373 IFAs participated in this survey which was conducted
across the country.
Currently, while there is a code of conduct for intermediaries (distributors), there
aren't any clearly defined guidelines to regulate the distributors. Cafemutual
founder & CEO Prem Khatri said, “It is surprising to witness that, such large
number of IFAs are in favour of regulation and 38% of the IFAs preferred Amfi
and another 27% Sebi as their regulator of choice.”
Other highlights of the survey were that while 70%. of the IFAs felt that mutual
fund houses has not been supportive post-ban on entry load, only 26% of the IFAs
said that new SEBI chairman would reverse the decision on entry load. “The
transition of fee-based model is gaining momentum and over 42% of IFAs are
now charging fees from their clients which stood at over 25% in our July survey,”
Khatri added.
Interestingly, 57% of the IFAs said commission structure was 'very influential' in
pushing the products, while remaining 43% felt that commission did 'influence'
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distributor push. Ever since (since August 2009 )the entry load was banned by the
market regulator, SEBI, many fund houses have been giving high upfront
commissions from their own pockets to push equity products. The survey finds
that, clients prefer equity funds against debt funds as only 4% of IFAs found high
acceptance among their clients for debt funds. “Fund industry needs to do more to
ensure that debt funds get a rightful share in client portfolio at the retail level,”
added Khatri. Interestingly, 47% of IFAs found their career rewarding and
satisfying while 16% thought it to be a hopeless career.
Many IFAs had actually gone inactive or quit the profession post ban on entry
load. There are close to 1 lakh IFAs in the country today.
The first major Indian equity market survey post the market meltdown of 2008
was being released by MCX Stock Exchange (MCX-SX), India’s new stock
exchange, for the benefit of all participants in the Indian market. ‘Indian Equity
Investors Survey 2010’, is a survey of Retail and Institutional investors. It is the
fourth major nationwide exercise of this nature and the first such effort by a stock
exchange in India , which was conducted by The Nielsen Company
The Survey polled 1,207 current and potential retail investors from 12 cities
across all geographic zones and levels of development, ages and occupation; 60
Corporates, including Banks and Financial Institutions, from the 4 metros and 120
SMEs from clusters in 12 cities throughout India.
This Survey identifies tremendous opportunities in the Indian equity market as of
today.

An opportunity for greater penetration is highlighted by the fact that across the
country, even though about 1.5% of the population invests directly in the
markets, only 18% of those surveyed of the urban, informed segment, invested
directly in equities. Housewives (7%) offer the greatest opportunity, followed
by Students (9%), Defence Personnel (18%), Self-employed (20%), Salaried
(21%) and Businessmen (27%).

The opportunity for increasing market reach is seen through the fact that 50%
of those surveyed were never approached by brokers or investment advisors.
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
There is also a great opportunity to impart financial knowledge. Retail
investors (94%) have shown a strong willingness to participate in financial
training programmes were they to be offered in their vicinity.

An overwhelming majority (80%) of retail respondents believed the stock
market industry would benefit from competition. This is supported across
zones, with 86% of the West, 82% of the East, 79% of the North and 72% of
the South holding this opinion.

Over half (57%) of the retail respondents feel more competition in Exchanges
will lead to a lower cost of participation in the markets. A great majority
(68%) of retail respondents perceive that more competition in exchanges will
lead to investors receiving better services.

Trading through Mobile Phones present another great opportunity. A clear
majority (56%) of retail investors across the country see Mobile Phones as the
preferred channel that will likely enable them to participate in the equity
market. This is especially so in the West zone (83%).
It’s an established proposition that ‘Trust forms the core of financial services
marketing. It has been of paramount importance in a country like ours where
financial literacy is almost non existent.
In a recent survey (2007) conducted by IIEF, some startling findings have been
noticed. Question was asked whether it is possible to get unbiased advice on
financial matters.
Fig 2.1
Response
Urban
Rural
Total
Yes
36440427
66150713
102591140
No
57960984
160825424 218786408
Total
94401411
226976137 321377548
Investor's Response conducted by IIEF
Majority of urban as well as rural respondents in the survey felt that it is not
possible to get unbiased advice on financial matters.
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Seeing the complexity of financial services
a Consultation Paper was published
“Minimum Common Standard for financial Advisor & Education “ India needs a
coordinated approach to address the twin issues of investor protection and
financial education. The research undertaken by this report shows that education
and order in the adviser marketplace are two sides of the same coin. Additionally,
there are global best practices that collapse these two goals into one executive
organisation.
Regulators can be seen in the same way as parents who negotiate teenagers at
home. There are those that over-prescribe, who get into every little market crevice
and in every transaction of market participants. There are those that lay out the
broad desirable outcomes and then step aside to let market forces take over—but
are always present in the background with their policing and supervisory staff
patrolling the markets. This translates into two broad thoughts behind regulation.
Rule-Based Regulation
Rule-based regulation is where the regulator tries to be present in each and every
transaction that takes place, through an extensive rulebook, tight policing and
penal system. The regulator tries to anticipate every possibility, every change,
every innovation in the market, and then writes rules around it.
Principle-Based Regulation
Principle-based regulation is where the regulator is more focused on the outcome
of the regulation. The regulator will articulate broad principles and allow market
players to innovate around them, keeping the outcome (as defined in the
principles) sacrosanct.
This approach does not totally do away with the need for rules. There will still be
rules to follow in any regulatory system, but it does eliminate the practice of
compliance officers using the ‘checklist’ approach to staying within the letter of
the law. Checklist compliance harms customers, as there may be no case of
regulatory violation, yet there may be mis-selling and malpractice. In such an
environment, compliance officers are not working towards a desired outcome for
the customer, but to outwit regulators. Once a regulatory loophole is discovered, it
becomes a race to the bottom, with the rest of the industry following.
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Using Financial Incentives As A Regulator
There is a third way to look at regulation. Where the market incentive structure is
used to take most of the reasons behind misconduct out of the market and then use
a principle based approach to target an outcome. The challenge is to find the holy
grail of regulation that allows for market innovation, while taking away the
incentive and power that the adviser has over the customer due to a skewed
incentive structure and knowledge. One of the tools for such regulation is to use
financial incentives in a manner that nudge participants into doing the right thing.
The commission and reward system today makes the adviser the agent of the
financial products manufacturer, but his compensation comes from the customer.
This must change for the adviser to look after the consumer of financial products.
The consumer, too, will have to learn to pay directly.
Market review, opinions, views, the survey and global best practices all point to
the fact that India is ready for a statutory body to bring all financial advisers under
a common minimum standard of regulation. The rule-based entry thresholds and
documentation already in the market, and the industry practices around them,
point to ‘checklist’ compliance by product manufacturers and distributors; only in
some cases is there evidence of a real effort to reach out to the customer with
material facts. This report leans towards a principle-based approach, while
flagging the issue that to translate principles into rules that work would be a huge
challenge in a market as vast and diverse as India.
This report proposes the use of market incentives as the base on which principlebased regulations will be used to ensure a common minimum standard of rules
and regulations for the financial adviser.
Who Will Be Regulated?
The Indian investor is served by agents, banks, post offices, financial planners
and, now, through the employer and retail chains as well. The common minimum
standard should apply to any person who sells financial products, provides advice,
or directly or indirectly profits from recommending and selling retail financial
products. This will include individual agents selling mutual funds and insurance,
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financial advisers, financial planners, bank employees, direct selling agents from
banks who sell banking and credit products like fixed deposits, credit cards, home
loans and car loans. Most of these currently do not display signs of ‘mis-selling’.
But they do come under the scope of over-the-counter retail finance products and
are included for work, if needed, at a future date. Today, the pressing need in the
market is a regulatory structure for mutual fund, insurance and pension sellers and
advisers. The report will focus on advisers in these three product categories. The
report proposes a common minimum standard for all sellers of mutual funds,
insurance products (life and general) and pensions products.
The Roadmap
The Committee suggests adopting an SRO-driven regulatory system for financial
advisers. The SRO will be a statutory body with punitive powers over its
members31.
Insurance policies need to remove the bias towards selling the policy with the
highest commission. Because there are almost three million small agents who will
have to adjust to a new way of earning money, it is suggested that immediately the
upfront commissions embedded in the premium paid be cut to no more than 15 per
cent of the premium. This should fall to 7 per cent in 2010 and become nil by
April 2011. The interim period should be used by insurance companies to help
their agents make the transition to a more mature way of selling and advising.
The Outcomes
The overarching outcome of the SRO arm of FINWEB should be financial health.
The outcome of financial health can be broken down into the outcomes of safety,
fairness and trust, which will have goals around education, conduct, disclosure,
reporting, punitive action and dispute redress.
Safety. Consumers should feel safe while dealing with, transacting and doing
business in the retail financial products and services market.
Fairness. Consumers should not feel cheated, but should get a sense of fair
treatment in their interactions and transactions.
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Trust. Consumers should feel confident, rather than cynical, about the redress
mechanism.
The outcomes above will be achieved by setting outcome goals in the following
six areas:
1. Education
2. Conduct
3. Disclosure
4. Reporting
5. Punitive action
6. Dispute redressal
1. Education. Outcome: Safety
There should be a common minimum entry barrier for all financial advisers. The
entry barrier should comprise a minimum knowledge-linked training programme,
which specifies a set of knowledge outcomes rather than number of hours of
study.
A person must clear a common examination pattern, with several modules, before
beginning selling financial products to retail consumers. The existing
examinations in mutual funds, insurance and others will continue as different
modules within the outcome-specific goals of FINWEB.
A new benchmark qualification should be introduced that will license an adviser
to operate in the market.
There should be a graded qualification matrix that will link more complicated
products to a higher level of education and testing. The nature of the license will
determine what products or what level of service an adviser can provide.
FINWEB should undertake a mass media campaign to ensure that consumers are
able to link the license with the service offered.
There should be a system of continuing education. The license should be renewed
every three years by clearing the refresher exam. This will be available for each
level of the qualification matrix.
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There should be a system of educating not just individual advisers, but also
employees working for a firm or bank that intermediates. Anybody facing the
customer must be a licensed entity. A corporate license is not enough—the entire
sales team will need to acquire the qualification.
2. Professional Conduct. Outcome: Safety
A trade becomes a profession when there is a development of formal
qualifications based on education and examination, and an emergence of a
regulatory body with the power to admit, discipline and admit members.
Intermediation currently is a low-value trade with little respect in society. The
conversion into a profession will need, apart from the education and examination
thresholds mentioned above, a code of conduct that ensures a minimum common
threshold of service expectation.
All advisers should be registered with FINWEB.
All members of FINWEB should be governed by a code of ethics that is standard
across products and organisations. Note will be taken of the structure put in place
by the RBI for its banking correspondents standards while formulating the code of
ethics.
The code of conduct should have principles of integrity, privacy and honesty as
key goals.
3. Disclosures. Outcome: Fairness
To remove the last shred of doubt about the intent of the adviser, which currently
is suspect, India needs a minimum common standard of disclosures. This must
address costs, risks, product features and realistic potential outcomes.

There should be a disclosure template developed by FINWEB that has
consumer understanding as an outcome.

The disclosure should reveal the income—direct or indirect—that an adviser
earns from the sale and maintenance of a product, both from consumers and
from product manufacturers.

The disclosure should reveal the total cost, current and ongoing, that will be
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borne by the consumer of the product.

The disclosure should give a realistic picture of the risk the product carries.

The disclosure should have third-party benchmarks in them to compare past
performance

The disclosure should ensure that consumers understand the role of the
product in their financial life.

The disclosure should ensure the product outcome is understood by
consumers.

A one-page note, with the most important terms and conditions, should be part
of the disclosure to ensure the customer understands the product and its impact
fully.

Product labelling should be used innovatively to inform consumers about what
they are buying.
4. Reporting. Outcome: Fairness
There is a mismatch today between what the adviser verbally tells the customer
and what the final product has the ability to achieve. Unless there is a paper trail
that affixes a name to advice and a product that has been sold, the practice of hitand-run financial products (where an adviser will hit a customer with a product
and disappear) will continue, eroding confidence in financial markets. The
reporting process must be such that:
1. The sales process should be documented.
2. A customer profiling should be put in place, as should a documentation of
the process that led to product selection.
3. The declaration should be counter-signed by the customer, acknowledging
the disclosures made by the adviser.
4. There should be a system of a paper or electronic trail to document the
adviser’s professional life and the business he writes.
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5. Punitive Action. Outcome: Trust
A key requirement of a trade transforming into a profession is the ability of a
consumer to get redress from the professional body that regulates the profession.
A well-defined system of affixing penalties in cases of mis-conduct, mis-selling or
otherwise causing a bad financial outcome must be put in place.
1. There should be a well-defined process to affix responsibility for a bad
outcome.
2. Punitive action will include fines that are related to the financial loss the
consumer has had to suffer.
3. For a serious breach of trust, the adviser or adviser firm will face loss of
license to do business.
4. For repeated and serious breaches of trust, criminal proceedings to be
initiated.
6. Dispute Redress. Outcome: Trust
An accessible system of dispute redress must be in place. Today, when customers
have a complaint, they go back to their agents, who are not accountable in any
manner. Most complaint systems today cost a person a lot of time in repeating the
complaint to six different call centre employees each time the phone is passed on
to the next person or when the consumer calls again. There must be a robust
system that makes it easy for consumers with a genuine complaint to file it, track
it and be able to explain why and how they feel cheated.
1. Consumers should have a common interface to complain about financial
products, service and outcomes.
2. A time-bound redress system should be put in place.
FINWEB: The Financial Literacy Cell
Transforming India’s financially challenged millions into an informed consumer
base is no easy task. There is no immediate solution. Further, any solution will not
be easy to conceptualize or implement. The newness of the subject and the lack of
empirical evidence on what will work make the task that much more challenging.
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The good part is that there is a broad agreement on the need for a nodal national
agency to be at the heart of the Indian national financial literacy initiative. What it
should be like, what work it should do and not do, how it will reach the millions
across the length and breadth of the country is the subject matter of the following
recommendations.

FINWEB should be the heart of all financial literacy initiatives in the
country. It is from the knowledge and expertise of FINWEB that willing
agencies active in the field of financial literacy should draw material,
conceptual knowledge, expert trainer and testing.

FINWEB will engage key professionals in various steering groups to drive
specific financial education programmes in identified areas of intervention.

FINWEB will not prevent any financial literacy initiative from carrying on
its work in its chosen area of interest and work. Its aim is to be a
knowledge and resource partner; not a regulator of financial literacy, but a
standards setting body

The aim of FINWEB is not to educate people to choose between mutual
fund A and mutual fund B. That is the work of the financial adviser. The
aim is not to substitute financial education for effective adviser and
product regulation. The goal of FINWEB would be to enable individuals,
at their level of need, to understand the role of money in their life, the need
and use of savings, the various options available in the market they can
access to convert their savings into investments, and a realistic recognition
of the attributes of these options. FINWEB would consider its work well
done if the financially literate person knows enough to be able to ask the
right questions of the person selling financial products.

This report recommends an alternate approach to financial education
in India. The content plan should focus on utility and concept-based
learning. The key question to be asked before developing any material or
conducting any training will be: how will this connect with the desired
audience and of what use is it in a person’s financial life in a practical
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way? While definitions and descriptions are important, they come as an
aside.
Utility-based learning. A group of health workers were trying to get women of a
remote village in India to understand age-weight benchmarks for children. The
idea was to encourage them to feed kids who were below the benchmarks better.
The NGO workers plotted the ideal age-weight line in the mud in the village
square. For age three, the ideal weight is this; at age four, it should be this much;
and so on. Next, they plotted the names of the kids by age and weight, above or
below the line. Everyone could see whose kids were under-nourished and whose
kids were nourished fine. The mothers of the under-nourished kids asked mothers
of the kids who were fine what they were feeding their kids, and begin doing the
same. No structured class could have achieved such an outcome, in such little
time.
FINWEB should use a utility-based approach to develop content and training
programmes. These should explain the lifecycle of money in a person’s life, with
earning, spending, budgeting, insurance, saving, investing and credit as key areas
of work. Asset classes, markets, products will fit into the utility-based paradigm,
rather than being taught separately.
Concept-based learning. Finance rests on concepts. These concepts can be seen as
alphabets. Once understood, they can be strung together to simply sign a name or
write books. Every part of the market—banking, insurance, capital market,
loans—uses certain finance concepts in product construction. A regular
investment-saving product will use the concepts of present value, future value and
rate of return. A life insurance product will use concepts of mortality—probability
of people dying at a certain age. A mutual fund will use the concept of risk and
reward. While these sound complex, their usage is not.
Distribution
Distribution is the game-changer for a corporation. A company can have the best
product, but unless it populates the market, it will remain in the warehouse. But
distribution chains are expensive to create, especially in a country as vast as India.
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Rather than create a network of arteries that will carry the oxygen of financial
empowerment across the length and breadth of India, it will be cheaper and more
effective to embed the existing networks with customised content and training.
FINWEB will not create an army of financial literacy staff. Rather, it will work
with a small core team of content developers and trainers, who will then partner
willing institutions, groups, organisations, NGOs and micro-finance companies.
The idea is to first empower the nodal agency’s staff with financial education.
Once the recipients understand and use the concepts in their own financial life,
they can pass on the training much better than some theoretical recitation of facts.
Disparities along regional, cultural, religious, gender, social, economic and
political lines would have already been resolved by the existing pipelines.
FINWEB will need to be nimble to be able to customise training and content to
suit specific pipeline needs.

Financial literacy modules and training should be embedded in existing
pipelines (the pipelines are described below).

A core group of financial sector and education professionals will work
with FINWEB to develop the content.

A core group of trainers, who would work with the content developers,
will be part of the staff of FINWEB. This group of trainers will be used to
train the trainers.

FINWEB will attempt to involve the following pipelines to reach target
audiences:
Existing Efforts. FINWEB will offer its expertise to existing financial education
efforts that are already on the ground with projects running and use their expertise
in fine-tuning its own work.
FINWEB will have an outcome-specific role. Any intervention by FINWEB will
result in a basic skill set getting created.
The content and training modules will have efficacy parameters as part of the
programme.
FINWEB will develop a website that will become the clearinghouse for all
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financial education efforts. The material developed by FINWEB will be put on the
website for downloading by anybody who wants to use it. It may encourage
smaller organisations to use it by moulding it to their own needs.
FINWEB will leave cost- and organisation-intensive areas like one-on-one
counseling and consumer help lines for Phase-II of implementation.
FINWEB will operate in three distinct ways. One it will begin engaging with
those who are already doing work. Two, it will reach out to large arteries who
could carry this. Three, it will be available as a resource house for any other
organisation that may want customization for its specific purpose.
Measuring it
It is essential to measure each intervention. It is probably only pure research that
can have non measurable results of years of work. A system where public money
will be used must have accountability and an outcome-linked mandate.
To measure the change in behaviour, FINWEB will carry out a nationwide survey
to fix benchmarks of current behaviour. Only then will subsequent surveys
determine efficacy.
FINWEB will have an outcome-specific role. Any intervention by FINWEB will
result in a basic skill set getting created. Each intervention will be tested with a
view to measuring efficacy.
SEBI taking the view point has published paper CONCEPT PAPER ON
REGULATION OF INVESTMENT ADVISORS and important points in it are
Tackling Conflict of Interest in Distribution of Financial Products
1) It is axiomatic that any industry, in order to achieve scale and high
productivity, must be free of internal contradictions and conflicts of interest.
Financial sector is no exception. The financial product distribution space is
particularly fraught with these conflicts between the manufacturers of
financial products like banks, mutual funds, and insurance companies, etc. and
the distributors which sell these products who call themselves by various
names like agents, financial advisors, financial planners, etc.
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2) It is necessary to resolve or at least mitigate these conflicts, especially in the
case of financial products because of their two peculiar characteristics. Firstly,
the products are intangible and conceptually more difficult to understand.
Secondly, the pay‐offs are in a distant future and can be camouflaged by
several factors external to the product. It is in this context that the distributors
occupy a key role; all the more so considering the low levels of financial
literacy and awareness in India.
3) Two major conflicts of interest in the financial product distribution space are
the following:
a. Dual role played by distributors as an agent of investors as well as of the
manufacturers. This is due to the fact that with respect to many financial
products, agents receive their payments from two sources: commissions
from the manufacturers (either directly or through deductions from the
investment amount of investors), and advisory fees or other charges
received from the investors. This immediately raises the question: whose
interests do they represent: the manufacturers’ or the investors’? This
question has also been raised in the Devendra Swaroop Committee report
on ‘Minimum Common Standards for Financial Advisors and Financial
Education’. This prevalence of divided loyalties may not be in the best
interest of all the stakeholders concerned. It often results in a situation
where the distributors are loyal to only themselves. They would happily
churn investors’ portfolio and also squeeze more commission from the
manufacturer.
b. A situation might arise where distributors are likely to be partial to, and
would sell more products of the manufacturer who is the best paymaster;
and ultimately, other manufacturers would scramble to do the same, thus
leading to a race to the bottom. Thus, there is an inherent conflict in the
activities of an agent/distributor distributing similar products of various
manufacturers.
4) There could be many possible solutions to these issues ‐ the most obvious and
the easiest being enhanced disclosures. However, in a country like India where
104
levels of literacy are low and financial literacy even lower, disclosures have a
limited effect.
5) The Financial Services Authority, UK, had outlined plans to ban commission
payments for product providers and enforce financial advisors to agree on fee
payments with clients upfront. It defined two categories of service:
independent and restricted, on the basis of which advisors would charge the
fee. Examples of restricted advice may be where advisors offer advice only
about the products of a particular manufacturer; or about the products from a
defined list of manufacturers. Independent advice would include unrestricted
advice based on a comprehensive and fair analysis of the relevant market.
However, there is a kind of restricted advice called ‘basic advice’. With Basic
Advice, the consumer is asked some pre‐scripted questions about their income,
savings and other circumstances to identify the consumer’s financial priorities
and suitability for a stakeholder product, but a full assessment of their needs is
not conducted nor is advice offered on whether a non‐stakeholder product may
be more suitable. ‘Basic advice’ is excluded from the new rules i.e. in case of
basic advice, commissions can be paid and the new advisor charging rules are
not applicable to the same. Also, non advised or execution only sales would be
remunerated only by commission and would not fall within the ambit of the
advisor charging rules.
6) SEBI, with effect from August 01, 2009, had banned entry loads in
mutual fund investments and had mandated that the upfront commission
should be paid directly by the investors to the distributors based on factors like
assessment of the service of the distributor. However, the distributor continued
to earn trail commissions from the Asset Management Company at the same
time. Thus, the first conflict of interest was only partially mitigated in this
model.
7) In this paper, SEBI has attempted to deal with only the first type of conflict of
interest. The possible model for tackling this conflict of interests may be the
following:
a. The person who interfaces with the customer should declare upfront
105
whether he is a financial advisor or an agent of the manufacturer.
b. If he is an advisor, he would be subject to the Investment Advisors
Regulations; and would require a much higher level of qualifications. He
would act as an advisor to the investor on all financial products. He would
receive all payments from the investor and there would be no limits set on
these payments. On the other hand, there will be agents who will be
associated with the manufacturer and would receive their remuneration
from them. However, they will be prevented from styling themselves as
financial advisors and will have to call themselves as agents only.
Structure of Proposed Regulations
The proposed regulatory framework intends to regulate the activity of providing
investment advisory services in various forms by a wide range of entities
including independent financial advisors, banks, distributors, fund managers etc.
The investment advice may be provided for investments in various financial
products including but not limited to securities, insurance products, pension funds,
etc. While the activity of giving investment advice will be regulated under the
proposed framework through an SRO, issues relating to financial products other
than securities shall come under the jurisdiction of the respective sectoral
regulators such as action for mis‐selling, violation of code of conduct, conflict of
interest etc. The SRO set up for the regulation of Investment Advisors shall follow
the rules/regulations laid down by respective regulators for products falling in
their jurisdiction, including but not limited to suitability and appropriateness of the
products.
1) The SRO formed to regulate investment advisors will be registered under the
SEBI (Self Regulatory Organization) Regulations, 2004. SRO will have
sufficient resources to perform its functions. Its duties would include
registering and setting minimum professional standards, including certification
of investment advisors, laying down rules and regulations and enforcing those;
informing and educating the investing public; Setting up and administering a
disputes resolution forum for investors and registered entities etc. Persons
desirous of registration as Investment Advisors shall obtain registration with
106
the SRO established for the purpose. The SRO will be entitled to charge a fee
for granting registration and an annual fee.
2) Complaints / disputes arising out of investment advisory services will be taken
up by the SRO with the respective regulatory authority, while the complaints
regarding the financial products and their manufacturers will be handled by
the respective regulators.
3) Investment Advisors tend to call themselves by varied names viz. wealth
managers, private bankers etc. This causes much confusion as to their role and
responsibility. Hence the regulations will provide that no person can carry on
the activity of offering investment advice unless he is registered as an
Investment Advisor under the regulations. On the other hand any person who
has obtained the certificate of registration as an Investment Advisor must
necessarily use the word “investment advisor” in his name.
Obligations of an Investment Advisor
1 Fiduciary Responsibility to Investors
All information received and provided by the investment advisor would be in
fiduciary capacity. The investment advisor will be responsible to maintain
confidentiality of the investment advice provided to the client and information
provided by the client. Advice should be given by the advisor in the best interest
of the investor.
2 Suitability and Risk Profiling
The Investment Advisors or their representatives would be required to do adequate
risk profiling of the client before any investment service is provided to them.
Based upon the risk profiling performed by the investment advisor or their
representative suitable investment advice should be provided. The records of such
risk profiling and investment advice should be maintained by the Investment
Advisor.
107
3 Advertising and Marketing Material
Investment Advisors should not use any advertisement that contains any untrue
statement of material fact or that is otherwise misleading. They should not use or
refer to testimonials (which include any statement of a client’s experience or
endorsement).
Refer to past, specific recommendations made by the advisor that were profitable,
unless the advertisement sets out a list of all recommendations made by the
advisor within the preceding period of not less than one year and complies with
other specified conditions.
4 Conflict of Interest
No financial incentives/ consideration would be received from any person other
than investors seeking advice. In case of advice regarding investment in entities
related to the investment advisor, adequate disclosures shall be made to investor
regarding the relationship.
5 Maintaining Records
Records in support of every investment recommendation /transaction made which
indicates the data, facts and opinion leading to that investment decision would be
maintained by the Investment Advisor. Records should be retained for at least 5
years. Systematic record of all advises provided would be kept including audio
recording of any oral advice given.
6)Fees and Charges
The Investment Advisor would clearly indicate to its clients the fees and charges
that are required to be paid by them. An investment advisor shall disclose to a
prospective clients all material information about itself, its businesses, its
disciplinary history, the terms and conditions on which it offers advisory services,
its affiliations with other intermediaries and such other information as is necessary
him to take an informed decision whether to avail of its services.
108
7) Execution Services
Investment advisors shall not accept funds / securities from investors, except the
fee for investment advice. If Non‐individual investment advisors (corporate
entities) offer assistance in execution services such as broking, custody services,
DP services, accounting etc., they must make appropriate disclosures, clarify that
the investor is under no obligation to use their services and maintain arms length
relationship through creation of Chinese walls. The choice of opting for execution
services offered by investment advisor should be left to the investors. Fees and
charges paid to service providers should be paid directly to them and not through
investment advisors.
8). Outsourcing
Other than sourcing of research reports, no other part of investment advisory
activity can be outsourced.
9). Liability
The investment advisors shall not be liable for civil or criminal liability in respect
of advice given unless the advice is negligent or mala‐fide in nature. Any dispute
between the investment advisor and his client would be resolved through
grievance redressal mechanism or arbitration created by SEBI
It is thus evident from the above studies and research that there is lot of literature
available on investor behaviour at various phases and in various geographies.
Besides there have been studies done on performance of mutual funds and
schemes. Regulator and various bodies are also trying to find various business
models for survival in financial distribution business. Similarly this research also
tries to find the behaviour of investor in one of the most turmoil error in share
market with also lot of regulatory changes happening in business
109
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-------:0:-------
FUNDAMENTALS OF MARKETING OF MUTUAL
FUNDS IN INDIA
The marketing of financial services such as mutual fund is a unique and highly
specialized branch of marketing. The practice of advertising, promoting, and
selling mutual fund product and services is in many ways far more complex than
the selling of consumer packaged goods, automobiles, electronics, or other forms
of goods or services. The environment in which mutual fund are marketed is
becoming more competitive, making the task of marketing mutual fund services
increasingly challenging and specialized. Mutual Fund marketers are challenged
every day by the unique characteristics of the products they market. For example,
often Mutual Fund or any financial service cannot be visually communicated in
advertisements as easily as consumer goods can. Furthermore, the relatively
unexciting nature of Mutual Fund makes the task of attracting consumer attention
and inspiring consumer desire a difficult one. However, the study of financial
services marketing is in many ways far more fascinating than other areas of
marketing. There are many predictable behaviors that consumers often exhibit in
their dealings with financial services providers. The predictability of these
behaviors and the abundance of data on existing and potential customers enable a
uniquely scientific approach to developing and executing successful strategies for
the marketing of mutual fund , much more so than in other markets.
Characteristics of Financial Services Products
The characteristics of Services viz ,intangibility, inseparability, heterogeneity and
perish ability are all present in Financial Services . Financial Services display an
additional features which affects the marketing process namely the fiduciary
responsibility .It refers to the implicit responsibility which financial services
organization have in respect of management of funds and the financial advice they
render to their customers
NEED OF MARKETING PRACTICES
Due to rapid advances in technology within the last 30 years, the financial services
115
sector has moved from “face-to-face” selling to direct marketing of products and
services in the form of phone, mail or computer transactions. There has been
awareness within the industry that certain consumers are receptive to this newer
way of marketing financial services, while other prefers personal interactions
Although, now a days marketing has become a means of communication that
engages the audience with the brand. It’s an original and unique advertising
approach that immerses the customer with the brand and its even lets the customer
reshape and market it in his own unique way.
“Mutual Fund Investments are subject to market-risk. Please read the offer
document carefully before investing”.
The above quoted statement state a part of marketing through the fund company,
which specifically states on the mind of investors who in real want to get averse of
risk.
Each and every Investor before investing in mutual fund just takes into
consideration; risk, return, profit margin, market timings, and market ups and
downs. Can every aspect of investing be known by the investor itself? It’s not
possible. So for the benefit of the investors various measures or practices are opt
by the fund company so that its doubts regarding its investment can be cleared
out, and this all can be sorted out through various modes such as in advertisement
through Television, newspapers, Banners, pamphlets, Booklets, Seminars or
programs held.
So when investor buys a mutual fund unit he/she buys a part of the equity or debt
portfolio owned by the mutual fund. Investors are an owner of the particular
security to the extent of their contribution to the total corpus, which is represented
in terms of units credited to their account.
In other words investors are buying a part ownership of various companies and
when they buy a debt mutual fund it means they are buying a part right to title to
debt securities. So each company for showing his market share, goodwill in a
better condition, have to do marketing for the fund (products), so the need for its
marketing practices arises to have its existence in the market. If profit and sales
116
are given preferences and if Marketing practices are ignored it means one or the
somewhere the company lacks to have its growth in the market.
Some of the techniques used to market mutual funds are not so different from
those used in distributing consumer goods. Like other products, funds offer their
buyers the promise of future benefits. Unlike other products, the nature of the
benefits is less predictable. As a result, fund marketers must adapt their skills to fit
the demands of a dynamic investment environment. Basically the need of
marketing practices arises as with the time, because the marketers are just
crowded with new ideas, marketing executives are forgetting the basics of how to
separate their brand from the competition. “What marketing folks need to look for
is that simple, obvious strategy and not get bogged down in the complexities” says
Trout.
The communication, the major factor being surrounded known a days and as well
as before if considered the 50 per cent of the work itself is done through the
marketing executives.
Any company that disseminate information through different channels needs to be
concerned with integrating them so that the customer receives unified messages
and promises about its offerings. Service companies must add to the traditional
communications or promotion mix a concern about the ways that customers
receive information about services through interactive marketing, marketing
between employees and customers. Figure 3.1 shows enhanced version of
marketing triangle demonstrating that the customer services is the target of two
types of marketing communication. First, external marketing communication
extends from the company to the customer and includes such traditional
communication channels as advertising, sales promotion, and public relations.
Second, interactive marketing communication involves the messages that
employees give to customers through such channels as personal selling, customer
service interactions, service encounter interactions and services capes. Third side
of triangle reflects internal marketing which states that communication must be
managed so that communications from the company to employees are accurate,
complete and consistent with what the customer is hearing or seeing.
117
Service cape (Elements of physical Evidence/facility as well as other forms of
tangible communication. Exterior attributes (such as signage, parking and the
landscape).Interior attributes (design, layout, equipment and decor).
Fig 3.1
So the need of marketing practices doesn’t starts and ends when your product is
purchased by the customer but its need must be enhanced with the changing
environment and according to the changing needs to the customer.
Challenges in marketing of mutual Fund
There is mounting evidence that suggests the environment in which financial
services are marketed is becoming more complex and challenging with Industry
Consolidation, New Entrants , Fragmenting Consumer Base and more importantly
building Investor Trust especially in the adverse equity market conditions
Marketing Mix in Mutual Fund
Product
Product Innovation in Mutual Fund:
Mutual Funds are a vehicle for retail and institutional investors to benefit from the
capital markets. They offer different kinds of schemes to cater to various types of
investors, retail, companies and institutions. Mutual fund schemes are offered to
118
investors for the first time through a New Fund Offering (NFO). Thereafter, closeended schemes stop receiving money from investors, though these can be bought
on the stock exchange(s) where they are listed. Open-ended schemes sell and repurchase their units on an ongoing basis. AMC's have come up with various
innovations in Mutual Fund schemes to make the schemes more attractive and
also less risk averse for investor's
Many managers are now taking interest in designing mutual fund products with
multi feature options for investors. Customers are often benefited from the
improvements that are offered by new features, for example by enhanced quality
products [Garvin (1984)]. These additions of features also offer advantages to
others in the value chain.
For the mutual fund agents new features provide new sales arguments in seller
buyer interaction. New features do not only infuse single products but also entire
product categories periodically with new lease of life [Broadbent (1980), Dowdy
W.L. (1986)].
Based on the literature [Kotler (2000), Nicholas, (1992), Sen. (1996), Starr(1992)]
a product feature is defined as each identifiable aspect of the total offering that a
critical reference group perceives and evaluates as an “extra” to a known standard
among comparable products. The success of a mutual fund and its capacity largely
depends on its ability to mobilize funds.
Features of Mutual Fund Schemes for Investment
a) SIP(Systematic Investment Plan
A Systematic Investment Plan (SIP) is a vehicle offered by mutual funds to help
you save regularly. It is just like a recurring deposit with the post office or bank
where you put in a small amount every month. The difference here is that the
amount is invested in a mutual fund. The minimum amount to be invested can be
as small as 100 and the frequency of investment is usually monthly or quarterly.
An SIP allows you to take part in the stock market without trying to second-guess
its movements. It is also known as Rupee Cost Averaging.
119
An SIP means investor commit itself to investing a fixed amount every month.
Let's say it is 1,000.
When the Market price of shares fall, the investor benefits by purchasing more
units; and is protected by purchasing less when the price rises. Thus the average
cost of units is always closer to the lower end
Fig 3.2 : Illustration : Systematic Transfer Plan
Date
01/01/12
02/01/12
03/01/12
04/01/12
05/01/12
06/01/12
NAV
10
10.5
11
9.5
9
11.5
Approx number of units
you will get at Rs 1000
100
95.23
90.9
105.26
111.11
86.95
As observed from the above table as and when NAV of scheme falls more Units
are accumulated and similarly when the NAV of scheme increases Investor buys
lesser units which in a way reduces the average cost of holding.
This is the benefit of disciplined investing. Many a times it is seen that in bear
markets, when the NAVs are at their rock bottom, investor are gripped by panic
and either stop their SIPs or worse, sell their units at a loss. Due to the in-built
mechanism of SIP, investors average cost reduces
b) STP(Systematic Transfer Plan)
In SIP investor’s money moves out of his savings account into the scheme of his
choice. Let’s say an investor has decided to invest Rs 5,000 every month, such
that Rs. 1,000 gets invested on the 5th, 10th, 15th, 20th and 25th of the month.
This means that the Rs. 5000, which will get invested in stages till 25th will
remain in the savings account of the investor for 25 days and earn interest @
3.5%.
If the investor moves this amount of Rs. 5000 at the beginning of the month to a
Liquid Fund and transfers Rs. 1000 on the given dates to the scheme of his choice,
then not only will he get the benefit of SIP, but he will earn slightly higher interest
as well in the Liquid Funds as compared to a bank FD. As the money is being
120
invested in a Liquid Fund, the risk level associated is also minimal. Add to this the
fact that liquid funds do not have any entry/ exit loads. This is known as STP.
c) Systematic Withdrawal Plan
SWP stands for Systematic Withdrawal Plan. Here the investor invests a lumpsum
amount and withdraws some money regularly over a period of time. This results in
a steady income for the investor while at the same time his principal also gets
drawn down gradually.
Say for example an investor aged 60 years receives Rs. 20 lakh at retirement. If he
wants to use this money over a 20 year period, he can withdraw Rs. 20,00,000/ 20
= Rs. 1,00,000 per annum. This translates into Rs. 8,333 per month. (The investor
will also get return on his investment of Rs. 20 lakh, depending on where the
money has been invested by the mutual fund). In this example we have not
considered the effect of compounding. If that is considered, then he will be able to
either draw some more money every month, or he can get the same amount of Rs.
8,333 per month for a longer period of time.
d) Flexi STP
A Flex STP does not always involve a fixed amount, but the fixed amount will be
the minimum amount that will invested. The actual amount that will be transferred
to the target fund varies along with fluctuations in the market, the beauty of the
product is that when the NAV of the target fund falls the investment is accelerated
to take advantage, whereas when the market keeps moving up a minimum amount
is always invested so that one doesn’t miss taking advantage of further rises.
Lets take HDFC Flex STP as an example. Investor has an investment amount of
Rs.100,000/- that one would like to invest. A wise decision is not to invest this
amount into an equity fund as a lumpsum to protect yourself from price
fluctuations, but invest this into a Debt Fund and setup a STP to an equity fund.
Lets compare the performance of an STP and a Flex STP over a 6 months period.
Case 1:
Investor setup a normal STP that transfers rupees 5000/- every month from the
Debt Fund to an Equity Fund.
121
Fig 3.3 : Illustration Systematic Transfer Plan
Installment
STP
Target Fund NAV
Units Purchased
1
5000
10
500
2
5000
8
625
3
5000
12
416.67
4
5000
10
500
5
5000
8
625
6
5000
12
416.67
At the end of 6 months Total Units Purchased :3083.32 by investing a Total
Amount of Rs.30,000/- indicating an Average Purchase Price of 9.729
Case 2
Investor setup a Flex STP with Minimum STP Amount as 5000/-.
The STP amount for a month is calculated as the Maximum of (Min STP Amount,
Min STP Amount * Installment – Current Market Price of Existing Units in the
Target Fund). From the table below, the STP amount for the 2nd month would be
Maximum of (5000, 5000 * 2 – 4000) = 6000/-
Fig 3.4 : Illustration Flexi STP
Installment Min STP Total Units
(a)
amount (b)
(c)
1
2
3
4
5
6
5000
5000
5000
5000
5000
5000
0
500
1250
1666.67
2166.67
3124.92
Target
Fund
NAV(d)
10
8
12
10
8
12
CMP of
existing
Units (e)
=(c) * (d)
0
4000
15000
16666.67
17333.33
37499
STP
Units
Amount:Ma Purchased
x of (b,b*ae)
5000
500
6000
750
5000
416.67
5000
500
7666
958.25
5000
416.67
At the end of 6 months Total Units Purchased :3521.57 by investing a Total
Amount of Rs.33,666/- indicating an Average Purchase Price of 9.559
1.
The average buying price of a mutual fund unit over a period of time is
lower than one in the normal STP
2.
The monthly investment varies according to market movements
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Examples of Other Product Innovation in Mutual Funds
ICICI Prudential Target Returns Fund, an open-ended diversified equity fund,
takes care of this asset allocation by an automated trigger mechanism and target
based investment approach. It provides the investor with an asset allocation
rebalancing tool and keeps emotions like fear and greed out of the investment
process, by pre-defining targets.
Asset allocation is the key to investing success as it intends to help you to reduce
the volatility of returns. Investors have always found it difficult to implement the
right strategy and sometimes even got tempted by the prospect of a 'quick buck'.
In reality, if investors practice a disciplined approach towards asset allocation and
portfolio rebalancing, they are less likely to meet with disappointment.
Reliance Any Time Money Card Reliance Mutual Fund (“RMF”) offers
Reliance Any Time Money Card (“the card”), linked to mutual fund schemes
offering you instant access to your investments. The card will allow you to
withdraw / spend against your own mutual fund investments by providing you
access in Visa-enabled ATMs and merchant outlets across the world.
Key Features of Reliance Any Time Money Card
3.
The card offers you the benefit of Mutual Fund Investments along with the
convenience of debit cards
4.
Allows cash withdrawal and transaction in Point of Sales (PoS) terminals
in Visa-powered ATM / PoS terminals
5.
Allows Balance Enquiry in Visa-enabled ATMs
6.
Investor have the choice to withdraw from any scheme linked to the card
in HDFC Bank ATMs
7.
In non-HDFC Bank ATMs and PoS terminals, transaction will happen only
through Primary Account only (i.e Reliance Liquid Fund – Treasury Plan
or Reliance Money Manager Fund)
8.
The Card will offer instant liquidity up to a permissible limit as fixed /
determined by the Bank for ATM cash withdrawals or 50% of the balance
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in scheme account or Rs. 50,000 (whichever is lower) as set by RMF, per
day, from time-to-time
9.
Investor can spend up to 50% of the balance in the primary scheme
account or Rs. 100,000 per day (whichever is lower) at PoS terminals
Pricing or Charges of Scheme
This is one of the most important decisions in the marketing of mutual fund
Price serves multiple roles for the AMC as well as for the distributor who sell
these services. To the AMC, these charge represents the sole source of revenues.
Most activities that an organization undertakes represent costs and an outflow of
funds. When advertising, for example, one has to spend money purchasing
advertising space in a newspaper or media time on radio or TV. When employing
staff in a sales department salaries and benefits need to be paid. All of these
activities represent an outflow of funds, and the only way to recover these
expenditures is through revenues obtained by charges embedded in the schemes. It
is critical not only to appreciate the importance of price, but also to be certain that
one’s prices are at optimal levels. Pricing too low or too high can have detrimental
effects on profitability of financial services organizations. In the recent years the
regulator has also come up heavily on the charge structure of Mutual Fund and the
biggest detrimental factor for distributor has been abolishment of entry load in
mutual fund scheme which was primarily used as a upfront commission for
Distributor
Charging Expenses in Mutual Fund Scheme
The AMC is appointed as investment manager for the scheme. The scheme
accounts are to be maintained independent of the AMC’s own accounts. Both need
to appoint different auditors.
The AMC’s role goes beyond fund management to various day to day operations
like sales, accounting etc. In order to perform its role, the AMC establishes
offices, recruits employees, ensures the requisite data and systems support etc. The
related rent, salary, software and other establishment expenses, incidental to the
AMC performing its role, are to be borne by the AMC itself. The scheme pays an
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asset management fee to the AMC, out of which the AMC has to meet these
establishment expenses.
Thus, the asset management fee is an expense for the scheme (but not the rent,
salary etc.).
Similarly, the scheme incurs several other expenses such as:
•
Expenses for services provided by custodian, RTA, auditors and bankers
•
Fees to depository for demat arrangements, and stock exchanges for listing
•
Advertising and sales promotion expenses
•
Commissions for distributors
•
Printing offer documents, application forms etc.
•
Expenses for investor services, such as fund account statements, dividend
warrants, redemption cheques etc.
•
Service Tax SEBI has prescribed limits to such scheme expenses, which are of
a recurring nature, as follows:
Fig 3.5 : SEBI Prescribed Limit of Scheme Expenses
Net Assets (Rs crore)
Equity Scheme
Debt Schemes
Upto Rs. 100 crore
2.50%
2.25%
Next Rs. 300 crore
2.25%
2.00%
Next Rs. 300 crore
2.00%
1.75%
Excess over Rs. 700 crore
1.75%
1.50%
Source: SEBI
The above limits are subject to the following further restrictions:
•
The management fee component (paid to the AMC) cannot exceed 1.25% on
the first Rs. 100 crores of net assets of each scheme; on the remaining net
assets, the management fee cannot exceed 1%.
•
Debt schemes cannot charge a management fee on the funds that are parked in
short term deposits with commercial banks.
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•
The following expenses cannot be charged to the scheme:

Initial issue expenses

Establishment expenses, infrastructure costs, depreciation, fund
accounting expenses, software expenses, general administration and
investment management expenses (all of which are to be borne by the
AMC out of the management fee it earns)

Corporate advertising

Legal, marketing, printing and other expenses that do not relate to any
schemes.

Interest on delayed payments to unit-holders

Fines and penalties for violating any laws.
Given the nature of the schemes, lower expense limits are available in the
following cases:
•
Recurring expense limit is 1.5% for index funds and Exchange Traded Funds.
Within this, the management fee cannot exceed 0.75%
•
Recurring expense limit is 0.75% for fund of funds.
Besides that Scheme also has provision of exit load if it is redeem before certain
time. SEBI
has permitted the distributor to charge their own advisory fees
separately from their client ,post abolishment of entry load as it was felt by
regulator that the distributor was more eager to sell product which offered higher
commission irrespective of the need of that product by the investor. However
there has been no fixed fee based model which is in practice for the same .
Approaches in Pricing
The general approach to pricing can be visualized as a process of determining
where on a continuous line one chooses to set the price charged to customers. The
range of these possibilities is shown in Exhibit 4.1 as a spectrum of pricing
possibilities. At the one extreme, one could choose to freely provide services to
consumers by charging nothing (point A) or can be refered as Zero Pricing
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Zero Pricing
While such an approach may result in a significant growth in one’s customer base,
it is typically financially unwise, as it will result in loss of significant amounts of
profits. Such a pricing approach is only associated with short-term promotional
objectives in which new customer acquisition is the primary objective and the
distributor relying on whatever small incentive/gift received by AMC
Cost Based Pricing
Alternatively, one could choose to price a financial service below cost (point B) or
at cost (point C). These price points may also serve the general objective of new
customer acquisition, but may be catastrophic in the long-term due to their
harmful impact on profitability.
Relative Points in Pricing
A
B
C
D
E
Most distributor try to work on volume by charging very nominal fees and
capitalise on building their customer base and increasing their AUM which will
help them in getting a trail commission
This approach is often referred to as cost-based pricing . The thought process
behind cost-based pricing is to determine the costs of providing a given financial
service and to apply a specific markup typical of one’s line of business in order to
ensure that appropriate levels of profitability are generated from offering the
service.
Parity Pricing :
A distributor may choose market share as its primary objective. Therefore, the
relative position of one’s prices versus those of key competitors might become the
primary focus. To take away market share from a leading competitor, one may
have to price below or at comparable levels to the competitor’s price. This could
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represent areas between points C and E on the price spectrum and is often
associated with what is referred to as parity pricing. Parity pricing involves
choosing prices that
are anchored around competing prices in the marketplace.
Value Based Pricing :
Higher prices may be interpreted by consumers as reflecting higher levels of
quality in certain financial services, it is important to note that price points above
E on the price spectrum may also be quite acceptable to consumers. The price of a
financial service may also be guided by the desire to maximize profits. In order to
do so, one has to determine the maximum amount of value that the financial
service represents to its customers and to translate the associated value into a
rupee mount that can be charged as a premium. This approach is referred to as
value-based pricing and may represent any of the various points discussed earlier
on the price spectrum. In value-based pricing, one assumes that the customer
perceives a unique benefit in using one’s financial services or products. This
unique benefit not only helps differentiate one from competitors, but also justifies
charging prices that may possibly exceed that of the competition which is a
common pricing method followed by big broking house and banks where value to
the money is provided by providing complete financial planning and also other
financial advisory services
Regulatory Pricing
A final approach to pricing financial services is guided by regulatory constraints.
In this approach, regulators would determine the specific prices or determine
acceptable price ranges within which financial services providers would operate.
According to this pricing approach – regulation-based pricing – all financial
services providers have to respect regulators’ price requirements.
Broker Pricing
The pricing of services provided by brokers and investment houses for the sale of
financial products and securities can be customized at the individual customer
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level or set as a fixed price applicable to all customers. Often, prices are assessed
based on the unique needs of individual clients, the total amount of assets being
managed, and even at times negotiated on an individual basis. Brokers whose job
is to facilitate the trading of securities for customers have a multitude of
approaches available to them for earning income.
One approach is to charge trading fees for the purchase and sale of securities on
behalf of a client. Trading fees might be flat regardless of the dollar amount of
securities traded, or they may be based on a percentage of amounts traded. The
brokerage business is divided into two general categories called full-commission
brokers (FCBs) and discount brokers.
FCBs generally charge higher prices for their services, but also provide financial
advice and portfolio planning services to their clients. A full-commission broker
may charge clients based on a percentage of total assets managed, charge a fixed
yearly fee, or charge a fee which is a combination of the two. Discount brokers,
on the other hand, typically do not provide advisory services, and pass on the task
of determining an optimal portfolio of investments to the client. As a result, prices
charged by discount brokers are often significantly lower than those charged by
full-commission brokers, and discount brokers tend to rely more on securities
trading fees.
Extract of SEBI Guidelines for pricing of Mutual Fund Schemes
SEBI, vide its circular no. Cir/ IMD/ DF/13/ 2011 dated August 22, 2011 has
introduced regulations regarding Mutual Funds. Some of them, relating to Mutual
Fund distributors, are reproduced here for ease of reference.
1. Transaction Charges (TC) in respect of investments sourced by
Distributors:
1.
In respect of new investors i.e. first time ever investor in any Mutual Fund
(for subscription / SIP only), a Fund House is allowed to pay Rs. 150/- as
TC only where the transaction / SIP commitment value is Rs. 10000/- and
above.
2.
Where such a transaction is from an existing investor, the corresponding
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TC will be Rs. 100/-.
3.
In respect of systematic investments (SIP only), a TC of Rs. 100/- is
payable in 4 equal installments, starting from the 2nd to the 5th
installment, provided the total commitment towards SIP is for Rs.10000/or above.
4.
Unit holder's statement of account will reflect subscription amount,
transaction charges and net investment.
Asset Management Companies (AMCs) will deduct the TC from the subscription
amount and pay to the concerned ARN holder, subject to deduction of service tax.
This could be in addition to existing upfront / trailer fees paid by the AMCs, if
any.
2. Categorization of Distributors as "Opt In" and "Opt Out"
SEBI has also introduced a concept of a distributor "Opting In" or "Opting Out"
for the purpose of transaction charges.
5.
Opt in - An Opt In distributor is someone whose clients will be levied with
transaction charges as described above, irrespective of the Fund where an
application is submitted.
6.
Opt Out - An Opt Out distributor is someone whose clients will not be
levied any transaction charge by any Fund.
7.
Please note that "Opt out" will be the DEFAULT OPTION for all
distributors, unless opted otherwise.
8.
A distributor should adopt a uniform practice i.e. he cannot be an Opt In
distributor for one investor and an Opt Out distributor for another investor,
at any point in time.
9.
Transactions routed through the stock exchange route will not be covered
for transaction charges.
Distributors can submit Option Letter for being an "Opt In" distributor (Opt Out
being default) in the specified format to the CAMS - Point of Service (POS), the
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list of which is available on AMFI Website. The distributors, who had earlier
exercised the option of "Opt in" and now wish to "Opt Out" for transaction
charges, have to submit a letter duly signed, indicating that they wish to "Opt out"
for Transaction cost, and submit the same to CAMS
Promotion
Mutual Fund industry has integrated approach which is a composite of
Advertising, Sales promotion, Direct marketing, Public Relation & Personal
Selling
Advertising in mutual fund
can be formally defined as marketing
communications carried out through the mass media or through direct marketing
means, with the intention of motivating the purchase of specific mutual fund
scheme or encouraging particular forms of financial behavior. Various forms of
media can be used to execute advertising campaigns. Broadcast media such as
television and radio, as well as print media such as newspapers and magazines, are
often used to execute advertising campaigns for mutual fund services. In addition,
a growing trend in mutual fund marketing involves using direct advertising
methods such as direct mail and direct e-mail to elicit consumer responses.
These methods create a sense of personalization and help generate leads for
subsequent sales. In addition, advertising may not only have the objective of
selling specific scheme but it may also be used simply to encourage specific forms
of financial behavior in consumers. For example, advertising may be used to
increase public awareness of the needs for retirement planning and savings, or to
encourage the purchase of SIP to protect oneself against market uncertainties.
Technology has played a very important role in spread of mutual fund among
investors with almost every AMC has a dedicated page in Social Networking site
such as facebook, twitter and video campaign floating in youtube.
AMC like Reliance Mutual fund also have their applications in Android market
which facilitates the user to do all transactions online and also showing current
NAV of all its schemes
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Regulatory Guidelines for Advertising in Mutual Fund
Market regulator SEBI has rationalised and simplified the regulations pertaining
to such advertising. And for once, when a regulatory organisation says
rationalised, it's actually true. The bulk of the verbiage in existing fund advertising
consists of various disclaimers and risk factors.
For example, the leading disclaimer is that the reader of the advertisement is
advised to take advice from an advisor because deciding on an investment might
require professional advice. It generally goes on to say that there's no assurance or
guarantee that the scheme's goals will be achieved.
Then, it goes on to say that the past performance of the schemes is neither an
indicator nor a guarantee of future performance, and may not be considered for
future investment decisions.
This is all unexceptionable stuff, in a legalistic sense. Except that anyone who
understands the basic psychology about how people take decisions that such
warnings are unlikely to actually affect investor behaviour.
Sebi's new code does it better. Firstly, it reduces the warning just to the brief
'Mutual fund investments are subject to market risks. Please read the offer
document carefully' which is a big improvement from the earlier stuff. More
importantly, the new code lays down the principles rather than micro-manage the
language.
It says the ads should be 'accurate, true, clear, complete, unambiguous and
concise' that they should not contain statements 'which are biased or deceptive,
based on assumption/projections and testimonials' or 'Slogans unrelated to nature
and risk or return profile of the product'.
The one part of the new regulations which goes down to details is the part that
specifies how funds' performance and other financial data is to be specified. This
part is important because the advertising of financial products is an important
component of the integrity of the product.
Unlike say, a house or a car or clothes, there is no physical object to examine and
the entire decision-making process is based on information alone. As such, the
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standardisation and comparability, the core performance and returns data are
crucial.
Another provision is that fund advertising must not include any ratings because
such ratings are not strictly comparable.
Personal Selling :
It includes personal presentation by the firm's sales force to the prospective
investor's for making sales Process , For corporate & HNI customers this seems to
be the most influential way of presenting ideas and scheme information
Awareness and Promotional Activity by AMFI
Even though the signs were encouraging amongst savvy investors, retail investors
relied on tried and tested options. It was discovered that apart from the doubts and
misconceptions associated with Mutual Funds, one of the main reasons for low
Mutual Funds awareness was the fact that there was never a genuine or trusted
forum for retail investors to clear these doubts. Identifying this as a major
concern, the Association of Mutual Funds in India (AMFI) in the year 2009,
initiated focused efforts towards retail investors by forming an AMFI Investor
Awareness Programme Committee (AMFI IAP). One of the main objectives of
this initiative was to reach out to investors and create awareness about Mutual
Funds across India. It also aimed to educate and clear various misconceptions
associated with Mutual Funds and to reposition Mutual Funds as a new way of
saving. AMFI has also resorted for Broadcast media for Advertising about benefit
of Mutual fund
Process
When an investor buys or sells shares in the secondary market, there is no
financial implication on the company whose shares are being traded or its other
shareholders. However, subscription to and re-purchase of units of a mutual fund
scheme, affect the financials of the scheme; these transactions therefore affect the
scheme’s other investors.
•
If investors are permitted to subscribe to new units of a scheme at a price
lower than their intrinsic value, then the prior investors lose out.
•
Similarly, if investors are able to offer their units for re-purchase at a price
133
higher than their intrinsic value, the investors who continue in the scheme are
cheated.
•
If investors subscribe to or re-purchase units at their intrinsic value, then
neither the prior investors nor the continuing investors are adversely affected.
•
Allowing an investor to invest at yesterday’s NAV, if the market has gone up
today, is again unfair.
•
Similarly, it would be unfair to allow an investor to offer his units for repurchase at yesterday’s NAV, after the investor has seen a decline in the
market today. Therefore, the day whose NAV the investor gets – the day of the
transaction, or a preceding or succeeding day – too is material. A few
operational factors compound the problem:
•
The scheme may receive a cheque for subscription to new units on Day T. But
the money will be received in the scheme’s bank accounts only on Day T+1 or
Day T+2. By then, the market may change.
•
Banks may credit the money into the account as of a “value date”. But the
funds may be available for investment by the scheme, only on the following
day.
•
Unscrupulous investors may bounce their subscription cheque if they see the
market going down after the application for subscription has been sent.
Considering all these dynamics, SEBI has mandated detailed regulations on the
applicable NAV for investors’ transactions with various types of schemes in
different situations. The applicable NAV depends on whether or not the investor’s
application for subscription / re-purchase was received before the specified “cutoff” timing. This is applicable to all mutual funds. It is to be uniformly applied to
all investors. The only exceptions are:
•
International funds
•
Transactions in Mutual Fund units undertaken on a recognized Stock
Exchange
Mutual Funds have to ensure that each payment instrument for subscription or
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purchase of units is deposited in a bank expeditiously by utilization of the
appropriate banking facility.
AMCs have to compensate any loss occasioned to any investor or to the scheme
and/or plan on account of non-compliance. Mutual Funds need to calculate NAV
for each calendar day for their liquid fund schemes and plans.
Cut off Timing
Liquid Schemes & Plans - Subscriptions
The following NAVs are to be applied:
•
Where the application is received upto 2.00 p.m. on a day and funds are
available for utilization before the cut-off time without availing any credit
facility, whether, intra-day or otherwise – the closing NAV of the day
immediately preceding the day of receipt of application;
•
Where the application is received after 2.00 p.m. on a day and funds are
available for utilization on the same day without availing any credit facility,
whether, intra-day or otherwise – the closing NAV of the day immediately
preceding the next business day; and
•
Irrespective of the time of receipt of application, where the funds are not
available for utilization before the cut-off time without availing any credit
facility, whether, intraday or otherwise – the closing NAV of the day
immediately preceding the day on which the funds are available for utilization.
“Business Day” does not include a day on which the money markets are closed or
otherwise not accessible.
For allotment of units in respect of purchase in liquid schemes, it has to be
ensured that:
•
Application is received before the applicable cut-off time.
•
Funds for the entire amount of subscription/purchase as per the application are
credited to the bank account of the respective liquid schemes before the cut-off
time.
135
•
The funds are available for utilization before the cut-off time without availing
any credit facility whether intra-day or otherwise, by the respective liquid
schemes.
For allotment of units in respect of switch-in to liquid schemes from other
schemes, it has to be ensured that:
•
Application for switch-in is received before the applicable cut-off time. Funds
for the entire amount of subscription/purchase as per the switch-in request are
credited to the bank account of the respective switch-in liquid schemes before
the cut-off time.
•
The funds are available for utilization before the cut-off time without availing
any credit facility whether intra-day or otherwise, by the respective switch-in
schemes.
Liquid Schemes & Plans – Re-Purchases
The following NAVs are to be applied:
•
Where the application is received up to 3.00 pm – the closing NAV of day
immediately preceding the next business day; and
•
Where the application is received after 3.00 pm – the closing NAV of the next
business day.
Other than Liquid Schemes & Plans - Subscriptions
The following NAVs are to be applied:
•
Where the application is received up to 3.00 pm with a local cheque or
demand draft payable at par at the place where it is received – closing NAV of
the day on which the application is received;
•
Where the application is received after 3.00 pm with a local cheque or demand
draft payable at par at the place where it is received – closing NAV of the next
business day; and
•
Where the application is received with an outstation cheque or demand draft
which is not payable on par at the place where it is received – closing NAV of
day on which the cheque or demand draft is credited.
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In respect of purchase of units in Income/ Debt oriented schemes (other than
liquid fund schemes and plans) with amount equal to or more than Rs. 1 crore,
irrespective of the time of receipt of application, the closing NAV of the day on
which the funds are available for utilization is applicable.
For allotment of units in respect of purchase in income/debt oriented mutual
fund schemes/plans other than liquid schemes, it has to be ensured that:
•
Application is received before the applicable cut-off time (3 pm).
•
Funds for the entire amount of subscription/purchase as per the application are
credited to the bank account of the respective schemes before the cutoff time
(3 pm).
•
The funds are available for utilization before the cut-off time (3 pm) without
availing any credit facility whether intra-day or otherwise, by the respective
scheme.
Other than Liquid Schemes & Plans – Re-purchases
The following NAVs are to be applied:
•
Where the application is received up to 3.00 pm – closing NAV of the day on
which the application is received; and
•
An application received after 3.00 pm – closing NAV of the next business day.
Official Points of Acceptance (PoA)
In order to ensure transparency in capturing the timing, SEBI has mandated
official points of acceptance for receipt of these applications. Application from
investors are to be received by mutual funds only at the official points of
acceptance, addresses of which have to be disclosed in the SID and on Mutual
Funds’ websites.
The Official PoA are typically offices of the AMC and RTA. Offices of the DP can
also be an Official PoA for re-purchase transactions. Offices of stock exchange
brokers can be Official PoA for transactions routed through the stock exchange.
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Time Stamping Requirements
•
For every machine, running serial number has to be stamped from the first
number to the last number as per its capacity before repetition of the cycle.
•
Every application for purchase is to be stamped on the face and the
corresponding payment instrument is to be stamped on the back indicating the
date and time of receipt and the running serial number. The application and
payment instrument should contain the same serial number.
•
Every application for redemption has to be stamped on the face and on the
investor’s acknowledgment copy (or twice on the application if no
acknowledgment is issued) indicating the date and time of receipt and running
serial number.
•
Different applications can not be bunched together with the same serial
number.
•
Blank papers should not be time stamped. Genuine errors, if any, are to be
recorded with reasons and the corresponding applications requests are to be
preserved.
•
The time stamping machine should have a tamper proof seal and the ability to
open the seal for maintenance or repairs must be limited to vendors or
nominated persons of the mutual fund, to be entered in a proper record.
•
Breakage of seal and/or breakdown of the time stamping process has to be
duly recorded and reported to the Trustees.
•
Every effort should be made to ensure uninterrupted functioning of the time
stamping machine.
In case of breakdown, the mutual funds have to take prompt action to rectify the
situation. During the breakdown period, mutual funds need to adopt an alternative
time stamping method that has already been approved by the Board of the AMC
and the Trustee(s).
An audit trail should be available to check and ensure the accuracy of the time
stamping process during the said period.
138
•
Any alternate mode of application that does not have any physical or
electronic trail needs to be converted into a physical piece of information and
time stamped in accordance with the time stamping guidelines.
•
Mutual Funds need to maintain and preserve all applications/ requests, duly
time stamped, at least for a period of eight years. They should be able to
produce them as and when required by SEBI or auditors appointed by SEBI.
Investment in Mutual Funds through NSE
National Stock Exchange (NSE) offers a low-cost distribution reach across the
country.
Therefore, the role of brokers in mutual fund distribution has been increasing. The
involvement of NSE brokers in different contexts is discussed below.
Listed Schemes
Under SEBI regulations, close-ended schemes are to be mandatorily listed. This is
equally applicable for debt and equity schemes. The only exception is Equity
Linked Savings Schemes (ELSS) schemes, which are not listed during the first
three years after NFO. This is because investors in ELSS are not permitted to sell
their units for three years. The difference in transactions between open-end and
close-ended schemes is important to understand:
Acquisition of Units by the Unit-holder

In an open-end scheme, the units are newly created by the scheme. This is
called a “sale” transaction. It happens at the NAV.

In a close-ended scheme, the pre-existing units change hands. It happens at a
price that is discovered in the stock exchange.

Extinguishment of Unit-holding

In an open-end scheme, the unit-holder offers his units for “re-purchase”. This
is effected at the NAV less Exit Load (if applicable). On re-purchase, the units
are cancelled.
The exit load, in percentage terms, is frozen when the unit-holder acquires the
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units. It may be different for different investors. For the same investor, the
percentage may be different for various unit holdings in the same scheme,
depending on when they were acquired.

In a close-ended scheme, the unit-holder sells the units to some counter-party
at a price that is determined in the stock exchange. The units continue to exist.
Only the name of the unit-holder changes in the scheme records.
Listed schemes (typically, close-ended) are traded through NSE’s trading system,
like any other securities. Buyers and sellers enter their orders through their
respective Trading Members (TM). The system matches orders based on price and
time priority. If a match is found, a trade is generated. The TM earns a brokerage
as per the terms of the contract with the client.
NSE’s Mutual Fund Service System (MFSS, discussed below) facilitates order
collection (sale and re-purchase) for open-end schemes.
Exchange Traded Funds (ETFs):
Like any share or close-ended scheme, ETFs are listed on the exchange.
Therefore, Trading Members at the NSE can help clients buy and sell ETFs as part
of their normal services.
Besides, market makers in ETF can benefit from two other streams of income:
•
The buy-sell spread arising out the market making operations. If the market
maker buys units from investors at Rs. 50.00 per unit, and sells units to
investors at Rs.50.60 per unit, a spread of Rs. 0.60 is earned for every unit so
traded.
•
Large investors subscribing to the ETF directly with the scheme, or offering
their units for re-purchase to the scheme, will need to give or receive index
securities in the same proportion as the index. There is scope to earn a
brokerage, when these investors buy or sell index securities as part of the
subscription or re-purchase.
Each ETF unit is defined to be equivalent to a certain proportion of the underlying
index.
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For example, 100 ETF Units = 1 Nifty. In that case, if the Nifty is at 6,000, then
the intrinsic value of each ETF Unit is Rs. 60.
Since large investors may choose to transact directly with the scheme, the trading
volumes in the exchange can get low in the case of some ETFs. Low liquidity
disrupts the price discovery mechanism, on account of which the ETF units may
trade at a price that is not in synch with its intrinsic value. The risk involved in
buying ETF units at prices higher than its intrinsic worth needs to be recognised;
so also, selling ETF units at prices lower than its intrinsic worth may lead to
opportunity loss.
Mutual Fund Service System (MFSS)
NSE launched India’s first Mutual Fund Service System (MFSS) on November
30, 2009. Using NEAT MFSS, an investor can subscribe or redeem units of a
mutual fund scheme, through eligible members of NSE. Trading members of NSE
who are ARN holders, and who have passed the Mutual Fund Distributor
certification examination of National Institute of Securities Market (NISM Series
MFD) are eligible to participate in NEAT MFSS. They are called participants.
NEAT MFSS is open for trading between 9 a.m. and 3 p.m. on all business days of
the capital market segment. Participants can make the service available for their
registered clients.
Participants need to open a separate Bank account with any of the Clearing Banks
identified by the Clearing Corporation. This will be the designated bank account
for transactions under MFSS. Pay-in of funds for subscription is to be done
through the designated bank accounts on T+1 basis, as per time lines specified by
the Clearing Corporation.
Participants can choose between Physical mode and depository mode while
capturing subscription / redemption requests on the MFSS. Securities settlement is
effected through the RTA (if physical mode) or through the Depository (if Demat
mode). The steps in the transactions are as follows:
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Subscription (Physical mode)
T-Day activities:
•
Investor has to submit the following documents/details along with clear funds
to the Participant:
 Completed and Signed respective scheme Application Form
 Copy of PAN Card of first holder
 Copy of PAN Card of each additional holder in case of joint investment
/either or survivor basis
 Copy of KYC acknowledgement of all holders
 Copy of Guardian’s PAN Card in case investment is on behalf of minor
 Folio No. in case the subscription is an additional purchase.
•
The Participant verifies the application for mandatory details including PAN
details and KYC compliant acknowledgment issued by CVL.
•
After completing the verification, Participant enters the subscription order on
the MFSS front-end system with the option of ‘Physical’ settlement.
 The folio No (if available) is captured on the MFSS front-end.
 The MFSS identifies each scheme uniquely in terms of Symbol & Series.
 Subscription orders are created in terms of Amount.
 Once the order is created, system generates a unique confirmation No. for
the order.
•
The investor receives a confirmation slip from the Participant. It contains
unique confirmation number and date and time stamp of order entry generated
from the MFSS system. Till the Participant provides allotment details to the
investor, the order confirmation slip is proof of the transaction.
 On allotment, the investor will receive Statement of Account from the RTA
directly.
•
The Participant writes the unique confirmation number on the physical
142
documents and delivers the same at any of the RTA /AMC offices as may be
intimated from time to time.
•
Exchange validates the transactions on T day evening with the RTA, and any
discrepancy in the transaction details is informed to the Participant on the
same day evening.
•
The Clearing Corporation provides the Participants with funds obligation
report end of day for all the valid transactions.
T+1 Day activities
•
The Clearing Corporation of the Exchange debits the designated clearing bank
account of the Participants for the required funds obligation on T+1 morning.
•
In case of shortage, the concerned Participant is provided an opportunity to
identify transactions and provide details of the transactions for which
payments have been received and transactions for which payments have not
been received.
•
The fund collected from the bank account of the Participant is compared with
the details provided by the Participant on the payment received status.

If the funds collected from the bank account of the Participant covers
the details of the payments received as provided by the Participant, the
same is further processed.

Wherever the funds collected from the bank account falls short of the
amount indicated in the details provided by the Participant, the details
are considered defective and are not further processed. In such cases,
the funds collected, if any, are returned to the designated bank account
of the Participant.

The Exchange / Clearing Corporation takes appropriate action
including penalty on participants who fail to fulfil their funds
obligation as required.

The Exchange notifies RTA for all such defective transactions and
rejections due to non-payment of funds.
143

The RTA reverses such transactions for respective Participants.
Transactions for other Participants who have fulfilled their funds
obligations are processed by the RTA.
•
The RTA intimates the allotment details for accepted transactions including
folio numbers.
•
Allotment information is provided to the Participants so that they can provide
allotment details to the investor.
Subscription (Demat mode)
T-Day activities:
•
The order is placed like a normal secondary market activity. The investor
provides the depository account details along with PAN details to the
Participant. KYC performed by DP is considered compliance with applicable
requirements.
•
Participant enters the subscription order on the MFSS front-end system with
the option of ‘Depository’ settlement.

MFSS identifies each scheme uniquely in terms of Symbol & Series.

Subscription orders are created in terms of Amount.

Once the order is created, system generates a unique confirmation
number for the order.
•
The investor receives a confirmation slip from the Participant. It contains
unique confirmation number and date and time stamp of order entry, generated
from the MFSS system. Till the Participant provides allotment details to the
investor, the order confirmation slip is proof of the transaction.

Demat statement given by depository participant is deemed to be
adequate compliance of the requirement of Statement of Account.
•
Exchange validates the transactions on T day evening with the RTA as well as
the depository. Any discrepancy in the transaction details is informed to the
Participant on the same day evening.
144
•
The Clearing Corporation provides the Participants with funds obligation
report end of day for all valid transactions.
T+1 Day activities:
•
The Clearing Corporation of the Exchange debits the designated clearing bank
account of the Participants for the required funds obligation on T+1 morning.
•
In case of shortage, the concerned Participant is provided an opportunity to
identify transactions and provide details of the transactions for which
payments have been received and transactions for which payments have not
been received.
•
The fund collected from the bank account of the Participant is compared with
the details provided by the Participant on the payment received status.
 If the funds collected from the bank account of the Participant covers the
details of the payments received as provided by the Participant, the same is
further processed.
 Wherever the funds collected from the bank account falls short of the
amount indicated in the details provided by the Participant, the details are
considered defective and are not further processed. In such cases, the funds
collected, if any, are returned to the designated bank account of the
Participant.
 The Exchange / Clearing Corporation takes appropriate action including
penalty on participants who fail to fulfil their funds obligation as required.
 The Exchange notifies RTA for all such defective transactions and
rejections due to non-payment of funds.
 The RTA reverses such transactions for respective Participants.
Transactions for other Participants who have fulfilled their funds
obligations are processed by the RTA.
•
The RTA intimates the allotment details for the accepted transactions including
folio numbers.
•
Allotment information is provided to the Participants so that they can provide
allotment details to the investor.
145
•
RTA credits the units to the pool account of the Participant, who will credit the
depository account of the investor if payment has been received.
Redemption (Physical Mode)
T-Day activities:
•
Investor has to submit the following documents/details to the Participant:

Completed and Signed redemption request, stating the folio number.

Copy of PAN Card of first holder

Copy of PAN Card of each additional holder in case of joint
investment

Copy or allotment statement / holding statement/ SOA displaying the
scheme holdings to be redeemed

•
Copy of Guardians PAN Card in case investment is on behalf of minor
The Participant verifies the application for mandatory details, investor identity
and verifies the signature on the application against the PAN signature of the
signatory
•
After completing the application verification, the Participant enters the
redemption order on the MFSS system with the option of ‘Physical’
settlement.

The MFSS identifies each scheme uniquely in terms of Symbol &
Series.

For physical orders the folio No is captured on the MFSS front-end.

Redemption orders are created either in terms of Amount or Quantity
for physical settlement.

Once the order is created system generates a unique confirmation No.
for the order.
•
The investor receives a confirmation slip from the Participant. It contains
unique confirmation number generated from the MFSS front-end system. This
146
is proof of the transaction for the investor till the redemption proceeds are
received from the registrar.
•
The Participant writes the unique confirmation number on the physical
documents and delivers the same at any of the RTA /AMC offices as may be
intimated from time to time.
•
Exchange validates the transactions on T day evening with the RTA and any
discrepancy in the transaction details in terms of folio number etc. is informed
to the Participant on the same day evening.
T+1 Day activities:
• RTA carries out the redemption processing at its end and provides final
redemption information to the Exchange on T+1.

The file contains information about valid and rejected redemption
orders.

For successful redemptions, the file contains the redemption NAV,
unitsredeemed, redemption amount, STT (if any).
•
Redemption information is provided to the Participants through files so that
they can provide Redemption details to the investor.
•
The redemption proceeds are directly sent by RTA through appropriate
payment mode such as direct credit, NEFT or cheque as decided by AMC
from time to time, as per the bank account details recorded with the RTA.
•
It is the primary responsibility of the Participant to ensure completeness of the
documents including filling up of the all Key fields by the investor before
accepting the same for processing.
•
It is also the responsibility of the Participant to ensure identity and
authentication of signature affixed based on the original PAN shown at the
time of accepting the redemption application form. In case of joint holding,
this is to be ensured by the Participant for all holders.
•
In case the subscription application form has not reached to the RTA, the
redemption request for such subscription will not be taken by the RTA and
shall be rejected.
147
Redemption (Demat Mode)
T-Day activities:
•
Investor places order for redemption as currently followed for secondary
market activities. The investor provides their depository account details along
with PAN details to the Participant. The investor also provides their
Depository Participant with Depository instruction slip (a copy of which is to
be provided to the participant at the time of placing the redemption request)
with relevant units to be credited to Clearing Corporation pool account same
day before 4.30 p.m.
•
The Participant enters the redemption order on the MFSS system with the
option of ‘Demat’ settlement.

The MFSS identifies each scheme uniquely in terms of Symbol &
Series.

Redemption orders are created only in quantity.

Once the order is created system generates a unique confirmation No.
for the order.
•
The investor receives a confirmation slip from the Participant. It contains
unique confirmation number generated from the MFSS front-end system. This
is proof of the transaction for the investor till the redemption proceeds are
received from the registrar.
•
Exchange validates the transactions on T day evening with the RTA and any
discrepancy in the transaction details in terms of DP Id etc.is informed to the
Participant on the same day evening.
•
Subsequent to the validation, Clearing Corporation will provide valid orders to
depository to validate the delivery instructions (DIS) received from the
investor and accept units received if they are equal to the valid transactions.
The units thus received will be credited to the beneficiary account of the
AMC(s) by the Clearing Corporation.
148
Physical Distribution
The Indian mutual fund industry has been growing at a rapid pace. Particularly
over the last 4 four years the growth has been phenomenal, thanks to a booming
capital market and favorable tax regime. This era of exponential growth has seen
changes, refinements, innovations etc in products, practices and channel
development of the AMCs. The ultimate beneficiary has been the growing and
prospering investors.
The distribution channels that have evolved in India are: Independent Financial
Advisors (IFA), the big distribution firms, banks and direct selling, including
online selling of mutual funds. The various factors which influence the success of
distribution channel are trust, customer servicing, including multiple and
accessible service points, good infrastructure, including IT support, the comfort
factor & exclusivity.
An efficient and effective distribution network is as important as any other
consumer industry. The customer base is huge here too. The industry since its
inception has been trying hard to attract retail investors by taking well calibrated
steps. It has entered into previously untapped markets. There is more stress on
product innovation. Initially there were very few options before the high net
worth individual (HNI), leave alone normal investors. Now, all investors can
invest in real estate, private equity and even stocks and mutual funds abroad. The
minimum investment amounts can be really small.
Mutual Fund Industry - Distribution Structure Abroad
There have been dramatic changes in the manner in which mutual funds are sold
abroad. Before 1980, most funds were vended through a broker, who provided
advice, assistance and ongoing service to the buyer. The unit holder paid for these
distribution services through a front-end sales charge when he bought the fund.
Funds sold through finance professionals such as brokers have since adopted
alternatives to the front-end sales charge.
The alternative payment methods typically include a fee based on assets that may
also be in combination with a front-end or back-end sales charge. In many cases,
149
funds offer several different share classes, all of which invest in the same
underlying portfolio of assets, but each share class may offer shareholders
different methods of paying for broker services.
With the expansion in distribution channels, many fund sponsors have moved
from single-channel distribution strategies in favor of multi-channel distribution.
The changes in fund distribution have been accompanied by a significant decrease
in the average cost of distribution services incurred by mutual fund buyers. The
decline in distribution costs reflects a variety of developments, including
competition between funds, expansion of the 401(k) plan market and other
markets with low distribution costs, and increased availability of lower-cost
advice to investors. Presently funds are sold abroad through five principal
distribution channels:
1. Direct channel, 2. Advice channel, 3. Retirement plan channel, 4.
Supermarket channel, 5. Institutional channel.
The first four channels primarily serve individual investors.
In the direct channel, investors carry out transactions directly with mutual funds.
In the advice, retirement plan and supermarket channels, individual investors use
third parties or intermediaries that conduct transactions with mutual funds on their
behalf.
The most important feature of the advice channel is the provision of investment
advice and ongoing assistance to fund investors by financial advisers at fullservice securities firms, banks, insurance agencies, and Financial Planning outfits.
The retirement plan channel primarily consists of employer-sponsored defined
contribution plans in which employers provide mutual funds and other
investments for purchase by plan participants through payroll deductions.
The supermarket channel is made up of discount brokers that offer mutual funds
from a large number of fund sponsors.
Many of the fund offerings are subject to no transaction charges or sales loads.
Businesses, financial institutions, endowments, foundations and other institutional
150
investors use the institutional channel to conduct transactions either directly with
mutual funds or through third parties.
The Indian mutual fund industry will also evolve on the above lines over a period
of time. SEBI’s latest move – no load for direct investments - is the first step
towards it.
Dynamics of Retailing of Mutual Fund in India
As already stated in brief, the retail push to MFs in India has been spearheaded by
the big distribution houses, IFAs and banks, including PSBs. MFs are now
expanding their own networks to this end. Online distribution, while catching up
among the computer-savvy segment of the public, will not be a very significant
contributor, at least in the near future.
Essentials of a Good Distribution System
Distribution success for mutual funds or any financial product is dependent on
certain key elements. These are:
•
Careful product selection
•
A careful selection of internal sales staff (who will sell)
•
Right targeting of customers - a properly graded geographical strategy based
on a demographic study will propel a smooth, seamless customer penetration
and sales volumes
•
Proper training - Training is the axle on which the entire distribution revolves.
Continuous training of the sales force is essential in this dynamic environment
•
Educating / counseling the customer about products, keeping in mind rising
customer expectations and increasing buyer expertise
•
After sales servicing
Role of Various Channels
Direct Selling: Direct selling is the least significant element today. Normally, only
very big ticket items are done through this. Alternatively, it derives its inflows
mainly from online sales. However, recent changes in regulation are all set to give
151
this channel a fillip. MFs are gearing up by opening their own offices in more
places. Also R&T Agents are expanding their infrastructure to facilitate this.
Organised distributors: Organised distributors are the backbone of MF
distribution. They have infrastructure and flexibility to adapt to the need of the
hour. They too have realized the importance of going to smaller centres and are
establishing offices in urban and semi-urban locations. This is the sector which
needs to be nurtured to expand.
Banks as distributors: Mutual fund distribution by banks is emerging a key
element. Banks have huge potential to build and improve the retail segment,
which needs to become as strong as its institutional counterpart.
Even among banks there are two major types of distributors. There are those that
handle wealth management of their clients and, on their behalf, manage portfolios
wherein investment in mutual funds is one asset class. Such banks have
sophisticated wealth management practices with qualified staff and well-heeled
clients. MNC banks, private banks and a few niche players (like HSBC, Citi,
ICICI, HDFC, Kotak etc) are examples.
Then there are banks that use their networks to sell Mfs as just another financial
service. Most of the PSBs and other commercial banks including large cooperative
banks fall under this category. For the banks the existing customer base serves as a
captive prospective investor base for marketing mutual funds. They have the
advantage of having already won the trust of the customer. There is no other
distribution channel that can have a more effective retail penetration across Tier-II
and Tier-III cities as well as across rural India.
This channel has slowly realized its own potential and is now emerging as a big
player. Abroad banks are among the leading fund supermarkets.
The Post Office too has been emerging as an effective channel. For all practical
purposes, it can be clubbed with PSBs. Banks with post offices are likely to
emerge as a very crucial channel for “financial inclusion” in the MF arena.
This combination along with the online variants in the near future will dominate
the distribution of mutual funds.
152
Independent Financial Advisors: Presently the IFA is the friendly neighborhood
guy – one who is very effective in selling the product. However, he has to manage
his costs from the commission he gets. Advisory services are today given gratis.
The scenario is changing and the space in advisory services will undergo a rapid
change in the next few years. Financial Planning services will be much sought
after and Certified Financial Planners will be in demand for their specialized
services
Building a distribution network is very expensive and time consuming. If the
AMC's are willing to take advantage of India's large population and reach a
profitable mass of customers, then new distribution avenues and alliances will be
necessary.
Initially mutual fund scheme was looked upon as a complex product with a high
advice and service component. Buyers prefer a face-to-face interaction and they
place a high premium on brand names and reliability. As the awareness increases,
the product becomes simpler and they become off-the-shelf commodity products
This component of the marketing mix is related to two important facets –
i) Managing the IFA , and
ii) Locating a branch.
The management of IFA's and distributors is found significant with the viewpoint
of maintaining the norms for offering the services. This is also to process the
services to the end user in such a way that a gap between the services- promised
and services -- offered is bridged over. In a majority of the service generating
organizations, such a gap is found existent which has been instrumental in making
worse the image problem. The transformation of potential investor to the actual
investor is a difficult task that depends upon the professional excellence of the
personnel. The IFA's and especially in semi urban cities and rural location acting
as a link, lack professionalism. The front-line staff and the branch managers also
are found not assigning due weight-age to the degeneration process. IFA's if not
managed properly would make all efforts insensitive. Even if the policy makers
make provision for the quality upgrading the promised services hardly reach to the
end users.
153
It is also essential that they have rural orientation and are well aware of the
lifestyles of the prospects or users. They are required to be given adequate
incentives to show their excellence. While recruiting IFA's , the branch managers
need to prefer local persons and provide them training and conduct seminars. In
addition to the IFA's, the front-line staff also needs an intensive training
programme to focus mainly on behavioral management.
Location of AMC branches :
Another important dimension to the Physical Distribution Mix is related to the
location of the AMC branches. To a large extent the technology is playing very
vital role as most of the AMC's are promoting Online Investment and even
distributors are finding convenient for encouraging their investor to apply online
services offered by them.
Besides SEBI has encouraged for creating more POA which has eased pressure on
AMC of establishment Branches which helps the AMC in reducing cost
PEOPLE:
Understanding the customer better allows to design appropriate products. Being a
service industry which involves a high level of people interaction, it is very
important to use this resource efficiently in order to satisfy customers. Training,
development and strong relationships with intermediaries are the key areas to be
kept under consideration. Training the employees, use of IT for efficiency, both at
the staff and distributor level, is one of the important areas to look into.
Post Abolishment of Entry Load there has been drastic fall in number of IFA's due
to lack of incentivisation from AMC's and besides that change in the examination
pattern and increasing the Registration fees to Rs 5000/- for new ARN number has
made the entry barrier tougher for new IFA's .It is thus imperative to engage these
IFA's and adopt ring fencing them as their Agent in Insurance industry continue to
earn high upfront commission which is as high as 35% of first year premium
AMC's are trying to engage IFA's through offering training programs and building
IFA's for longer time and rebranding IFA's as a complete Financial Planner and to
look Financial Advisory business as long term business and in turn able to earn
good trail commission by increasing their AUM.
154
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RESEARCH METHODOLOGY
Introduction :
The changing dynamics of Mutual Fund Industry and volatility in stock market
has impacted the growth and penetration of Industry, in an attempt to identify the
major factors which are impacting the investor's confidence the research was
undertaken. The research also focused on the view point and perception of Mutual
Fund distributor and employees of Asset Management Companies. This was also
done primarily to understand the view point of stakeholders which can eventually
help in framing marketing strategies for companies . The survey was therefore
done in major cities of U.P for understanding the regional dynamics toward the
industry.
The application of appropriate methods and adoption of a scientific frame of mind
is an essential requirement for any systematic study. This has great relevance not
only for collection of reliable information but also for the final outcome of the
study. System development is the hub of research that interacts with other research
methodologies to form an integrated and dynamic research program, no single
research methodology is sufficient by itself
RESEARCH DESIGN
A “Research Design” is a framework or blueprint for conducting the research
project. It specifies the details of the procedures necessary for obtaining the
information needed to structure and solve marketing research problems.
In our research methodology, exploratory research questions have been asked
during the survey and research. An exploratory survey identifies the important
process and result variables in marketing practices decisions. The survey has been
conducted using questionnaires. Data obtained cover variables of marketing
decision-making relating to different schemes offered by mutual-fund companies.
Present research work is exploratory cum descriptive in nature. Researcher has
contacted a number of marketing executives of mutual fund companies, marketing
experts, Amfi advisors (qualified) and brokers, who had practical experience with
157
the problem and contributed new ideas for solving the problem. Before conducting
this study, the Researcher has been in contact with the Investors including Mutual
fund Investors and those who invest in Banks, post offices etc. Rough problems of
marketing were discussed along with them to reach the real concept of this study.
Data and Data Sources:
The study requires to understand the investment behavior of investor in the region
of U.P for which Primary Source of data was used and similarly the study also
has used secondary data
Data Collection
The more relevant secondary sources of information were collected from websites
such as SEBI,AMFI,NSE and AMC's . The secondary data have been collected
mainly from journals, magazines, government reports, books and unpublished
dissertations.
Data Collection through primary Sources
The study mainly deals with the financial behaviour of Individual Investors
towards Mutual funds in central region of U.P primarily spread in cities of
Lucknow, Gorakhpur, Kanpur. Allahabad, Varanasi, Bareilly & Agra The required
data was collected through a pretested questionnaire administered on a
combination of simple random and judgement sample of 200 educated individual
investors. Judgment sample selection is due to the time and financial constraints.
Respondents were screened and inclusion was purely on the basis of their
knowledge about Financial Markets, MFs in particular. This was necessary,
because the questionnaire presumed awareness of some basic terminology about
Mutual Funds. The purpose of the survey was to understand the behavioral aspects
of individual investors, mainly their fund selection behavior, various factors
influencing this behavior and also the conceptual awareness level among
individual. Taking into consideration the objectives of the study, a questionnaire
was prepared after a perusal of available literature and thorough consultation with
the experts of related fields. Each question was improved for its relevance and
meaning by constant interaction with the experts in the areas. The questionnaire
158
was constructed based on Likert scaling technique. Pre-testing of questionnaire
was done during August 2009, involving 25 respondents to know the relevance of
the questions. In the light of pre-testing, necessary changes were incorporated in
the questions and their sequences.
To assess the viewpoint of Distributors in Mutual Fund Business another simple
random and judgment sample of 50 advisors & 50 employees of AMC's operating
in the same region was administered through different set of questionnaires,
The purpose of which was to assess their viewpoint on changing regulations in
distribution business and also to find what do they perceive about the investor's
requirement.
Unit of the study
In the first set of Questionnaire, the unit of investigation is a Mutual Fund Investor
who has a portfolio of at least Rs 25,000 in it.
In the second Set of Questionnaire, the unit of investigation is a Independent
Financial Advisor who is a holder of active ARN holder
In the third Set of Questionnaire , the unit of Investigation are Employees of
AMC’s who have at least two year of experience in Mutual fund Industry
The data obtained from the study were analyzed by using Statistical Analysis for
identification of the key features preferred by the respondents in a mutual fund
product.
Hypothesis testing was done to find relationship of certain factors on behavior of
Investor and Distributor and Chi Square test was used for the same
Data Collected through Primary Sources
There were three Samples taken to understand about overview of Changes in
Mutual fund Industry namely
•
Investor
•
Independent Financial Advisor
•
Employees of AMC
159
Universe of the Study
The Universe of the study comprises of major cities of U.P mainly Lucknow,
Kanpur, Allahabad, Varanasi, Gorakhpur, Bareilly, Moradabad and Agra
Questionnaire Design
Taking the pertinent issues into consideration the perception of the respondents
were noted
Sampling
It was planned to have a sample of 200 investors for which purposive random
sampling was used in the first set of questionnaire.
For the second set of questionnaire a sample 75 IFA’s through purposive random
sampling was used
Similarly for the third set of Questionnaire a sample of 50 employees from AMC
through random sampling was used.
•
Analysis layout
•
Data Preparation Process
•
Questionnaire Checking
•
Editing
•
Coding
•
Transcribing
•
Data Cleaning
•
Statistically Adjusting the data
•
Selecting Data Analysis and Strategy
•
Questionnaire Checking
All the three sets of Questionnaire were independently checked. Adequate care
was taken on the following points regarding the questionnaire
•
Whether all the parts of the questionnaire were complete?
160
•
Whether the returned questionnaire contained all responses?
•
The profile of the respondents
•
The Quality of responses
Editing the Questionnaire
Each questionnaire
from all
the sets were reviewed to identify, illegible,
incomplete, inconsistent or ambiguous responses
The Code Sheet
The questions were then coded to enable statistical analysis.
Transcribing the Data
The data was then transcribed on computer
Data Cleaning
Thorough and Extensive check for consistency and treatment of missing responses
was done
The Analysis Strategy
As in most research data, the maximum variable here is nominal. Also the
information is cross sectional. In the light of such information we would such
tools as would favour the analysis of categorical data
The preliminary analysis was done using graphical tools and descriptive statistics.
Since the data is basically categorical, cross table representation was the most
preferred tool for investigating underlying characteristics in the data
Statistical Techniques Used :
In order to sharpen the inferences drawn on the basis of simple description of facts
in terms of frequencies , averages and percentages , appropriate tools of statistical
inference have been used for the purpose of testing various of null hypothesis
regarding association of investor behaviour with determinant attribute, non
parametric test s based on Chi Square Test has been used
161
The used of cross tabulation yielded the desired proportion of investors in
different segment. The different segments explored in the manner were Age,
Income and Profession and subgroups within this group. Contingency tables gave
the measures and differences in proportions for various categories o various
investors. Chi Square was used to measure the independence of attributes
The Chi square test is used to determine whether there is a relationship between
two nominal variables . Nominal data by definition cannot be averaged
meaningfully because the numbers are meaningless by themselves
The Chi Square test examines whether people are distributed across the category
by chance(which would mean there is no relationship between the independent
and dependent variables) when taking sampling errors into account. If there is no
relationship, the frequencies would be equal across the categories. If there is a
relationship, then people won't be distributed as expected by chance
The Null Hypothesis states there is no true relationship between the treatment(or
experimental condition) and the frequency, which is why the null hypothesis
expects that frequencies are distributed evenly across the categories.
The alternative hypothesis states that there is a true relationship in the target
populations and expects the frequencies to unequal across categories or different
from chance . The Chi Square tests this hypothesis by essentially calculating
whether the difference between the observed and expected frequencies in each
category could have occurred because of chance sampling errors or instead
because the treatment or experimental condition) had an effect on the outcome
Test Criteria
The calculated value of x2 is compared with the table value of x2 for given
degrees of freedom at 0.05 level of significance.
If the calculated value of x2>x2.05 the difference between the theory and
observation, is said to be significant at 0.05 level of significance.
To study the objective of study certain hypothesis were tested on following
Attributes which are
162
•
Age of Investor
•
Occupation of Investor
•
Income of Investor
Hypothesis tested on these attributes
1. Whether that attribute has any relevance with the expected return from
Investment in Mutual Fund
2. Down side risk which an individual can tolerate has any relevance with the
attributes
3. Age, Occupation & Income of Investor has no relevance with the time
horizon for investment in Mutual Fund
4. Attitude of Investor is independent of Age, Income & Occupation
5. Age, Income & Occupation has no relevance with the mode of Investing in
Mutual Fund
6. Age, Income & Occupation has no relevance with the distribution channel
chosen by Investor
7. Choice for Investor of taking advice is independent of the given attributes
8. Continuity with the existing adviser is independent with the attributes
9. All these attributes is independent for payment of fees
The research also takes opinion of IFA's and Employees of AMC and their
viewpoint is taken for that following hypothesis is tested on IFA's
1. Impact of Abolishment of entry load has is independent of AUM of IFA
2. Payment of seperate fees by Investor's is independent of AUM of IFA
3. Abolishment of Entry load has brought more transparency in distribution
business of Mutual Fund and is independent of AUM of IFA
4. Investor Behavior change is independent of AUM of advisor
To study
the impact on consolidated basis which is by investor, IFA's and
163
Employees of AMC's following hypothesis were tested
•
Attitude of Investor toward investment is independent of various class
•
Investor will pay separate fees for Mutual Fund distribution
On testing the hypothesizes various analysis and suggestions are made.
Limitations of the Study
1)
Sample size is limited to 200 educated individual investors which has
spread of different cities of U.P which are primarily Lucknow, Gorakhpur,
Kanpur. Allahabad, Varanasi, Bareilly & Agra . Similarly sample of 50
distributors and 50 employees of AMC ere also taken from same cities .
The sample size may not adequately represent the national market because
of constraint of geographic locations and time
2)
Simple Random and judgment sampling techniques is due to time and
financial constraints.
3)
This study has not been conducted over an extended period of time having
both ups and downs of stock market conditions which a significant
influence on investor’ s buying pattern and preferences.
4)
The implications of the study are subject to the limitations in
psychological and emotional characteristics of surveyed population.
5)
AMC's offers various mutual schemes diversifying in various asset classes
such as Equity, Debt, Gold however the the study has focused on equity
mutual fund and investor's response towards it
6)
Mutual fund industry has been very dynamic in nature and has gone
various regulatory changes besides changes in process, the report however
has studied the impact of various changes till December 2012
The research aimed to identify the dynamics of Mutual Fund Industry in the
region so as to increase the level of penetration of Industry in U.P in the current
environment
164
References

Bell, J. (1999). Doing your research project. Buckingham: OUP

Boot, John C.G., and Cox, Edwin B., Statistical Analysis for Managerial
Decisions, 2nd ed. New Delhi:

Ferber, Robert (ed.), Handbook of Marketing Research, New York: McGrawHill, Inc

Greenwood, P.E., Nikulin, M.S. (1996) A guide to chi-squared testing. Wiley,
New York. ISBN 0-471-55779-X

Kothari C.R , Research Methodology , New Age Publication

Levin, Richard I., Statistics for Management, New Delhi: Prentice-Hall of
India Pvt. Ltd.

R. A. Fisher (1925).Statistical Methods for Research Workers, Edinburgh:
Oliver and Boyd, 1925, p.43.

Schervish, M (1996) Theory of Statistics, p. 218. Springer ISBN 0- 38794546-6
-------:0:-------
ANALYSIS OF RESEARCH FINDINGS
The study which was conducted for a period ranging from 2007 – 2012 , the
mutual fund industry has witnessed a high turmoil in equity market which has
also been a reason of volatility in AUM (Asset Under Management ) of many
AMC's . As observed from the Table 5.1 there has been steep declined in the AUM
of Equity Mutual Fund and even if the Share markets have seen rise but the
AUM's of company have not witnessed the same growth and there have bee
multifold factors which have effected this
Table 5.1
Equity AUM of AMC's from 2006- 2012
Year
TOTAL EQUITY AUM
(Rs Crores)
17150
10272
12431
2150
7230
5367
4951
Mar-06
Mar-07
Mar-08
Mar-09
Mar-10
Mar-11
Mar-12
SENSEX
11307
13072
15612
9689
17527
19445
17404
Source: BSE & AMFI
Table 5.1a
EQUITY MUTUAL FUND AUM VS SENSEX
19445
17527
17150
17404
15612
13072
11307
SENSEX
TOTAL EQUITY AUM (Rs
Crores)
12431
10272
9689
7230
5367
4951
Jan-11
Jan-12
2150
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
166
Investment Pattern in Equity Mutual Fund 2005 - 2012
Year
No. of Equity Folio
% Change
2011-12
37647466
-4.18%
2010-11
39290289
-4.45%
2009-10
41118785
-0.03%
2008-09
41131623
8.91%
2007-08
37766259
48.82%
2006-07
25376347
47.21%
2005-06
17238776
90.67%
2004-05
9041075
Source : AMFI
Table 5.2
As seen the fall in rise in AUM is correlated with the performance of the market
which is primarily because of fall in valuation and also because of negative
sentiments of investors in equity market during downturn
Besides this there have been other factors which have impacted the Mutual fund
industry for which the research was done
The data obtained from the survey which was conducted over different cities of
Uttar Pradesh need to be analyzed and for that SPSS – 16 software is used and in
that data has to be cross tabulated and on which certain hypothesis are being tested
using Chi Square test . The analysis is done on primarily three attributes Age ;
Income & Occupation of the investors. Therafter the research also took the view
point of distributor and employees of Asset Management Companies who play
critical role in Mutual Fund industry
Factors affecting the choice of AMC
While deciding on the investments in Mutual Fund Schemes the choice has to
made on AMC and there are many factors which influences investor. Major
factors effecting the decision are
a) Brand
b) Advice given by adviser
167
c) Service offered by AMC
d) Past Track record of schemes in AMC
e) Promoter's credibility
Table 5.3
PREFERED CRITERION FOR CHOOSING AMC BY INVESTOR(%)
Brand
Advisor
advice
Service
Past track
record of
fund
Promoters
credibility
Least
prefered
Less
prefered
Average
7.2
11.3
31.8
7.2
37.9
16.4
24.6
22.6
9.7
27.7
16.9
31.8
17.9
22.6
14.9
Preferred
30.8
15.9
15.9
22.1
12.8
Most
prefered
28.7
16.4
11.8
38.5
6.7
100
100.0
100.0
100.0
100.0
Total
Table 5.4
As seen from the table Past track of funds(38.5%) and brand of AMC (28.7%)are
the most preferred reasons for investor's choosing AMC whereas promoter's
credibility is the least preferred criterion (37.9%) while deciding AMC
168
Table 5.5
Distributor's Response : Investor's preference while investing in
the mutual fund (%)
Fund
AMC
Manager
Brand
38.6
24.1
4.8
20.5
14.5
21.7
38.6
13.3
3.6
AVERAGE
28.9
9.6
15.7
32.5
19.3
PREFERED
24.1
19.3
13.3
20.5
30.1
MOST
PREFERED
27.7
10.8
8.4
28.9
26.5
Total
100.0
100.0
100.0
100.0
100.0
Stability
Objective
LEAST
PREFERED
4.8
LESS
PREFERED
Advice
Distributors were also of view point that investor also prefer brand of AMC and
stability of fund while investing in Mutual Fund
Fig 5.6
Distributor have different factors on which they decide to choose their preferred
AMC for advising to their clients and the factors which effect their decision
making are
169
a) Brand of AMC
b) Earnings they get from the AMC's
c) Promoter's or Sponsor’s Background
d) Service which they get from AMC's
e) Past Track Record of Funds offered by AMC
Table 5.7
DISTRIBUTOR'S CHOICE OF CHOOSING AMC(%)
Brand
Earning
Promoters
Background
Service
PastTrack
8.4
31.3
21.7
15.7
12.0
25.3
16.9
24.1
21.7
3.6
AVERAGE
26.5
19.3
22.9
22.9
12.0
PREFERED
28.9
13.3
18.1
28.9
14.5
MOST
PREFERED
10.8
19.3
13.3
10.8
57.8
Total
100.0
100.0
100.0
100.0
100.0
LEAST
PREFERED
LESS
PREFERED
Fig 5.8
170
As seen from the table Distributor looks for Past Track of Funds(57.8%) while
choosing AMC but in the current regime Earnings and Incentives from AMC's
also is an important parameter when the IFA's choose their AMC.
Service even though is not the most preferred criterion for choosing the AMC but
definitely it is a preferred criterion as most of the advisor choose CAMS &
KARVY as their one point shop for all their queries and most of the veteran
advisors have taken an online platform such as Fundznet for resolving their
customer queries
Preferred Brand of AMC
Brand plays a pivotal role in deciding to choose any product or service . In
Financial Services also the brand value of service provider gives the early entry to
investor's mind .As also seen from above analysis Brand plays an important role in
deciding choice of AMC.
On analyzing the investor’s behavior and their preferred brand of AMC , 76%
investor Reliance was among the preferred brand followed by HDFC Mutual fund
69% and SBI 49% and ICICI MF with 41% are the other preferred brand of AMC
for Investors
Fig 5.9
Prefered AMC for Investment
80%
70%
60%
50%
40%
30%
20%
10%
0%
HDFC
ICICI Sundram Frankiln IDFC Kotak
JM
LIC
Axis
Reliance SBI
DSP
TATA
Birla
UTI Pricipal L&T
HSBC Taurus
171
Similarly from Distributor's perspective
75% of Advisor Reliance is their
preferred brand while HDFC MF was preferred by 70%, SBI 34% Sundaram
55% ICICI 27% Franklin 25%
Fig 5.10
ADVISOR'S PREFERED AMC
80%
70%
60%
50%
40%
30%
20%
JM
DW
S
Ta
ur
us
L&
T
AX
IS
UT
I
SB
I
IC
I
Fr CI
an
kli
n
Bi
rla
DS
P
TA
TA
ID
FC
Re
l
ia
nc
e
HD
FC
Su
nd
ar
am
10%
0%
Reliance Mutual Fund seems to be preferred AMC for both Investor & Advisers in
the research followed by HDFC Mutual Fund
Expected Return by Investors
The prime objective for investors is to get a decent return from their investments.
However with the high expectation of higher return one need to have appetite of
high risk which means high variation in returns
As per CAPM (Capital Asset Pricing Model)
Expected Return of Portfolio(rp ) = Risk Free rate of Return (rf) +Beta of
Portfoli (p) [(Market Return (rM )– Risk Free rate of return(rf )]
Risk Free Rate of Return : It is generally the return generated from investment
which has no risk associated with it which in Indian environment one can expect
is the return expected from Government Securities such as G-Sec bond which is in
the range of 8% per annum. It also implies that the minimum return investor
should expect from any investment
Beta of the Portfolio is the risk that one associate by investing in a stock or
172
portfolio and higher beta implies high risk which is associated with it and the
expectation of the investor increases
Market Return is the return which investor gets by investing in market portfolio.
To understand the kind of return which Investor's have got by investing in the
mutual fund scheme , performance of best equity scheme as analyzed by Value
Research are seen
Following is the performance of the equity oriented schemes
Table 5.11
Top 20 Equity Mutual Fund Schemes April 2007 – April 2012
Sl No. Fund Name
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
IDFC Premier Equity
ICICI Prudential Discovery
Inst I
ICICI Prudential Discovery
UTI Opportunities
Birla Sun Life Dividend
Yield Plus
ING Dividend Yield
UTI Dividend Yield
Canara Robeco Equity Tax
Saver
Quantum Long Term
Equity
Tata Dividend Yield
HDFC Mid-Cap
Opportunities
Taurus Tax Shield
Reliance Equity
Opportunities
Canara Robeco Equity
Diversified
HDFC Top 200
Sahara Tax Gain
Reliance Regular Savings
Equity
UTI Equity
BNP Paribas Dividend
Yield
Religare Tax Plan
Source : Value Research
1-Y
Return
(%)
-1.68
1.74
3-Y
Return
(%)
15.4
17.65
5-Y
Return
(%)
13.71
12.92
7-Y
Return
(%)
---
10-Y
Return
(%)
---
0.76
1.66
-4.4
16.45
11.53
13.36
11.65
11.64
11.51
16.56
15.76
14.44
----
-5.35
-3.96
-1.7
14.77
11.41
12.38
11.49
11.15
10.91
-16.78
18.59
--23.85
1.1
14.24
10.69
--
--
-3.49
-1.79
14.49
18.51
10.45
9.96
14.66
--
---
-4.96
1.42
6.38
19.24
9.92
9.67
9.1
17.95
20.65
--
0.13
11.98
9.5
16.04
--
-5.92
-2.65
-8.4
8.36
9.6
6.36
9.44
9.35
9.26
18.21
15.92
15.5
28.78
24.1
--
-0.09
-3.23
11.47
12.74
9.1
8.76
14.44
--
22.53
--
-5.91
10.8
8.68
--
--
173
As seen from the table above over a period of time of three years maximum return
generated by scheme is near 17% whereas in period of five years it is near 13-14%
whereas as seen for longer horizon of ten years almost all schemes which were in
existence for these period have give return over 20%
Fig 5.12
History of Sensex Returns
Sensex
Date
Index
1-Apr-79
100.00
1-Apr-80
128.57
1-Apr-81
173.44
1-Apr-82
217.71
1-Apr-83
211.51
1-Apr-84
245.33
1-Apr-85
353.86
1-Apr-86
574.11
1-Apr-87
510.36
1-Apr-88
398.37
1-Apr-89
713.60
1-Apr-90
781.05
1-Apr-91
1167.97
1-Apr-92
4285.00
1-Apr-93
2280.52
1-Apr-94
3778.99
1-Apr-95
3260.96
1-Apr-96
3366.61
1-Apr-97
3360.96
1-Apr-98
3892.75
1-Apr-99
3739.99
1-Apr-00
5001.28
1-Apr-01
3604.38
1-Apr-02
3469.00
1-Apr-03
3049.00
1-Apr-04
5528.00
1-Apr-05
6492.00
1-Apr-06
11307.00
1-Apr-07
13072.00
1-Apr-08
15612.00
1-Apr-09
9689.00
1-Apr-10
17527.77
1-Apr-11
19445.22
1-Apr-12
17404.20
Average
Source : BSE Website
1-Year
28.57%
34.90%
25.52%
-2.85%
15.99%
44.24%
62.24%
-11.10%
-21.94%
79.13%
9.45%
49.54%
266.88%
-46.78%
65.71%
-13.71%
3.24%
-0.17%
15.82%
-3.92%
33.72%
-27.93%
-3.76%
-12.11%
81.31%
17.44%
74.17%
15.61%
19.43%
-37.94%
80.90%
10.94%
-10.50%
25.52%
Annualised Growth Rate for the period
5-Year
10-Year 15-Year 20-Year
25-Year
19.66%
22.44%
27.05%
18.58%
13.50%
23.81%
17.16%
15.26%
53.04%
41.76%
39.57%
33.09%
23.58%
-4.74%
11.29%
-0.21%
8.93%
1.37%
0.63%
-4.77%
8.13%
5.36%
25.69%
30.38%
38.63%
11.88%
21.97%
11.45%
5.89%
17.94%
22.22%
21.66%
23.23%
22.72%
24.00%
20.18%
21.55%
19.26%
19.30%
21.57%
21.72%
19.77%
21.01%
34.71%
26.84%
31.45%
24.87%
19.35%
20.74%
25.60%
18.02%
20.40%
11.93%
-2.09%
2.95%
3.88%
7.13%
12.88%
14.55%
14.90%
9.99%
13.36%
18.36%
17.50%
17.08%
27.40%
24.05%
21.86%
20.02%
21.43%
19.92%
19.31%
13.03%
13.63%
14.53%
14.62%
15.16%
16.34%
7.72%
13.68%
6.48%
11.86%
12.40%
11.59%
16.05%
19.85%
20.09%
16.38%
14.85%
14.27%
16.85%
15.66%
16.07%
17.60%
20.13%
13.93%
16.83%
15.10%
7.26%
16.06%
174
As analyzed from the above table of the performance of Sensex following
conclusion can be drawn which implies that in the longer the term in equity the
risk in investments gets reduced
Fig 5.13
Analysis of Performance of SENSEX Returns from Year 1989-2012
Holding Max Return Min Return
Period(yrs)
Variation
Average
return
Probability
of Loss
1
267%
-47%
314%
25%
12 /33
5
53%
-5%
58%
18%
3/29
10
34%
-2.00%
36%
17%
1/24
15
27%
7%
21%
16%
0
20
20%
7%
13%
16%
0
25
23%
19%
4%
21%
0
By looking at the above table it is observed that return from equity gets stable and
probability of loss from the market is almost zero and equity as an asset class is
only suitable for those investor who have horizon for long term which is at least
five years.
Also in the long run equity has been a consistent performer and has most of the
time has beaten inflation which is the most important aspect when looking for
wealth creation as most of the guaranteed return products such as Fixed deposits
and Govt Securities are unable to eat inflation in long term
To get the detailed investor's perspective return expected from investors are
analyzed with respect to Age , Occupation and Income of Investors
175
Table 5.14
Cross Tabulation between Age of Investors & Expected Return
AGE * EXPECTEDRETURN
EXPECTED RETURN
10%-15% 15%-20%
< 30 YRS
Count
30-45 YRS
AGE
30
13
% within AGE
18.9%
56.6%
24.5%
100.0%
% within
EXPECTED
RETURN
27.8%
29.4%
22.8%
27.2%
% of Total
5.1%
15.4%
6.7%
27.2%
15
49
24
% within AGE
17.0%
55.7%
27.3%
100.0%
% within
EXPECTED
RETURN
41.7%
48.0%
42.1%
45.1%
% of Total
7.7%
25.1%
12.3%
45.1%
7
9
11
% within AGE
25.9%
33.3%
40.7%
100.0%
% within
EXPECTED
RETURN
19.4%
8.8%
19.3%
13.8%
% of Total
3.6%
4.6%
5.6%
13.8%
4
14
9
% within AGE
14.8%
51.9%
33.3%
100.0%
% within
EXPECTED
RETURN
11.1%
13.7%
15.8%
13.8%
% of Total
2.1%
7.2%
4.6%
13.8%
36
102
57
% within AGE
18.5%
52.3%
29.2%
100.0%
% within
EXPECTED
RETURN
100.0%
100.0%
100.0%
100.0%
% of Total
18.5%
52.3%
29.2%
100.0%
45-60 YRS
Count
Count
>60 YRS
Total
10
Count
Count
Total
MORE
THAN
20%
53
88
27
27
195
176
Chi-Square Tests
Value
df
Asymp. Sig. (2-sided)
Pearson Chi-Square
5.243a
6
.513
Likelihood Ratio
5.321
6
.503
Linear-by-Linear
Association
.741
1
.389
N of Valid Cases
195
a. 2 cells (16.7%) have expected count less than 5. The minimum expected count is 4.98.
Null Hypothesis: Age Group of Investor has no relevance with the expected return
Alternative Hypothesis: Age Group of Investor has relevance with the expected
return
Pearson Chi Square Value at 6 degree of freedom is 5.243 which is less than
Table value at 12.59, hence the hypothesis is accepted and expected return are
independent of age of investor’s and hence no association
Investors at different age group behave differently towards expectation of return
they have on their investments in Mutual fund
177
Table 5.15
Cross Tabulation between Expected return and Occupation of
Investor
PVT SERVICE
BUSINESS/PRO
FESSIONAL
RETIRED
OCCUPATION
GOVT SERVICE
Crosstab
Total
Count
% within
OCCUPATION
% within
EXPECTED
RETURN
% of Total
Count
% within
OCCUPATION
% within
EXPECTED
RETURN
% of Total
Count
% within
OCCUPATION
% within
EXPECTED
RETURN
% of Total
Count
% within
OCCUPATION
% within
EXPECTED
RETURN
% of Total
Count
% within
OCCUPATION
% within
EXPECTED
RETURN
% of Total
EXPECTEDRETURN
10%-15% 15%-20% MORE
THAN
20%
7
19
11
18.9%
51.4%
29.7%
Total
37
100.0%
19.4%
18.6%
19.3%
19.0%
3.6%
20
27.8%
9.7%
28
38.9%
5.6%
24
33.3%
19.0%
72
100.0%
55.6%
27.5%
42.1%
36.9%
10.3%
5
8.6%
14.4%
37
63.8%
12.3%
16
27.6%
36.9%
58
100.0%
13.9%
36.3%
28.1%
29.7%
2.6%
4
14.3%
19.0%
18
64.3%
8.2%
6
21.4%
29.7%
28
100.0%
11.1%
17.6%
10.5%
14.4%
2.1%
36
18.5%
9.2%
102
52.3%
3.1%
57
29.2%
14.4%
195
100.0%
100.0%
100.0%
100.0%
100.0%
18.5%
52.3%
29.2%
100.0%
178
Chi-Square Tests
Value
df
Asymp. Sig. (2-sided)
Pearson Chi-Square
12.466a
6
.052
Likelihood Ratio
12.926
6
.044
Linear-by-Linear
.089
1
.766
Association
N of Valid Cases
195
a. 0 cells (.0%) have expected count less than 5. The minimum expected count is 5.17.
Null Hypothesis: Expected return from mutual fund is independent of Occupation
of Investor
Alternative Hypothesis: Expected return from mutual fund is dependent on
occupation of investor
As Chi square value at 6 dof is 12.466 < 21.026 which implies that we accept the
Null Hypothesis and conclude that return expected by investor is independent of
occupation of investor
179
Table 5.16
Cross Tabulation Between Income & Expected Return
3 LAC - 5 LAC
5 LAC -10 LAC
MORE THAN 10
LAC
INCOME
LESS THAN 3
LAC
Crosstab
Total
Count
% within
INCOME
% within
EXPECTED
RETURN
% of Total
Count
% within
INCOME
% within
EXPECTED
RETURN
% of Total
Count
% within
INCOME
% within
EXPECTED
RETURN
% of Total
Count
% within
INCOME
% within
EXPECTED
RETURN
% of Total
Count
% within
INCOME
% within
EXPECTED
RETURN
% of Total
EXPECTEDRETURN
MORE
10%15%THAN
15%
20%
20%
10
27
11
Total
48
20.8%
56.3%
22.9%
100.0%
27.8%
26.5%
19.3%
24.6%
5.1%
15
13.8%
40
5.6%
24
24.6%
79
19.0%
50.6%
30.4%
100.0%
41.7%
39.2%
42.1%
40.5%
7.7%
11
20.5%
30
12.3%
7
40.5%
48
22.9%
62.5%
14.6%
100.0%
30.6%
29.4%
12.3%
24.6%
5.6%
0
15.4%
5
3.6%
15
24.6%
20
.0%
25.0%
75.0%
100.0%
.0%
4.9%
26.3%
10.3%
.0%
36
2.6%
102
7.7%
57
10.3%
195
18.5%
52.3%
29.2%
100.0%
100.0%
100.0%
100.0%
100.0%
18.5%
52.3%
29.2%
100.0%
180
Chi-Square Tests
Value
df
Asymp. Sig. (2-sided)
Pearson Chi-Square
26.902a
6
.000
Likelihood Ratio
27.665
6
.000
Linear-by-Linear
Association
5.456
1
.020
N of Valid Cases
195
a. 1 cells (8.3%) have expected count less than 5. The minimum expected count is 3.69.
Null Hypothesis: Null Hypothesis: Income of Investor has no relevance with the
expected return
Alternative Hypothesis: Income
of Investor has relevance with the expected
return
Chi Square Value at 6 dof for 95% confidence Interval is 26.902 > Table Value
12.592 hence Null hypothesis gets rejected and can be conclude that expectation
of return gets varied as the income of investor Changes
The expected return desired by investor changes according to income level of
investor
Fig 5.17
181
As observed from cross tabulation and also from chart that most of the
investors(52.30%) expect return in the range of 15-20% from their investment in
equity mutual fund scheme
Fig 5.18
Fig 5.19
182
Fig 5.20
1. 52.3% Investors expected return in the range of 15 -20% ; whereas 29.2%
expect return more than 20% per annum and only 18.5% people were content
with 10 % -15% return. In last five years (April 2007 – April 2012) Sensex
has give a return of mere 5.89% p.a and has
the same period . The return given by
failed to beat even inflation for
many equity scheme too has been
dismal.
2. People in the age group 45 - 60 yrs have higher expectation from Mutual fund
and 40.7% expect more than 20% p.a return however in other age groups
majority of the investor expect return in the range of 15 – 20%
3. On testing the hypothesis it was concluded that age has no relevance with the
expected return from mutual fund and expected return by investor is
independent of the age of investor
4. 91.4% of Businessman/Professional expect return more than 15% as they
generally compare their return with the return generated by their own business
and tend to expect higher returns
5. It was also observed that Return expected from Mutual fund is independent of
profession of investor
6. Investors having Income more than Rs 10 lac have higher expectations as 75%
183
of the people in that category expect return of more than 20%
7. Expectation of Return also varies with the Income of the Investor and Investor
having higher income expect higher which is also due to fact that they have
money to put in risky assets wheres investor in Lower income bracket are
content moderate return
Preferred criterion for Investing in Mutual fund Scheme
Investors have varied reason for making Investment in Mutual Fund scheme
which are it is 1) Getting higher returns on their money which they are unable
to get from other investment option such as FD and post office schemes.
1. Wealth Creation : Investors also invest for creating wealth for long term
goals which may be child education, retirement planning buying house etc.
2. Tax planning :Equity Mutual fund proceeds are exempt from long term
capital gain and schemes like ELSS(Equity Linked Saving scheme) also offers
Income deduction under section 80C. Government has also recently allowed
Rajeev Gandhi Equity schemes to be launched through AMC's
3. Safety : Portfolio diversification is a key in equity investment which helps in
reducing risk which can be easily done through Mutual fund schemes thus
providing a bit of safety as compare to directly investing in Equity
Table 5.21
PREFERED CRITERION FOR CHOOSING MUTUAL FUND SCHEME BY
INVESTOR(%)
HIGH
RETURN
SAFETY
TAX
LONG TERM
WEALTH
LEAST
PREFERED
5.1
22.1
49.2
22.1
LESS
PREFERED
16.4
33.8
27.2
20.5
PREFERED
39.0
22.6
18.5
21.5
MOST
PREFERED
39.5
21.5
5.1
35.9
Total
100.0
100.0
100.0
100.0
184
Investor's invest in mutual fund scheme with prime objective for getting high
return and creating Long term wealth however it is seen that as the expected
return falls investor's tend to redeem their investments
Fig 5.22
Downside risk :
Investor's were asked about the downside risk that they can tolerate. Generally it is
tendency of investor's to expect a high return without tolerating any risk but in
reality there cannot be any asset class or investment where one can expect a high
return without taking risk . It is also seen from the above tables and analysis that
downside risk gets reduced as time horizon of investments in equity is increased.
More importantly it is also to be seen that investments should be more of goal
based and if they are so then investors should not be tempted to redeem their
investments by some short term fluctuations in markets , however it is seen that
with the fall in markets there is bound to have some panic selling which creates
fear in mind of investor and they redeem their investment even at loss.
As seen in various studies of Behavioural Finance this behaviour of investor,
Tversky and Kahneman originally described "Prospect Theory" in 1979. They
found that contrary to expected utility theory, people placed different weights on
gains and losses and on different ranges of probability. They found that
185
individuals are much more distressed by prospective losses than they are happy by
equivalent gains. Some economists have concluded that investors typically
consider the loss of $1 dollar twice as painful as the pleasure received from a $1
gain. They also found that individuals will respond differently to equivalent
situations depending on whether it is presented in the context of losses or gains.
Researchers have also found that people are willing to take more risks to avoid
losses than to realize gains.
Table 5.23
AGE * DOWNSIDERISK Cross tabulation
> 60 YRS
45-60 YRS
AGE
30-45 YRS
< 30 YRS
DOWNSIDERISK
Total
MORE
THAN
15%
WILL
HOLD
TILL
PROFIT
ABLE
WILL
HOLD
TILL
GOAL IS
ACHIEV
ED
LESS
THAN
10%
10%
15%
Count
10
15
1
13
14
53
% within AGE
18.9%
28.3%
1.9%
24.5%
26.4%
100.0%
% within
DOWNSIDERISK
19.6%
26.8%
9.1%
34.2%
35.9%
27.2%
% of Total
5.1%
7.7%
.5%
6.7%
7.2%
27.2%
Count
26
23
2
16
21
88
% within AGE
29.5%
26.1%
2.3%
18.2%
23.9%
100.0%
% within
DOWNSIDERISK
51.0%
41.1%
18.2%
42.1%
53.8%
45.1%
% of Total
13.3%
11.8%
1.0%
8.2%
10.8%
45.1%
Count
10
8
5
4
0
27
% within AGE
37.0%
29.6%
18.5%
14.8%
.0%
100.0%
% within
DOWNSIDERISK
19.6%
14.3%
45.5%
10.5%
.0%
13.8%
% of Total
5.1%
4.1%
2.6%
2.1%
.0%
13.8%
Count
5
10
3
5
4
27
% within AGE
18.5%
37.0%
11.1%
18.5%
14.8%
100.0%
% within
DOWNSIDERISK
9.8%
17.9%
27.3%
13.2%
10.3%
13.8%
% of Total
2.6%
5.1%
1.5%
2.6%
2.1%
13.8%
Count
51
56
11
38
39
195
% within AGE
26.2%
28.7%
5.6%
19.5%
20.0%
100.0%
%
within
DOWNSIDERISK
100.0
%
100.0%
100.0%
100.0%
100.0%
100.0%
% of Total
26.2%
28.7%
5.6%
19.5%
20.0%
100.0%
-
Total
186
Chi-Square Tests
Value
df
Asymp. Sig. (2-sided)
Pearson Chi-Square
25.211a
12
.014
Likelihood Ratio
28.128
12
.005
Linear-by-Linear
3.416
1
.065
Association
N of Valid Cases
195
a. 4 cells (20.0%) have expected count less than 5. The minimum expected count is 1.52.
Null Hypothesis: Down side risk which an individual can tolerate has no relevance
with age group
Alternate hypothesis: Downside risk of an individual is dependent on age group
Pearson Chi Square at 12 degree of freedom is 25.211 > Table Value at 5% level
of confidence 21.026
Thus we reject the Null Hypothesis and conclude that depending upon the age
group the downside risk appetite for Investor behavior changes
As observed from the Table Investor who are in the age band of <30 yrs and age
band of 30 -45 yrs have tendency to hold their investments till their goals are
achieved but at higher age band the investor seems to loose patience
187
Table 5.24
OCCUPATION * DOWNSIDERISK Crosstabulation
PVT SERVICE
BUSINESS/PROFESS
IONAL
RETIRED
OCCUPATION
GOVT SERVICE
DOWNSIDERISK
WILL
HOLD
TILL
GOAL
IS
ACHIE
VED
<10%
10% 15%
> 15%
WILL
HOLD
TILL
PROFI
TABLE
Count
8
18
1
5
5
37
% within
OCCUPATION
21.6%
48.6%
2.7%
13.5%
13.5%
100.0%
% within
DOWNSIDERISK
15.7%
32.1%
9.1%
13.2%
12.8%
19.0%
% of Total
4.1%
9.2%
.5%
2.6%
2.6%
19.0%
Count
21
11
3
16
21
72
% within
OCCUPATION
29.2%
15.3%
4.2%
22.2%
29.2%
100.0%
% within
DOWNSIDERISK
41.2%
19.6%
27.3%
42.1%
53.8%
36.9%
% of Total
10.8%
5.6%
1.5%
8.2%
10.8%
36.9%
Count
14
16
7
12
9
58
% within
OCCUPATION
24.1%
27.6%
12.1%
20.7%
15.5%
100.0%
% within
DOWNSIDERISK
27.5%
28.6%
63.6%
31.6%
23.1%
29.7%
% of Total
7.2%
8.2%
3.6%
6.2%
4.6%
29.7%
Count
8
11
0
5
4
28
% within
OCCUPATION
28.6%
39.3%
.0%
17.9%
14.3%
100.0%
% within
DOWNSIDERISK
15.7%
19.6%
.0%
13.2%
10.3%
14.4%
% of Total
4.1%
5.6%
.0%
2.6%
2.1%
14.4%
Count
51
56
11
38
39
195
% within
OCCUPATION
26.2%
28.7%
5.6%
19.5%
20.0%
100.0%
% within
DOWNSIDERISK
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
% of Total
26.2%
28.7%
5.6%
19.5%
20.0%
100.0%
Total
Total
188
Null Hypothesis : Profession is independent of Downside risk which is tolerable
Alternate Hypothesis: Downside risk is dependent on Profession
Chi Square Value for 12 dof at 5% level is 24.005 > Table Value 21.026
Hence it is concluded that Downside risk which one can tolerate is dependent on
type of profession which investor has as Null Hypothesis is rejected
Table 5.25
Cross Tabulation Between Income and Downside Risk
Crosstab
3 LAC - 5 LAC
5 LAC -10 LAC
MORE THAN
10 LAC
INCOME
LESS THAN 3
LAC
DOWNSIDERISK
Total
Count
% within
INCOME
% within
DOWNSID
ERISK
% of Total
Count
% within
INCOME
% within
DOWNSID
ERISK
% of Total
Count
% within
INCOME
% within
DOWNSID
ERISK
% of Total
Count
% within
INCOME
% within
DOWNSID
ERISK
% of Total
Count
% within
INCOME
% within
DOWNSID
ERISK
% of Total
MORE
THAN
15%
WILL
HOLD
TILL
PROFIT
ABLE
12
0
9
WILL
HOLD
TILL
GOAL IS
ACHIEV
ED
11
33.3%
25.0%
.0%
18.8%
22.9%
100.0%
31.4%
21.4%
.0%
23.7%
28.2%
24.6%
8.2%
25
6.2%
23
.0%
1
4.6%
19
5.6%
11
24.6%
79
31.6%
29.1%
1.3%
24.1%
13.9%
100.0%
49.0%
41.1%
9.1%
50.0%
28.2%
40.5%
12.8%
10
11.8%
18
.5%
2
9.7%
7
5.6%
11
40.5%
48
20.8%
37.5%
4.2%
14.6%
22.9%
100.0%
19.6%
32.1%
18.2%
18.4%
28.2%
24.6%
5.1%
0
9.2%
3
1.0%
8
3.6%
3
5.6%
6
24.6%
20
.0%
15.0%
40.0%
15.0%
30.0%
100.0%
.0%
5.4%
72.7%
7.9%
15.4%
10.3%
.0%
51
1.5%
56
4.1%
11
1.5%
38
3.1%
39
10.3%
195
26.2%
28.7%
5.6%
19.5%
20.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
26.2%
28.7%
5.6%
19.5%
20.0%
100.0%
LESS
THAN
10%
10%
15%
16
-
Total
48
189
Null Hypothesis: Down side risk which an individual can tolerate has no relevance
with income of investor
Alternate hypothesis: Downside risk of an individual is dependent on income of
Investor
Chi Square test for 12 dof at 95% confidence Interval 62.394 > 21.026
Hence Alternative Hypothesis is accepted which implies that downside risk which
an investor can tolerate depends on Income of Investor
Investor with different Income Level have different downside risk
Fig 5.26
Fig 5.27
190
Fig 5.28
Fig 5.29
191
1. 54.9% of investor can tolerate a downside risk of less than 15% , whereas
19.5% investors will hold till their investment become profitable and 20% will
hold irrespective of downside fall until their goal is achieved
2. By testing hypothesis it is observed that downside risk which an individual can
tolerate changes with the age of the investor as for investor whose age is less
than 30 , 34.2% of investor were of view that they will hold till their
investment becomes profitable and 35.9% of investor intend to hold their
investment till their goal of investment is achieved. For age group > 60 years ,
55.5% investor can tolerate downside risk of 15% . This behavior of investor
is quite understandable as with higher age the risk appetite of investor goes
down
3. 67.9% of investor who have retired can tolerate downside risk of more than
15%; whereas Investors who are in Private Service 22.2% will hold till their
Investment are profitable and 29.2% opined that they will hold till the goal of
investment is achieved
4. It was inferred from the hypothesis testing that downside risk which Investor
can tolerate is dependent on profession of Investor
Time Horizon for Investments :
It is historical fact that longer we stay in equity mutual fund the higher chances of
getting better return however investors are tempted by other factors which force
them to redeem their investments . A prudent investor will link his investment
with the goal he would like to achieve and shall continue to align investments
which is primarily long term wealth creation
192
Table 5.30
Cross tabulation Table Age with Time horizon of investment
Crosstab
LESS THAN 30
YRS
TIME HORIZON
LESS
THAN
ONE
YR
1-3
YRS
3-5
YRS
MORE
THAN
5 YRS
1
9
28
15
53
% within AGE
1.9%
17.0%
52.8%
28.3%
100.0%
% within TIME
HORIZON
12.5%
17.6%
35.0%
26.8%
27.2%
.5%
4.6%
14.4%
7.7%
27.2%
5
30
28
25
88
% within AGE
5.7%
34.1%
31.8%
28.4%
100.0%
% within
TIMEHORIZON
62.5%
58.8%
35.0%
44.6%
45.1%
% of Total
2.6%
15.4%
14.4%
12.8%
45.1%
2
7
9
9
27
% within AGE
7.4%
25.9%
33.3%
33.3%
100.0%
% within
TIMEHORIZON
25.0%
13.7%
11.3%
16.1%
13.8%
% of Total
1.0%
3.6%
4.6%
4.6%
13.8%
0
5
15
7
27
% within AGE
.0%
18.5%
55.6%
25.9%
100.0%
% within
TIMEHORIZON
.0%
9.8%
18.8%
12.5%
13.8%
% of Total
.0%
2.6%
7.7%
3.6%
13.8%
8
51
80
56
195
4.1%
26.2%
41.0%
28.7%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
4.1%
26.2%
41.0%
28.7%
100.0%
Count
% of Total
AGE
30-45 YRS
Count
MORE THAN
60 YRS
45-60 YRS
Count
Count
Count
% within AGE
Total
% within
TIMEHORIZON
% of Total
Total
193
Chi-Square Tests
Value
df
Asymp. Sig. (2-sided)
Pearson Chi-Square
13.100a
9
.158
Likelihood Ratio
14.179
9
.116
Linear-by-Linear
Association
.001
1
.971
N of Valid Cases
195
a. 4 cells (25.0%) have expected count less than 5. The minimum expected count is 1.11.
Null Hypothesis: Age group of Investor has no relevance with the time horizon
for investment in Mutual Fund
Alternative Hypothesis: Age group of Investor has relevance with the time horizon
for Investment in Mutual Fund
Pearson Chi Square 13.10 dof 9 < 16.919 Table Value at 5% confidence Interval
Thus we accept Null Hypothesis and conclude that Irrespective of Age of Investor
Investor's Investment horizon in Mutual Fund is same as majority of Investor's
(41%) have tendency to hold for 3- 5 yrs
194
Table 5.31
Cross tabulation Table Occupation with Time Horizon for Investment
OCCUPATION * TIMEHORIZON Crosstabulation
TIMEHORIZON
PVT SERVICE
BUSINESS/
PROFESSIONAL
OCCUPATION
GOVT SERVICE
< ONE
YR
Count
RETIRED
3-5
YRS
MORE
THAN 5
YRS
Total
1
13
16
7
37
% within
OCCUPATION
2.70%
35.10%
43.20%
18.90%
100.00%
% within TIME
HORIZON
12.50%
25.50%
20.00%
12.50%
19.00%
% of Total
0.50%
6.70%
8.20%
3.60%
19.00%
3
13
23
33
72
% within
OCCUPATION
4.20%
18.10%
31.90%
45.80%
100.00%
% within TIME
HORIZON
37.50%
25.50%
28.80%
58.90%
36.90%
% of Total
1.50%
6.70%
11.80%
16.90%
36.90%
4
13
32
9
58
% within
OCCUPATION
6.90%
22.40%
55.20%
15.50%
100.00%
% within TIME
HORIZON
50.00%
25.50%
40.00%
16.10%
29.70%
% of Total
2.10%
6.70%
16.40%
4.60%
29.70%
0
12
9
7
28
% within
OCCUPATION
0.00%
42.90%
32.10%
25.00%
100.00%
% within TIME
HORIZON
0.00%
23.50%
11.30%
12.50%
14.40%
% of Total
0.00%
6.20%
4.60%
3.60%
14.40%
8
51
80
56
195
% within
OCCUPATION
4.10%
26.20%
41.00%
28.70%
100.00%
% within TIME
HORIZON
100.00%
100.00%
100.00%
100.00%
100.00%
4.10%
26.20%
41.00%
28.70%
100.00%
Count
Count
Count
Count
Total
1-3
YRS
% of Total
195
Null Hypothesis: Time Horizon for Investment in Mutual fund is independent of
profession
Alternate Hypothesis: Time Horizon for Investment in Mutual fund is dependent
of profession
Chi-Square Tests
Value
df
Asymp. Sig. (2-sided)
Pearson Chi-Square
25.769a
9
.002
Likelihood Ratio
26.030
9
.002
Linear-by-Linear
Association
.740
1
.390
N of Valid Cases
195
a. 4 cells (25.0%) have expected count less than 5. The minimum expected count is 1.15.
Chi Square Test 25.769 dof 9 > Table Value 16.919
Hence it can be conclude that Time Horizon for investment is dependent on
Investor's profession
196
Table 5.32
Cross tabulation Table Income with Time Horizon for Investment
Crosstab
3 LAC - 5 LAC
5 LAC -10 LAC
MORE THAN 10
LAC
INCOME
LESS THAN 3
LAC
TIMEHORIZON
Total
Count
% within
INCOME
% within
TIME
HORIZON
% of Total
Count
% within
INCOME
% within
TIME
HORIZON
% of Total
Count
% within
INCOME
% within
TIME
HORIZON
% of Total
Count
% within
INCOME
% within
TIME
HORIZON
% of Total
Count
% within
INCOME
% within
TIME
HORIZON
% of Total
LESS
THAN
ONE
YR
0
1-3
YRS
3-5
YRS
MORE
THAN
5 YRS
23
21
4
.0%
47.9%
43.8%
8.3%
.0%
45.1%
26.3%
7.1%
24.6%
.0%
6
11.8%
14
10.8%
34
2.1%
25
7.6%
17.7%
43.0%
31.6%
24.6%
79
100.0
%
75.0%
27.5%
42.5%
44.6%
40.5%
3.1%
2
7.2%
14
17.4%
19
12.8%
13
4.2%
29.2%
39.6%
27.1%
40.5%
48
100.0
%
25.0%
27.5%
23.8%
23.2%
24.6%
1.0%
0
7.2%
0
9.7%
6
6.7%
14
.0%
.0%
30.0%
70.0%
24.6%
20
100.0
%
.0%
.0%
7.5%
25.0%
10.3%
.0%
8
.0%
51
3.1%
80
7.2%
56
4.1%
26.2%
41.0%
28.7%
10.3%
195
100.0
%
Total
48
100.0
%
100.0% 100.0% 100.0% 100.0%
100.0
%
4.1%
100.0
%
26.2%
41.0%
28.7%
197
Chi Square 41.252 dof 9
Null Hypothesis: Time Horizon for Investment in Mutual fund is independent of
Income of Investor
Alternate Hypothesis: Time Horizon for Investment in Mutual fund is dependent
on Income of Investor
Chi Square Value at 9 dof for 95% confidence is 41.252 > 16.919 , which implies
that Null Hypothesis is rejected and it can be concluded that Time horizon for
Investment is dependent on Income of Investor
Chi-Square Tests
Value
df
Asymp. Sig. (2-sided)
Pearson Chi-Square
41.252a
9
.000
Likelihood Ratio
46.679
9
.000
Linear-by-Linear
Association
16.365
1
.000
N of Valid Cases
195
a. 4 cells (25.0%) have expected count less than 5. The minimum expected count is .82
Fig 5.33
198
Fig 5.34
Fig 5.35
199
Fig 5.36
As seen from the analysis 41% of the investor seems to invest in equity mutual
fund for a period of 3-5 years, whereas 28.7% investor invest with the horizon of
5 years or more. Equity is basically a long term investment asset class and is said
to be generate return .The history of Sensex tells about the long term performance
of Equity Market and gives an idea that investing longer in equity market gives a
stable positive return and chances of loosing money in market goes down as
holding period goes up in market
1. On testing the hypothesis it was also inferred that time horizon for which the
investor invests has no relevance with the age of investor , this behaviour of
investor is in contradictory where it is assumed that people with younger age
tend to invest for long term and old age age people to invest for short term.
This abnormal behavior primarily has been due to redemption of investment
because of negative market condition
2. Investor's in Private sector majority of them (45.80%) tend to invest for more
than 5 years
3. On testing the hypothesis it was observed that time horizon for investment in
200
Mutual fund is dependent on the profession of investor and retired people tend
to invest for shorter period as 42.9% of retired people invest for less than
three years
4. Investor's having Income more than 10 lacs (70% )tend to hold for longer
duration which is more than 5 years and others tend to invest for a period of 3
-5 years
5. On testing the hypothesis it was also conclude that Time horizon for which the
investment is made depends on Income of Investor
Attitude of Investor :
During the period in which study was done , it has been very volatile period for
stock market as senses peaked to crossed beyond 21000 and it also breached 8000
level in just one year and again bounced back to It was during this period that the
mutual fund industry went through turmoil and investor's behaviour towards
equity was reflected as logically one should invest more when markets are down
but psychologically down the investor in these period redeemed their investment
and the losses which were initially only perceived turned into actual losses.
201
Table 5.37
Cross tabulation Table Age with Attitude of Investor
AGE * ATTITUDEOFINVESTOR
Crosstabulation
ATTITUDEOFINVESTOR
Total
LESS THAN 30
YRS
Yes
Yes
No
conser- aggressive change
vative
Count
20
12
21
53
% within AGE
37.7%
22.6%
39.6%
100.0%
% within
ATTITUDE OF
INVESTOR
24.4%
23.5%
34.4%
27.3%
% of Total
10.3%
6.2%
10.8%
27.3%
32
25
31
88
% within AGE
36.4%
28.4%
35.2%
100.0%
% within
ATTITUDE OF
INVESTOR
39.0%
49.0%
50.8%
45.4%
% of Total
16.5%
12.9%
16.0%
45.4%
17
6
3
26
% within AGE
65.4%
23.1%
11.5%
100.0%
% within
ATTITUDE OF
INVESTOR
20.7%
11.8%
4.9%
13.4%
% of Total
8.8%
3.1%
1.5%
13.4%
13
8
6
27
% within AGE
48.1%
29.6%
22.2%
100.0%
% within
ATTITUDE OF
INVESTOR
15.9%
15.7%
9.8%
13.9%
% of Total
6.7%
4.1%
3.1%
13.9%
82
51
61
194
% within AGE
42.3%
26.3%
31.4%
100.0%
% within
ATTITUDE OF
INVESTOR
100.0%
100.0%
100.0%
100.0%
% of Total
42.3%
26.3%
31.4%
100.0%
AGE
30-45 YRS
Count
MORE THAN 60
YRS
45-60 YRS
Count
Total
Count
Count
202
Chi-Square Tests
Value
df
Asymp. Sig. (2-sided)
Pearson Chi-Square
10.661
6
.017
Likelihood Ratio
21.391
9
.011
Linear-by-Linear
.793
1
.373
Association
N of Valid Cases
193
As observed that 42.3% of investor have become conservative because of recent
downturn in equity market and at all age groups Investors seems to becoming
conservative in investing in Equity Mutual Fund
Null Hypothesis: Attitude of Investor is independent of Age
Alternative Hypothesis: Attitude of Investor changes with the age
Pearson Chi Square Value 10.661 at 6 dof < 12.592 at 95% confidence Interval
This implies that Null Hypothesis is accepted
and it can be concluded that
irrespective of age group Investor Attitude has become more conservative towards
Equity Mutual Fund
203
Table 5.38
Cross tabulation Table Occupation with Attitude of Investor
Crosstab
ATTITUDEOFINVESTOR
Total
7
36
% within OCCUPATION
55.6%
25.0%
19.4%
100.0%
% within ATTITUDE OF
INVESTOR
24.4%
17.6%
11.5%
18.6%
% of Total
10.3%
4.6%
3.6%
18.6%
25
20
27
72
% within OCCUPATION
34.7%
27.8%
37.5%
100.0%
% within ATTITUDE OF
INVESTOR
30.5%
39.2%
44.3%
37.1%
% of Total
12.9%
10.3%
13.9%
37.1%
27
15
16
58
% within OCCUPATION
46.6%
25.9%
27.6%
100.0%
% within ATTITUDE OF
INVESTOR
32.9%
29.4%
26.2%
29.9%
% of Total
13.9%
7.7%
8.2%
29.9%
10
7
11
28
% within OCCUPATION
35.7%
25.0%
39.3%
100.0%
% within ATTITUDE OF
INVESTOR
12.2%
13.7%
18.0%
14.4%
3.6%
5.7%
14.4%
82
51
61
194
% within OCCUPATION
42.3%
26.3%
31.4%
100.0%
% within ATTITUDE OF
INVESTOR
100.0%
100.0%
100.0%
100.0%
% of Total
42.3%
26.3%
31.4%
100.0%
PVT SERVICE
Count
BUSINESS/
PROFESSIONAL
Count
TOTAL
Count
T
A
P
% of Total
U
C
C
O
RETIRED
Count
5.2%
O
9
I
Count
GOVT SERVICE
20
N
YES
YES
NO
CONSER AGGRES CHANGE
VATIVE
SIVE
204
Chi-Square Tests
Value
df
Asymp. Sig. (2-sided)
Pearson Chi-Square
6.426
6
.111
Likelihood Ratio
16.423
9
.059
Linear-by-Linear
.024
1
.877
Association
N of Valid Cases
193
Null Hypothesis : Attitude of Investor is independent of Occupation of Investor
Alternative Hypothesis : Attitude of Investor is dependent on Occupation of
Investor
Chi Square test 6.426 dof 6 < Table Value at 5% 12.592 hence it can be conclude
that Attitude of Investor is Independent of Occupation of Investor
205
Table 5.39
Cross tabulation Table Income with Attitude of Investor
Crosstab
ATTITUDE OF INVESTOR
Total
MORE THAN 10
LAC
5 LAC -10 LAC
INCOME
3 LAC - 5 LAC
LESS THAN 3
LAC
YES
YES
NO
CONSER AGGRES CHANGE
VATIVE
SIVE
Total
Count
25
3
20
48
% within INCOME
52.1%
6.3%
41.7%
100.0%
% within
ATTITUDE OF
INVESTOR
30.5%
5.9%
32.8%
24.7%
% of Total
12.9%
1.5%
10.3%
24.7%
35
21
23
79
% within INCOME
44.3%
26.6%
29.1%
100.0%
% within
ATTITUDE OF
INVESTOR
42.7%
41.2%
37.7%
40.7%
% of Total
18.0%
10.8%
11.9%
40.7%
17
14
16
47
% within INCOME
36.2%
29.8%
34.0%
100.0%
% within
ATTITUDE OF
INVESTOR
20.7%
27.5%
26.2%
24.2%
% of Total
8.8%
7.2%
8.2%
24.2%
5
13
2
20
% within INCOME
25.0%
65.0%
10.0%
100.0%
% within
ATTITUDE OF
INVESTOR
6.1%
25.5%
3.3%
10.3%
% of Total
2.6%
6.7%
1.0%
10.3%
82
51
61
194
% within INCOME
42.3%
26.3%
31.4%
100.0%
% within
ATTITUDE OF
INVESTOR
100.0%
100.0%
100.0%
100.0%
% of Total
42.3%
26.3%
31.4%
100.0%
Count
Count
Count
Count
206
Chi-Square Tests
Value
df
Asymp. Sig. (2-sided)
Pearson Chi-Square
26.708a
6
.003
Likelihood Ratio
31.718
9
.000
Linear-by-Linear
14.439
1
.000
Association
N of Valid Cases
193
Null Hypothesis : Attitude of Investor is independent of Income of Investor
Alternative Hypothesis : Attitude of Investor is dependent on Income of Investor
Chi Square test 24.990 dof 9 > Table Value at 5% 12.592
Hence it can be conclude that Attitude of Investor is dependent on Income of
Investor
Fig 5.40
207
Fig 5.41
Fig 5.42
208
Fig 5.43
1. 36.3% of total investor were of view point that they have become conservative
after the fall in share market which happened because of slowdown in
economy and Sub Prime and Euro crises whereas 33.2% were of view that
they will not change their asset allocation because of these turmoil in share
market
2. 39.6% of Investor of age less than 30 years have not changes their asset
allocation, Similarly for Investor whose age is between 30–45 years 37.5%
have not changed their asset allocation but as the age increases investors have
become conservative as 17.3% investors in the age of 45-60 years have
become conservative and those above 60, 36.3% have become conservative
3. On testing the hypothesis it was found that change of attitude is independent
of age of investor thus it was observed that people have change their attitude
and that is independent of age of investor
4. Investor of all profession except those in private job have become
conservative in their investment and have move away from equity mutual fund
as 48.6% of investors in govt service have become conservative, similarly
209
34.5% of businessman and 39.3% of retired investors have become
conservative , however 49.6% of investor in private sector have not change
their attitude
5. On hypothesis testing it was inferred that change of attitude of investors has
no relevance with the profession of investor
6. On analyzing the behavior of Investor on the basis of income it was observed
that 39.6% of investor whose income is less than Rs 3 lakh have become
conservative , Similarly 31.6% of investor in the income group of Rs 3lakh to
Rs 5 lakh have become conservative and 39.1 % of investor in the income
range of Rs 3lac to Rs 5 lac have become conservative , However Investors
having income of more than Rs 10 lac , 45% have become more aggressive in
Equity Mutual fund investing
7. On testing the hypothesis with Income of Investor it was observed that attitude
of investor changes with the Income of Investor and people having higher
Income have remain indifferent with changes in market
210
Table 5.44
Crosstabulation of AUM of Distributor with Investor’s Behaviour
Investors Behaviour
Total
Yes
No
Aggressive change
2
2
16
% within AUM
75.0%
12.5%
12.5%
100.0%
% within Investors
Behaviour
25.0%
6.9%
33.3%
19.3%
% of Total
14.5%
2.4%
2.4%
19.3%
14
6
0
20
% within AUM
70.0%
30.0%
.0%
100.0%
% within Investors
Behaviour
29.2%
20.7%
.0%
24.1%
% of Total
16.9%
7.2%
.0%
24.1%
18
7
0
25
% within AUM
72.0%
28.0%
.0%
100.0%
% within Investors
Behaviour
37.5%
24.1%
.0%
30.1%
% of Total
21.7%
8.4%
.0%
30.1%
4
14
4
22
% within AUM
18.2%
63.6%
18.2%
100.0%
% within Investors
Behaviour
8.3%
48.3%
66.7%
26.5%
% of Total
4.8%
16.9%
4.8%
26.5%
48
29
6
83
% within AUM
57.8%
34.9%
7.2%
100.0%
% within Investors
Behaviour
100.0%
100.0%
% of Total
57.8%
34.9%
Between 50 lakh
-1 crore
12
Between 1 crore
- 5 crore
Count
Count
Count
More than 5
crore
AUM
Less than 50
lakhs
Yes
Conservative
Total
Count
Count
100.0% 100.0%
7.2%
100.0%
211
Chi-Square Tests
Value
df
Asymp. Sig. (2-sided)
Pearson Chi-Square
23.670a
6
.001
Likelihood Ratio
27.534
6
.000
Linear-by-Linear
Association
9.320
1
.002
N of Valid Cases
83
a. 4 cells (33.3%) have expected count less than 5. The minimum expected count is 1.16.
Null Hypothesis : Investor Behavior change is independent of AUM of advisor
Alternative Hypothesis : Investor Behavior change is dependent on AUM of
advisor
Chi Square Value 23.670 > Table Value 12.58 which implies Null Hypothesis is
rejected
This implies that advisors have different opinion regarding investor's attitude and
behaviour towards equity market and advisors having high AUM think differntly
than others in the Mutual Fund distribution
Fig 5.45
212
Fig 5.46
Table 5.47
Cross Tabulation of Various Classes and Investor’s Attitude
INVESTOR ATTITUDE
DISTRIBUTO
R
INVESTOR
CLASS
EMPLOYEE
YES
YES
CONSERVA AGGRES
TIVE
IVE
Count
Total
CHANGE
26
21
11
58
% within CLASS
44.8%
36.2%
19.0%
100.0%
% within INVESTOR
ATTITUDE
16.7%
20.6%
14.1%
17.3%
% of Total
7.7%
6.3%
3.3%
17.3%
48
29
6
83
% within CLASS
57.8%
34.9%
7.2%
100.0%
% within INVESTOR
ATTITUDE
30.8%
28.4%
7.7%
24.7%
% of Total
14.3%
8.6%
1.8%
24.7%
82
52
61
195
% within CLASS
42.1%
26.7%
31.3%
100.0%
% within INVESTOR
ATTITUDE
52.6%
51.0%
78.2%
58.0%
% of Total
24.4%
15.5%
18.2%
58.0%
156
102
78
336
% within CLASS
46.4%
30.4%
23.2%
100.0%
% within INVESTOR
ATTITUDE
100.0%
100.0%
100.0%
100.0%
% of Total
46.4%
30.4%
23.2%
100.0%
Count
Count
Count
Total
NO
213
Chi-Square Tests
Value
df
Asymp. Sig. (2-sided)
Pearson Chi-Square
20.319a
4
.000
Likelihood Ratio
23.036
4
.000
Linear-by-Linear
5.241
1
.022
Association
N of Valid Cases
336
a. 0 cells (.0%) have expected count less than 5. The minimum expected count is 13.46.
Null Hypothesis: Investor's attitude towards investment is independent of class
Alternative Hypothesis : Investor's attitude is dependent on class
At 95% confidence interval Chi Square Value 20.319 > Table Value 9.348 Hence
the Null Hypothesis is rejected and it can be concluded that Investor's attitude is
dependent on class as 31.3% investors feels that there is no change in their attitude
however only 7.2% investor feel that there has been no change in attitude of
investor and 19% employees feel that there is no change in investor's attitude
Fig 5.48
214
Investor's Attitude towards Investment in Equity Mutual Fund
Distributor's response
1. Even 57.8% of advisors were of view that the Investor has become
conservative and 34.9% were of view that the Investor portfolio has become
aggressive
2. Its been also observed Advisors who have larger AUM base (more than Rs 5
crore) have (63.6% )opined that investors have become aggressive
3. On testing the hypothesis it was observed that opinion of advisor of behaviour
of Investor is depending on AUM of advisor
On analyzing the combine response from Investor , Distributor and Employees of
AMC , 46.4% of them believed that Investors have become conservative in their
Investments and have migrated from Equity Mutual Fund to other investment
avenues
Mode of Investing : Mutual Fund offers various mode of Investing and investors
are lured in the scheme by offering various investment options. One of the very
common mode of investing during the period 2001- 2007 was by bringing NFO
(New Fund Offer) in which advisors used to wrongly lured investors by offering
high rebating and also misguiding investors of selling schemes at Rs 10 NAV.
SEBI intervened by framing rules for NFO for AMC's of not bringing any new
scheme if they have schemes running which will have similar portfolio
It was during period of volatility in equity market that importance of SIP & STP
became prominent
215
Table 5.49
Cross tabulation of Age of Investor with Mode of Investing
Crosstab
LESS THAN 30
YRS
MODEOFINVESTING
SIP
LUMP
SUM
NFO
STP
37
7
5
4
% within AGE
69.8%
13.2%
9.4%
7.5%
100.0%
% within MODE
OF INVESTING
32.7%
11.7%
55.6%
30.8%
27.2%
% of Total
19.0%
3.6%
2.6%
2.1%
27.2%
52
25
4
7
% within AGE
59.1%
28.4%
4.5%
8.0%
100.0%
% within MODE
OF INVESTING
46.0%
41.7%
44.4%
53.8%
45.1%
% of Total
26.7%
12.8%
2.1%
3.6%
45.1%
14
12
0
1
% within AGE
51.9%
44.4%
.0%
3.7%
100.0%
% within MODE
OF INVESTING
12.4%
20.0%
.0%
7.7%
13.8%
% of Total
7.2%
6.2%
.0%
.5%
13.8%
10
16
0
1
% within AGE
37.0%
59.3%
.0%
3.7%
100.0%
% within MODE
OF INVESTING
8.8%
26.7%
.0%
7.7%
13.8%
% of Total
5.1%
8.2%
.0%
.5%
13.8%
113
60
9
13
195
57.9%
30.8%
4.6%
6.7%
% within MODE
100.0% 100.0%
OF INVESTING
100.0
%
% of Total
4.6%
Count
30-45 YRS
Count
AGE
MORE THAN 60
YRS
45-60 YRS
Count
Count
Count
% within AGE
Total
57.9%
30.8%
Total
53
88
27
27
100.0%
100.0% 100.0%
6.7%
100.0%
216
Chi-Square Tests
Value
df
Asymp. Sig. (2-sided)
Pearson Chi-Square
23.904a
9
.004
Likelihood Ratio
25.855
9
.002
Linear-by-Linear
Association
.383
1
.536
N of Valid Cases
195
a. 7 cells (43.8%) have expected count less than 5. The minimum expected count is 1.25.
As observed from Cross Tabulation SIP (Systematic Investment Plan) is the most
popular way of Investing in Mutual Fund However at higher age people tend to
prefer Lump Sum Investment in MF
Null Hypothesis: Age has no relevance with the mode of Investing in Mutual Fund
Alternative Hypothesis: Mode of Investing has relevance and is dependent on Age
of Investor's
Chi Square Test 23.904 dof 9 > 16.919 Table Value at 5% level of Confidence
which implies that Null Hypothesis is rejected and we can conclude that Mode of
Investing changes with the age of Investor
217
Table 5.50
Cross tabulation of Occupation of Investor with Mode of Investing
Crosstab
PVT SERVICE
BUSINESS/
PROFESSIONAL
RETIRED
OCCUPATION
GOVT SERVICE
MODE OF INVESTING
Total
Total
SIP
LUMP
SUM
NFO
STP
Count
21
13
1
2
37
% within
OCCUPATION
56.8%
35.1%
2.7%
5.4%
100.0%
% within MODE
OF INVESTING
18.6%
21.7%
11.1%
15.4%
19.0%
% of Total
10.8%
6.7%
.5%
1.0%
19.0%
Count
51
11
6
4
72
% within
OCCUPATION
70.8%
15.3%
8.3%
5.6%
100.0%
% within MODE
OF INVESTING
45.1%
18.3%
66.7%
30.8%
36.9%
% of Total
26.2%
5.6%
3.1%
2.1%
36.9%
Count
30
20
2
6
58
% within
OCCUPATION
51.7%
34.5%
3.4%
10.3%
100.0%
% within MODE
OF INVESTING
26.5%
33.3%
22.2%
46.2%
29.7%
% of Total
15.4%
10.3%
1.0%
3.1%
29.7%
Count
11
16
0
1
28
% within
OCCUPATION
39.3%
57.1%
.0%
3.6%
100.0%
% within MODE
OF INVESTING
9.7%
26.7%
.0%
7.7%
14.4%
% of Total
5.6%
8.2%
.0%
.5%
14.4%
Count
113
60
9
13
195
% within
OCCUPATION
57.9%
30.8%
4.6%
6.7%
100.0%
% within MODE
OF INVESTING
100.0%
100.0%
100.0%
100.0%
100.0%
% of Total
57.9%
30.8%
4.6%
6.7%
100.0%
218
From the survey SIP is supposed to be the best form of Investment in Mutual Fund
as 57.9% investors preferred this mode
Null Hypothesis: Mode of Investment is independent of Occupation of Investor
Alternate Hypothesis : Mode of Investment is dependent on Occupation of
Investor
Chi Square Test 22.291 dof 9 > Table Value 16.919 at 95% confidence level
Hence it can be concluded that Mode of Investment is dependent on Occupation
of Investor
as Retired people and Businessman tend to prefer Lump Sum
Investment in Mutual Fund whereas Salaried class is more inclined towards SIP
mode of Investment
Chi-Square Tests
Value
df
Asymp. Sig. (2-sided)
Pearson Chi-Square
22.291a
9
.008
Likelihood Ratio
23.231
9
.006
Linear-by-Linear
1.260
1
.262
Association
N of Valid Cases
195
a. 8 cells (50.0%) have expected count less than 5. The minimum expected count is 1.29.
219
Table 5.51
Cross Tabulation of Income of Investor with Mode of Investing
3 LAC - 5 LAC
5 LAC -10 LAC
MORE THAN 10
LAC
INCOME
LESS THAN 3
LAC
MODE OF INVESTING
SIP
LUMP
SUM
NFO
STP
37
10
0
1
48
% within
INCOME
77.1%
20.8%
.0%
2.1%
100.0%
% within MODE
OF INVESTING
32.7%
16.7%
.0%
7.7%
24.6%
% of Total
19.0%
5.1%
.0%
.5%
24.6%
41
26
6
6
79
% within
INCOME
51.9%
32.9%
7.6%
7.6%
100.0%
% within MODE
OF INVESTING
36.3%
43.3%
66.7%
46.2%
40.5%
% of Total
21.0%
13.3%
3.1%
3.1%
40.5%
28
11
3
6
48
% within
INCOME
58.3%
22.9%
6.3%
12.5%
100.0%
% within MODE
OF INVESTING
24.8%
18.3%
33.3%
46.2%
24.6%
% of Total
14.4%
5.6%
1.5%
3.1%
24.6%
7
13
0
0
20
% within
INCOME
35.0%
65.0%
.0%
.0%
100.0%
% within MODE
OF INVESTING
6.2%
21.7%
.0%
.0%
10.3%
% of Total
3.6%
6.7%
.0%
.0%
10.3%
113
60
9
13
195
% within
INCOME
57.9%
30.8%
4.6%
6.7%
100.0%
% within MODE
OF INVESTING
100.0%
100.0%
100.0%
100.0%
100.0%
% of Total
57.9%
30.8%
4.6%
6.7%
100.0%
Count
Count
Count
Count
Count
Total
Total
220
Chi-Square Tests
Value
df
Asymp. Sig. (2-sided)
Pearson Chi-Square
25.921a
9
.002
Likelihood Ratio
28.625
9
.001
Linear-by-Linear
4.664
1
.031
Association
N of Valid Cases
195
a. 7 cells (43.8%) have expected count less than 5. The minimum expected count is .92.
Null Hypothesis:Mode of Investment is independent of Income of Investor
Alternate Hypothesis : Mode of Investment is dependent on Income of Investor
Chi Square Value at 95% confidence for 9 dof is 25.921 > 16.919
Thus Null Hypothesis is accepted which implies that Mode of Investment is
dependent of income of Investor
Fig 5.52
221
Fig 5.53
Fig 5.54
222
Fig 5.55

57.9% of Investor prefer SIP as a mode of investment in Mutual Fund,
whereas 30.8% prefer Lumpsum for Investing in Mutual Fund as regards
Investing in NFO is concerned during the period of Survey there were very
few NFO in the market and as regard STP is concerned Investor in the region
were unaware of this mode of Investment in Mutual fund and its benefit

Investor in the age group of more than 60 prefer Lump Sum Investment more
over SIP , and for all other ages SIP is the preferred Mode of Investing in
Mutual Fund

On testing Hypothesis it was also concluded that Mode of Investing changes
with the age

While evaluating Mode of Investing with the Occupation of the Investor's in
Govt Job and Private Service tend to prefer SIP as a Mode of Investment.
Retired people tend to prefer Lump sum Investment (57.1% ) as against SIP
(39.3%). In most cases these people have their retirement benefit amount to
invest and hence their preference is LumpSum Investment and most of these
are unaware of STP mode of investment. Similarly Businessmen too prefer
Lump sum Investment (33.3%) as against SIP (26.5%)

On Testing the hypothesis it was inferred that mode of investment is
dependent on the occupation of the investor
223
Choice of Distributor:
Investor has various choices through which he can invest in Mutual Fund scheme.
The various intermediaries are

Independent Financial Advisor (IFA's): These are individual advisor who
have obtained registration number from AMFI after passing examination
conducted by NISM. These are the biggest distribution network and have
widest geographic reach

Broker : These are corporate distributors and have their branches at various
locations and they create sub -brokership under themselves and they share
their revenue with the sub brokers

Banks : In the recent years Banks & Post office have converted themselves
into a financial mall and as one hop for selling all financial products
besides conducting tier banking activities.

Direct/Online: With the abolishment of entry load , SEBI has allowed
investors have choice to invest directly by walking to AMC and also
almost all AMC's today permit investors to buy mutual fund schemes
directly through there websites
224
Table 5.56
Cross Tabulation of Age with Choice of Distributor
Crosstab
LESS THAN
30 YRS
DISTRIBUTOR
6
DIRE
CT/
ONLI
NE
21
52
1.9%
11.5%
40.4%
100.0%
19.8%
12.5%
24.0%
53.8%
26.9%
12.4%
.5%
3.1%
10.9%
26.9%
61
4
8
15
88
% within AGE
69.3%
4.5%
9.1%
17.0%
100.0%
% within
DISTRIBUTOR
50.4%
50.0%
32.0%
38.5%
45.6%
% of Total
31.6%
2.1%
4.1%
7.8%
45.6%
17
0
7
2
26
% within AGE
65.4%
.0%
26.9%
7.7%
100.0%
% within
DISTRIBUTOR
14.0%
.0%
28.0%
5.1%
13.5%
% of Total
8.8%
.0%
3.6%
1.0%
13.5%
19
3
4
1
27
% within AGE
70.4%
11.1%
14.8%
3.7%
100.0%
% within
DISTRIBUTOR
15.7%
37.5%
16.0%
2.6%
14.0%
% of Total
9.8%
1.6%
2.1%
.5%
14.0%
Count
121
8
25
39
193
% within AGE
62.7%
4.1%
13.0%
20.2%
100.0%
% within
DISTRIBUTOR
100.0
%
100.0
%
100.0
%
100.0
%
100.0%
% of Total
62.7%
4.1%
13.0%
20.2%
100.0%
IFA
BRO
KER
BAN
KS
24
1
% within AGE
46.2%
% within
DISTRIBUTOR
% of Total
Count
AGE
30-45 YRS
Count
45-60 YRS
Count
MORE THAN
60 YRS
Total
Total
Count
225
Chi-Square Tests
Value
df
Asymp. Sig. (2-sided)
Pearson Chi-Square
29.711a
9
.000
Likelihood Ratio
29.470
9
.001
Linear-by-Linear
10.016
1
.002
Association
N of Valid Cases
193
a. 6 cells (37.5%) have expected count less than 5. The minimum expected count is 1.08.
As observed from Cross tabulation that at younger age Investor do have a
tendency to choose Online/Direct as one of their preferred way of Investing in
Mutual Fund as at age group of less than30 years , 40.4% investor preferred
Online/Direct
It is also seen that 62.4% Investor prefered IFA for Mutual Fund Investment
Null Hypothesis: Age has no relevance with the distribution channel chosen by
Investor
Alternative Hypothesis: Distribution channel depends upon the Age of the
Investor
Chi Square 29.711 dof 9 > 16.919 at 5% confidence interval which implies Null
Hypothesis is rejected and it can be concluded that Distribution Channel is
associated with the age of Investor
226
Table 5.57
Cross tabulation of occupation of Investor with choice of Distributor
Crosstab
DISTRIBUTOR
PVT SERVICE
BUSINESS/
PROFESSIONAL
OCCUPATION
GOVT SERVICE
IFA
Count
RETIRED
DIRECT/
ONLINE
25
2
3
6
36
% within
OCCUPATION
69.4%
5.6%
8.3%
16.7%
100.0%
% within
DISTRIBUTOR
20.7%
25.0%
12.0%
15.4%
18.7%
% of Total
13.0%
1.0%
1.6%
3.1%
18.7%
40
2
8
21
71
% within
OCCUPATION
56.3%
2.8%
11.3%
29.6%
100.0%
% within
DISTRIBUTOR
33.1%
25.0%
32.0%
53.8%
36.8%
% of Total
20.7%
1.0%
4.1%
10.9%
36.8%
36
1
10
11
58
% within
OCCUPATION
62.1%
1.7%
17.2%
19.0%
100.0%
% within
DISTRIBUTOR
29.8%
12.5%
40.0%
28.2%
30.1%
% of Total
18.7%
.5%
5.2%
5.7%
30.1%
20
3
4
1
28
% within
OCCUPATION
71.4%
10.7%
14.3%
3.6%
100.0%
% within
DISTRIBUTOR
16.5%
37.5%
16.0%
2.6%
14.5%
% of Total
10.4%
1.6%
2.1%
.5%
14.5%
121
8
25
39
193
62.7%
4.1%
13.0%
20.2%
100.0%
100.0%
100.0%
100.0%
100.0%
4.1%
13.0%
20.2%
100.0%
Count
Count
Count
Count
Total
BROKER BANKS
Total
% within
OCCUPATION
% within
100.0%
DISTRIBUTOR
% of Total
62.7%
227
IFA (Independent Financial Advisers seems to be the preferred distributor medium
as 62.7% of Investor showed preference towards IFA.
Null Hypothesis: Choice of distributor is independent on Profession of Investor
Alternative Hypothesis : Choice of distributor is dependent on Profession of
Investor
Chi Square Value at 95% 14.072 dof 9 < table Value 16.919 Hence Null
Hypothesis is accepted and can be concluded that Choice of distributor is
Independent of Profession of Investor
Chi-Square Tests
Value
df
Asymp. Sig. (2-sided)
Pearson Chi-Square
14.072a
9
.120
Likelihood Ratio
15.079
9
.089
Linear-by-Linear
.795
1
.373
Association
N of Valid Cases
193
a. 6 cells (37.5%) have expected count less than 5. The minimum expected count is 1.16.
228
Table 5.58
Cross tabulation of Income of Investor with Choice of Distributor
3 LAC - 5 LAC
5 LAC -10 LAC
MORE THAN 10
LAC
INCOME
LESS THAN 3 LAC
DISTRIBUTOR
Total
Total
DIRECT/
IFA
BROKER
BANKS
Count
30
2
4
11
47
% within
INCOME
63.8%
4.3%
8.5%
23.4%
100.0%
% within
DISTRIBUTOR
24.8%
25.0%
16.0%
28.2%
24.4%
% of Total
15.5%
1.0%
2.1%
5.7%
24.4%
Count
57
2
8
12
79
% within
INCOME
72.2%
2.5%
10.1%
15.2%
100.0%
% within
DISTRIBUTOR
47.1%
25.0%
32.0%
30.8%
40.9%
% of Total
29.5%
1.0%
4.1%
6.2%
40.9%
Count
27
4
3
13
47
% within
INCOME
57.4%
8.5%
6.4%
27.7%
100.0%
% within
DISTRIBUTOR
22.3%
50.0%
12.0%
33.3%
24.4%
% of Total
14.0%
2.1%
1.6%
6.7%
24.4%
Count
7
0
10
3
20
% within
INCOME
35.0%
.0%
50.0%
15.0%
100.0%
% within
DISTRIBUTOR
5.8%
.0%
40.0%
7.7%
10.4%
% of Total
3.6%
.0%
5.2%
1.6%
10.4%
Count
121
8
25
39
193
% within
INCOME
62.7%
4.1%
13.0%
20.2%
100.0%
% within
DISTRIBUTOR
100.0% 100.0%
100.0%
100.0%
100.0%
% of Total
62.7%
13.0%
20.2%
100.0%
4.1%
ONLINE
229
Null Hypothesis: Choice of distributor is independent on Income of Investor
Alternative Hypothesis : Choice of distributor is dependent on Income of Investor
Chi Square Value at 95% confidence at 9 dof is 34.020
Chi-Square Tests
Value
df
Asymp. Sig. (2-sided)
Pearson Chi-Square
34.020a
9
.000
Likelihood Ratio
26.324
9
.002
Linear-by-Linear
2.967
1
.085
Association
N of Valid Cases
193
a. 6 cells (37.5%) have expected count less than 5. The minimum expected count is .83.
Fig 5.59
230
Fig 5.60
Fig 5.61
231
Fig 5.62
1. At all age groups IFA seems to be preferred Intermediary for Mutual Fund
Schemes, however Investor at age group less than 30 yrs 46.2% Investors
preferred IFA , whereas 40.4% preferred Online/Direct Mode of Investing
2. On Testing the hypothesis , it was inferred that the choice of distribution
changes with the age of the investor as at younger age investors are showing
inclination towards online Mode of Investment which is not there as the age
increases
3. Investors who are in Private Service also have shown inclination towards
Direct/Online Mode of Investment as 29.6% of Investors in Private Service
prefer this mode, even though 56.3% prefer IFA's , whereas Retired Investor
seems to prefer IFA's only as 71.4% preferred IFA's and only 3.1% retired
Investor opted for Online Mode.
4. On testing the hypothesis it was observed that Choice of distributor is
independent of profession of Investor as there is no particular trend with the
profession of the investor
5. IFA's are preferred choice of Intermediary for all ages except for those whose
232
income >10 lacs where investor preferred Banks as their preferred Distributor
(50%) , primarily due to Wealth Banking services offered by Banks to this
segment
6. On testing the hypothesis it was observed that Choice of distributor changes
with the Income of the investor and Investor having higher Income have
shown inclination towards banks and brokers
7. Online /Direct Mode of Investment is fastly becoming more attractive mode of
investment as with the advancement of technology and Mobile application
offered by AMC's Investors are getting attracted toward this mode
Advise for Investments : Investors have various option from where they take
advice for investments in Mutual fund namely
Independent Financial Advisor: IFA's are definitely the first choice for investor
for taking advice for investment in mutual fund scheme
Corporate Brokers: These being corporate houses
do
provide extensive
research report for various mutual fund scheme and suggest their customer about
various schemes
Banks: Banks becoming a financial store also providing advisory services to their
client for various financial products
Friends & Relatives: Investors also take advice from their friends and relatives
who have knowledge about financial products and mutual funds
Self research: These days there are websites which provide ranking and rating of
performance of mutual fund schemes through which investors identify schemes
of their choice
233
Table 5.63
Cross tabulation of Age with Choice of Advisor
Crosstab
LESS THAN 30 YRS
ADVICE FROM WHERE
IFA
CORPOR
ATE
BROKE
RS
BANKS
15
2
11
1
22
51
% within AGE
29.4%
3.9%
21.6%
2.0%
43.1%
100.0%
% within
ADVICE
FROM WHERE
14.4%
20.0%
34.4%
14.3%
56.4%
26.6%
% of Total
7.8%
1.0%
5.7%
.5%
11.5%
26.6%
55
5
11
2
14
87
% within AGE
63.2%
5.7%
12.6%
2.3%
16.1%
100.0%
% within
ADVICE
FROM WHERE
52.9%
50.0%
34.4%
28.6%
35.9%
45.3%
% of Total
28.6%
2.6%
5.7%
1.0%
7.3%
45.3%
14
0
7
3
3
27
% within AGE
51.9%
.0%
25.9%
11.1%
11.1%
100.0%
% within
ADVICE
FROM WHERE
13.5%
.0%
21.9%
42.9%
7.7%
14.1%
% of Total
7.3%
.0%
3.6%
1.6%
1.6%
14.1%
20
3
3
1
0
27
% within AGE
74.1%
11.1%
11.1%
3.7%
.0%
100.0%
% within
ADVICE
FROM WHERE
19.2%
30.0%
9.4%
14.3%
.0%
14.1%
% of Total
10.4%
1.6%
1.6%
.5%
.0%
14.1%
104
10
32
7
39
192
% within AGE
54.2%
5.2%
16.7%
3.6%
20.3%
100.0%
% within
ADVICE
FROM WHERE
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
% of Total
54.2%
5.2%
16.7%
3.6%
20.3%
100.0%
Count
AGE
30-45 YRS
Count
MORE THAN 60
YRS
45-60 YRS
Count
Count
Count
Total
Total
FRIENDS
SELF
&
RESEAR
RELATIV
CH
ES
234
Chi-Square Tests
Value
df
Asymp. Sig. (2-sided)
Pearson Chi-Square
41.391a
12
.000
Likelihood Ratio
44.348
12
.000
Linear-by-Linear
19.222
1
.000
Association
N of Valid Cases
192
a. 10 cells (50.0%) have expected count less than 5. The minimum expected count is .98.
As observed from the cross tabulation IFA(Independent Financial Advisor) 54.2%
seems to be preferred choice for taking advice for investing in Mutual Fund
however at younger age people do rely on their on self research
Null Hypothesis: Choice for Investor of taking advice is independent of age
group
Alternative Hypothesis: Choice for investor of taking advice is dependent on age
group of Investor
Chi 41.931 dof 12 > 21.026
and hence Null Hypothesis is rejected and we
conclude that as the age changes the choice from where advice is taken changes
235
Table 5.64
Cross tabulation of Occupation with Choice of Advisor
Crosstab
PVT SERVICE
BUSINESS/
PROFESSIONAL
RETIRED
OCCUPATION
GOVT SERVICE
ADVICEFROMWHERE
Total
Total
IFA
CORPO
RATE
BROK
ERS
BANK
S
FRIEN
DS &
RELAT
IVES
SELF
RESEA
RCH
Count
26
2
2
0
5
35
% within
OCCUPATION
74.3%
5.7%
5.7%
.0%
14.3%
100.0%
% within
ADVICEFRO
MWHERE
25.0%
20.0%
6.3%
.0%
12.8%
18.2%
% of Total
13.5%
1.0%
1.0%
.0%
2.6%
18.2%
Count
30
2
19
2
18
71
% within
OCCUPATION
42.3%
2.8%
26.8%
2.8%
25.4%
100.0%
% within
ADVICE
FROM
WHERE
28.8%
20.0%
59.4%
28.6%
46.2%
37.0%
% of Total
15.6%
1.0%
9.9%
1.0%
9.4%
37.0%
Count
27
3
8
4
16
58
% within
OCCUPATION
46.6%
5.2%
13.8%
6.9%
27.6%
100.0%
% within
ADVICE
FROM
WHERE
26.0%
30.0%
25.0%
57.1%
41.0%
30.2%
% of Total
14.1%
1.6%
4.2%
2.1%
8.3%
30.2%
Count
21
3
3
1
0
28
% within
OCCUPATION
75.0%
10.7%
10.7%
3.6%
.0%
100.0%
% within
ADVICE
FROM
WHERE
20.2%
30.0%
9.4%
14.3%
.0%
14.6%
% of Total
10.9%
1.6%
1.6%
.5%
.0%
14.6%
Count
104
10
32
7
39
192
% within
OCCUPATION
54.2%
5.2%
16.7%
3.6%
20.3%
100.0%
% within
ADVICE
FROM
WHERE
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
% of Total
54.2%
5.2%
16.7%
3.6%
20.3%
100.0%
236
Chi-Square Tests
Value
df
Asymp. Sig. (2-sided)
Pearson Chi-Square
29.312a
12
.004
Likelihood Ratio
35.520
12
.000
Linear-by-Linear
.235
1
.628
Association
N of Valid Cases
192
a. 9 cells (45.0%) have expected count less than 5. The minimum expected count is 1.02.
Null Hypothesis: Null Hyothesis: Choice for
Investor of taking advice is
independent of profession of investor
Alternative Hypothesis: Choice for investor of taking advice is dependent on
profession of Investor
Chi Square 29.312 dof 12 at 95% Confidence > 21.026 Table Value, Hence
Alternate hypothesis is accepted which implies with the change in profession the
choice of investor for taking advice changes
Most of the Investor take advice from IFA (54.2%) for choosing Mutual Fund
Scheme and investors from all profession prefer IFA for advice
237
Table 5.65
Cross tabulation of Income with Choice of Advisor
Crosstab
3 LAC - 5 LAC
5 LAC -10 LAC
MORE THAN 10
LAC
INCOME
LESS THAN 3
LAC
ADVICE FROM WHERE
IFA
CORP
ORAT
E
BROK
ERS
BANK
S
FRIEN
DS &
RELA
TIVES
SELF
RESE
ARCH
27
3
6
1
10
47
% within INCOME
57.4%
6.4%
12.8%
2.1%
21.3%
100.0%
% within ADVICE
FROMWHERE
26.0%
30.0%
18.8%
14.3%
25.6%
24.5%
% of Total
14.1%
1.6%
3.1%
.5%
5.2%
24.5%
45
4
14
4
10
77
% within INCOME
58.4%
5.2%
18.2%
5.2%
13.0%
100.0%
% within ADVICE
FROMWHERE
43.3%
40.0%
43.8%
57.1%
25.6%
40.1%
% of Total
23.4%
2.1%
7.3%
2.1%
5.2%
40.1%
26
3
2
1
16
48
% within INCOME
54.2%
6.3%
4.2%
2.1%
33.3%
100.0%
% within ADVICE
FROMWHERE
25.0%
30.0%
6.3%
14.3%
41.0%
25.0%
% of Total
13.5%
1.6%
1.0%
.5%
8.3%
25.0%
6
0
10
1
3
20
% within INCOME
30.0%
.0%
50.0%
5.0%
15.0%
100.0%
% within ADVICE
FROMWHERE
5.8%
.0%
31.3%
14.3%
7.7%
10.4%
% of Total
3.1%
.0%
5.2%
.5%
1.6%
10.4%
104
10
32
7
39
192
% within INCOME
54.2%
5.2%
16.7%
3.6%
20.3%
100.0%
% within ADVICE
FROMWHERE
100.0
%
100.0
%
100.0
%
100.0
%
100.0
%
100.0%
% of Total
54.2%
5.2%
16.7%
3.6%
20.3%
100.0%
Count
Count
Count
Count
Count
Total
Total
238
Chi-Square Tests
Value
df
Asymp. Sig. (2-sided)
Pearson Chi-Square
29.710a
12
.003
Likelihood Ratio
28.159
12
.005
Linear-by-Linear
2.428
1
.119
Association
N of Valid Cases
192
a. 10 cells (50.0%) have expected count less than 5. The minimum expected count is .73.
Null Hypothesis: Choice for Investor of taking advice is independent of income
of investor
Alternative Hypothesis: Choice for investor of taking advice is dependent on
Income of Investor
Chi Square Value at 95% confidence for 12 dof is 29.710 > 21.026 which implies
that Null hypothesis is rejected and conclude that choice for Investor of taking
Advice varies with Income of Investor
Fig 5.66
239
Fig 5.67
Fig 5.68
240
Fig 5.69
 In the region still 54.2% Investor seek advice from IFA's and 20.3% of
Investor are doing heir own research for Investments followed by banks
where 16.7% investor have shown preference
 On doing Age wise analysis it was observed that Investor who are less than
30 years rely more on self research (43.1%) and retired people rely on their
advisers (74.1% )
 On testing the hypothesis it was inferred that as the age changes the choice of
advisor changes and as can be observed that younger age investor are
inclining toward self research whereas old people (Age >60) seem to rely on
his IFA for advice
 Investors who are in Government Service preferred IFA's for advice (74.3%)
whereas Investor in private service have diverse opinion as 42.3% preferred
IFA's 26.8% preferred Banks and 25.4% rely on Self Research .
 On testing the hypothesis it was inferred that with the change in profession
the choice for advisor changes and can be conclude that choice of advisor is
dependent on profession of Investor
241
 Investor at all Income group preferred IFA 's for their advice except for those
having high Income (More than Rs 10 lakh) where the preferred advisor is
Bank(50%). This is possibly due to specialized services given by banks to
their privilege customers
 On testing the hypothesis it was inferred that the choice of adviser is
dependent on the Income of the Investor
Continuity with existing Advisor : With the change in market condition and false
claims made by various advisor and brokers Investors at time change their
advisors especially in the market
period which is accompanied by negative
returns. At times some of the advisors push for certain schemes which offer high
incentives
242
Table 5.70
Cross tabulation of Age with Continuity with Advisor
Crosstab
CONTINUEWITHADVISOR
NO
PARTLY
31
11
11
53
58.5%
20.8%
20.8%
100.0%
21.8%
34.4%
52.4%
27.2%
15.9%
5.6%
5.6%
27.2%
69
16
3
88
% within AGE
78.4%
18.2%
3.4%
100.0%
% within
CONTINUE
WITH ADVISOR
48.6%
50.0%
14.3%
45.1%
% of Total
35.4%
8.2%
1.5%
45.1%
16
4
7
27
% within AGE
59.3%
14.8%
25.9%
100.0%
% within
CONTINUE
WITH ADVISOR
11.3%
12.5%
33.3%
13.8%
% of Total
8.2%
2.1%
3.6%
13.8%
26
1
0
27
96.3%
3.7%
.0%
100.0%
18.3%
3.1%
.0%
13.8%
13.3%
.5%
.0%
13.8%
142
32
21
195
% within AGE
72.8%
16.4%
10.8%
100.0%
% within
CONTINUE
WITH ADVISOR
100.0%
100.0%
100.0%
100.0%
% of Total
72.8%
16.4%
10.8%
100.0%
Count
% within AGE
< 30 % within
YRS
CONTINUE
WITH ADVISOR
% of Total
Count
30-45
YRS
AGE
Count
45-60
YRS
Count
% within AGE
> 60 % within
YRS
CONTINUE
WITH ADVISOR
% of Total
Count
Total
Total
YES
243
Most Investors (72.8%) have continued with their advisers and at all age group
Investors have shown tendency to continue with its existing adviser
Chi-Square Tests
Value
df
Asymp. Sig. (2-sided)
Pearson Chi-Square
26.074a
6
.000
Likelihood Ratio
29.038
6
.000
Linear-by-Linear
6.695
1
.010
Association
N of Valid Cases
195
a. 4 cells (33.3%) have expected count less than 5. The minimum expeted count is 2.91.
Null Hypothesis : Continuity with the existing adviser is independent with the age
of Investor
Alternative Hypothesis : Continuity with the existing adviser is dependent with
the age of Investor
Chi Square Value 26.074 at 6 dof < Table value 12.59
Hence Accepting the Null Hypothesis
244
Table 5.71
Cross tabulation of Occupation with continuity of Advisor
PVT SERVICE
BUSINESS/
PROFESSIONAL
RETIRED
OCCUPATION
GOVT SERVICE
Crosstab
Total
Count
% within
OCCUPATION
% within
CONTINUE
WITH ADVISOR
% of Total
Count
% within
OCCUPATION
% within
CONTINUE
WITH ADVISOR
% of Total
Count
% within
OCCUPATION
% within
CONTINUE
WITH ADVISOR
% of Total
Count
% within
OCCUPATION
% within
CONTINUE
WITH ADVISOR
% of Total
Count
% within
OCCUPATION
% within
CONTINUE
WITH ADVISOR
% of Total
CONTINUE WITH ADVISOR
YES
NO
PARTLY
27
4
6
Total
37
73.0%
10.8%
16.2%
100.0%
19.0%
12.5%
28.6%
19.0%
13.8%
49
2.1%
18
3.1%
5
19.0%
72
68.1%
25.0%
6.9%
100.0%
34.5%
56.3%
23.8%
36.9%
25.1%
39
9.2%
9
2.6%
10
36.9%
58
67.2%
15.5%
17.2%
100.0%
27.5%
28.1%
47.6%
29.7%
20.0%
27
4.6%
1
5.1%
0
29.7%
28
96.4%
3.6%
.0%
100.0%
19.0%
3.1%
.0%
14.4%
13.8%
142
.5%
32
.0%
21
14.4%
195
72.8%
16.4%
10.8%
100.0%
100.0%
100.0%
100.0%
100.0%
72.8%
16.4%
10.8%
100.0%
245
Most of the Investor 72.8% have continued with their existing advisers , Retired
people has shown more inclination towards their existing advisers 96.4% investors
have continued with their advisers
Null Hypothesis: Continuity with the existing adviser is independent of Profession
of Investor
Alternative Hypothesis: Continuity with the existing adviser is dependent on
Profession of Investor
Chi Square Value at 95% confidence Interval for 6 dof 16.669 < Table Value
12.592 Hence Null Hypothesis is accepted which implies that continuity with the
advisor is independent on profession of Investor
246
Table 5.72
Cross tabulation of Income of Investor with continuity with Advisor
Crosstab
3 LAC - 5 LAC
5 LAC -10 LAC
MORE THAN 10
LAC
INCOME
LESS THAN 3 LAC
CONTINUE WITH ADVISOR
Total
Total
YES
NO
PARTLY
36
3
9
48
% within INCOME
75.0%
6.3%
18.8%
100.0%
% within
CONTINUE
WITH ADVISOR
25.4%
9.4%
42.9%
24.6%
% of Total
18.5%
1.5%
4.6%
24.6%
64
12
3
79
% within INCOME
81.0%
15.2%
3.8%
100.0%
% within
CONTINUE
WITH ADVISOR
45.1%
37.5%
14.3%
40.5%
% of Total
32.8%
6.2%
1.5%
40.5%
31
11
6
48
% within INCOME
64.6%
22.9%
12.5%
100.0%
% within
CONTINUE
WITH ADVISOR
21.8%
34.4%
28.6%
24.6%
% of Total
15.9%
5.6%
3.1%
24.6%
11
6
3
20
% within INCOME
55.0%
30.0%
15.0%
100.0%
% within
CONTINUE
WITH ADVISOR
7.7%
18.8%
14.3%
10.3%
% of Total
5.6%
3.1%
1.5%
10.3%
Count
142
32
21
195
% within INCOME
72.8%
16.4%
10.8%
100.0%
% within
CONTINUE
WITH ADVISOR
100.0%
100.0%
100.0%
100.0%
% of Total
72.8%
16.4%
10.8%
100.0%
Count
Count
Count
Count
247
Null Hypothesis: Continuity with the existing adviser is independent of Income of
Investor
Alternative Hypothesis: Continuity with the existing adviser is dependent on
Income of Investor
Chi-Square Tests
Value
df
Asymp. Sig. (2-sided)
Pearson Chi-Square
15.529a
6
.017
Likelihood Ratio
16.595
6
.011
Linear-by-Linear
Association
1.540
1
.215
N of Valid Cases
195
a. 2 cells (16.7%) have expected count less than 5. The minimum expected count is 2.15.
Null Hypothesis: Continuity with the advisor is Independent of Income of Investor
Alternative Hypothesis : Continuity with the advisor is dependent on Income of
Advisor
Chi Square Value at 95% with 6 dof is 15.529 > 12.592 , Thus accepting the Null
Hypothesis
Fig 5.73
248
Fig 5.74
Fig 5.75
249
Fig 5.76
 In the survey it was revealed that most of the investors have continued with
their existing advisors (72.8%) and only 16.4% have left their advisor
 On testing hypothesis it was inferred that Continuity with the existing advisor
is independent of age of investor
 Similarly while evaluating the
profession of Investors it was same and
investor from all professions have continued with their existing advisor
 On testing the hypothesis also
it was inferred that continuity with the
existing adviser is independent of profession of Investor
 While evaluating the continuity of advisors with the income of Investor it was
observed that even though at all income group Investor's tend to continue
with the existing adviser however as the income is increasing investors are
parting away with the adviser as investor having income in the range of Rs 5
lac to Rs 10 lac, 22.9% investors have changed their advisors. Similarly
Investor with more than Rs 10 lac income , 30% investors have changed their
advisors
 On testing the hypothesis it was inferred that Continuity with the advisor is
dependent on the Income of the Investor
250
Payment of Separate Fees for Advisory: The most critical question which has
been raised in Mutual fund distribution has been whether the investor will pay
separate advisory fees, the model which has been suggested by SEBI for the
advice rendered by Advisor. In the geography where rebating has become a
culture where the investor demands a cut from the commission from which
advisor earns charging fees from investor is an arduous task. Investor's were
asked whether they will pay separate advisory fees if good service and advice is
imparted and similar question was asked from the distributor and employees of
AMC also
Table 5.77
Cross tabulation of Investor’s Age with Payment of Fees
Crosstab
30-45 YRS
45-60 YRS
MORE
THAN 60
YRS
AGE
LESS
THAN 30
YRS
SEPERATEFEES
Total
Count
% within AGE
% within
SEPERATE FEES
% of Total
Count
% within AGE
% within
SEPERATE FEES
% of Total
Count
% within AGE
% within
SEPERATE FEES
% of Total
Count
% within AGE
% within
SEPERATE FEES
% of Total
Count
% within AGE
% within
SEPERATE FEES
% of Total
Total
34
64.2%
CANT
SAY
2
3.8%
19.8%
35.1%
16.7%
27.2%
8.7%
37
42.0%
17.4%
44
50.0%
1.0%
7
8.0%
27.2%
88
100.0%
43.0%
45.4%
58.3%
45.1%
19.0%
16
59.3%
22.6%
8
29.6%
3.6%
3
11.1%
45.1%
27
100.0%
18.6%
8.2%
25.0%
13.8%
8.2%
16
59.3%
4.1%
11
40.7%
1.5%
0
.0%
13.8%
27
100.0%
18.6%
11.3%
.0%
13.8%
8.2%
86
44.1%
5.6%
97
49.7%
.0%
12
6.2%
13.8%
195
100.0%
100.0%
100.0%
100.0%
100.0%
44.1%
49.7%
6.2%
100.0%
YES
NO
17
32.1%
53
100.0%
251
Chi-Square Tests
Value
df
Asymp. Sig. (2-sided)
Pearson Chi-Square
13.176a
6
.040
Likelihood Ratio
14.794
6
.022
Linear-by-Linear
5.661
1
.017
Association
N of Valid Cases
195
a. 3 cells (25.0%) have expected count less than 5. The minimum expected count is 1.66.
In analyzing whether the investor will pay separate fees for Mutual fund advise ,
Investors are still showing reluctance in paying fees as 49.7% were of the view
that they will not pay separate fees for Mutual fund advise . However as the age of
the investor increases they do tend to incline towards payment of extra fees
Null Hypothesis: Age is independent for payment of fees
Alternative Hypothesis: Investor paying the fees is associated with the age
Pearson Chis Square value 13.176 dof 6 > 12.592 at 5% level of confidence
Hence Null Hypothesis is rejected and it can be concluded that as the age of
Investor changes the investor choice towards payment of fees changes
252
Table 5.78
Cross tabulation of Occupation of Investor with Payment of Separate Fees
Crosstab
PVT SERVICE
BUSINESS/
PROFESSIONAL
OCCUPATION
GOVT SERVICE
SEPERATEFEES
YES
NO
CANT
SAY
Total
17
18
2
37
% within
OCCUPATION
45.9%
48.6%
5.4%
100.0%
% within
SEPERATE FEES
19.8%
18.6%
16.7%
19.0%
% of Total
8.7%
9.2%
1.0%
19.0%
28
39
5
72
% within
OCCUPATION
38.9%
54.2%
6.9%
100.0%
% within
SEPERATE FEES
32.6%
40.2%
41.7%
36.9%
% of Total
14.4%
20.0%
2.6%
36.9%
26
27
5
58
% within
OCCUPATION
44.8%
46.6%
8.6%
100.0%
% within
SEPERATE FEES
30.2%
27.8%
41.7%
29.7%
% of Total
13.3%
13.8%
2.6%
29.7%
15
13
0
28
% within
OCCUPATION
53.6%
46.4%
.0%
100.0%
% within
SEPERATE FEES
17.4%
13.4%
.0%
14.4%
% of Total
7.7%
6.7%
.0%
14.4%
86
97
12
195
% within
OCCUPATION
44.1%
49.7%
6.2%
100.0%
% within
SEPERATE FEES
100.0%
100.0%
100.0%
100.0%
% of Total
44.1%
49.7%
6.2%
100.0%
Count
Count
Count
RETIRED
Count
Count
Total
253
Chi-Square Tests
Value
df
Asymp. Sig. (2-sided)
Pearson Chi-Square
3.925a
6
.687
Likelihood Ratio
5.559
6
.474
Linear-by-Linear
.722
1
.395
Association
N of Valid Cases
195
a. 4 cells (33.3%) have expected count less than 5. The minimum expected count is 1.72.
Investors showed mix response on payment of separate fees for Mutual Fund
advice
Null Hypothesis: Payment of Separate fees to Advsior is independent of
Profession of Investor
Alternative Hypothesis : Payment of separate fees to advisor is dependent on
Profession of Investor
Chi Square 3.926 dof 6 < Table Value 12.592 which thus implies that payment of
Separate fees is independent of Profession of Investor
254
Fig 5.79
Cross Tabulation of Income of Investor with payment of fees
Crosstab
SEPERATEFEES
3 LAC - 5 LAC
5 LAC -10 LAC
MORE THAN 10
LAC
INCOME
LESS THAN 3
LAC
YES
Count
Total
14
30
4
48
% within
INCOME
29.2%
62.5%
8.3%
100.0%
% within
SEPERATE FEES
16.3%
30.9%
33.3%
24.6%
% of Total
7.2%
15.4%
2.1%
24.6%
35
39
5
79
% within
INCOME
44.3%
49.4%
6.3%
100.0%
% within
SEPERATE FEES
40.7%
40.2%
41.7%
40.5%
% of Total
17.9%
20.0%
2.6%
40.5%
24
23
1
48
% within
INCOME
50.0%
47.9%
2.1%
100.0%
% within
SEPERATE FEES
27.9%
23.7%
8.3%
24.6%
% of Total
12.3%
11.8%
.5%
24.6%
13
5
2
20
% within
INCOME
65.0%
25.0%
10.0%
100.0%
% within
SEPERATE FEES
15.1%
5.2%
16.7%
10.3%
% of Total
6.7%
2.6%
1.0%
10.3%
86
97
12
195
% within
INCOME
44.1%
49.7%
6.2%
100.0%
% within
SEPERATE FEES
100.0%
100.0%
100.0%
100.0%
% of Total
44.1%
49.7%
6.2%
100.0%
Count
Count
Count
Count
Total
CANT
SAY
NO
255
Chi-Square Tests
Value
df
Asymp. Sig. (2-sided)
Pearson Chi-Square
11.002a
6
.088
Likelihood Ratio
11.835
6
.066
Linear-by-Linear
6.496
1
.011
Association
N of Valid Cases
195
a. 4 cells (33.3%) have expected count less than 5. The minimum expected count is 1.23.
Null Hypothesis: Payment of Separate fees to Adviser is independent of Income of
Investor
Alternative Hypothesis : Payment of separate fees to adviser is dependent on
Income of Investor
Chi Square Value for 6 dof at 95% confidence is 11.002 < 12.592 which implies
that Null Hypothesis is accepted and thus can be concluded that Payment of
Separate fees to Advisor is independent of the Income of Investor
Table 5.80
256
Fig 5.81
Fig 5.82
257
Fig 5.83
Table 5.84
Cross Tabulation of AUM of Distributor with Payment of Fees
More
than 5
crore
AUM
Between Between
1 crore - 50 lakh 5 crore
1 crore
Less than
50 lakhs
Crosstab
Total
Count
% within AUM
% within Fees
% of Total
Count
% within AUM
% within Fees
% of Total
Count
% within AUM
% within Fees
% of Total
Count
% within AUM
% within Fees
% of Total
Count
% within AUM
% within Fees
% of Total
Investor will pay Fees
Yes
No
6
7
37.5%
43.8%
15.8%
26.9%
7.2%
8.4%
5
12
25.0%
60.0%
13.2%
46.2%
6.0%
14.5%
10
6
40.0%
24.0%
26.3%
23.1%
12.0%
7.2%
17
1
77.3%
4.5%
44.7%
3.8%
20.5%
1.2%
38
26
45.8%
31.3%
100.0%
100.0%
45.8%
31.3%
Cant Say
3
18.8%
15.8%
3.6%
3
15.0%
15.8%
3.6%
9
36.0%
47.4%
10.8%
4
18.2%
21.1%
4.8%
19
22.9%
100.0%
22.9%
Total
16
100.0%
19.3%
19.3%
20
100.0%
24.1%
24.1%
25
100.0%
30.1%
30.1%
22
100.0%
26.5%
26.5%
83
100.0%
100.0%
100.0%
258
Chi-Square Tests
Value
df
Asymp. Sig. (2-sided)
Pearson Chi-Square
21.331a
6
.002
Likelihood Ratio
22.441
6
.001
Linear-by-Linear
2.305
1
.129
Association
N of Valid Cases
83
a. 2 cells (16.7%) have expected count less than 5. The minimum expected count is 3.66.
Null Hypothesis :Investor paying fees to Advisor is independent of the AUM of
advsior
Alternative Hypothesis : Investor paying fees is dependent on AUM of advisor
Chi Square Value 21.331 > Table Value 12.592
Hence Null Hypothesis is rejected
Fig 5.85
259
Fig 5.86
Table 5.87
Cross Tabulation of Class with Payment of Separate Fees
DISTRIBUT
OR
INVESTOR
CLASS
EMPLOYEE
CLASS * SEPERATEFEES Cross tabulation
SEPERATE FEES
CANT
SAY
YES
NO
Count
45
6
7
% within CLASS
77.6%
10.3%
12.1%
% within
26.6%
4.7%
18.4%
SEPERATE FEES
% of Total
13.4%
1.8%
2.1%
Count
38
26
19
% within CLASS
45.8%
31.3%
22.9%
% within
22.5%
20.2%
50.0%
SEPERATE FEES
% of Total
11.3%
7.7%
5.7%
Count
86
97
12
% within CLASS
44.1%
49.7%
6.2%
% within
50.9%
75.2%
31.6%
SEPERATE FEES
% of Total
25.6%
28.9%
3.6%
Total
Count
169
129
38
% within CLASS
50.3%
38.4%
11.3%
% within
100.0%
100.0% 100.0%
SEPERATE FEES
% of Total
50.3%
38.4%
11.3%
Total
58
100.0%
17.3%
17.3%
83
100.0%
24.7%
24.7%
195
100.0%
58.0%
58.0%
336
100.0%
100.0%
100.0%
260
Chi-Square Tests
Value
df
Asymp. Sig. (2-sided)
Pearson Chi-Square
44.377a
4
.000
Likelihood Ratio
46.285
4
.000
Linear-by-Linear
3.305
1
.069
Association
N of Valid Cases
336
a. 0 cells (.0%) have expected count less than 5. The minimum expected count is 6.56.
Null Hypothesis: Payment of separate fees is independent of class
Alternative Hypothesis : Payment of separate fees is dependent of class
At 95% confidence interval Chi Square Value is 44.377> Table Value 9.488 hence
Null Hypothesis is rejected
from which conclusion can be drawn that as
Employees and Distributor feel that investor will pay fees however investors have
different opinion on it
Fig 5.88
261
1) Investors have shown mixed response as 44.1% investors agreed to pay
seperate fees , however 49.7% were not ready to pay seperate fees to
distributor
2) On analyzing age wise behaviour it was observed that younger investor are not
inclined in paying separate fees as 64.2% (Age <30), 50% (Age 30 -45) were
not interested in paying fees however at higher age (Age 45 -60), 59.3% (Age
>60), 59.3% investors were ready to pay separate fees
3) On testing the hypothesis it was inferred that payment of fees depends on the
age of the investor and the behavior of investor towards payment of fees
changes with the age
4) A mixed response was also seen when it was analyzed with the occupation of
the investor however Retired Investor (53.6%) agreed to pay Fees for advice
5) On testing hypothesis it was inferred that payment of fees is independent of
the profession of the investor and no definite reference can be drawn from
occupation of the investor
6) Similarly a mixed response was observed when it was analyzed with the
Income of the investor , however Investor having higher Income have shown
some inclination towards payment of fees
7) While testing hypothesis it was observed that payment of separate fees is
independent of Income of Investor
Distributor's Response
This is in contrast with the Investor's response
 It was also observed that advisers having higher AUM base are more
optimistic and confident that the investors will pay seperate fees as 77.3%
(More than 5crore AUM) of advisers agreed that investors will pay seperate
fees
 On testing this hypothesis it was inferred that whether investor will pay fees
depend on the AUM of adviser
262
Impact of Abolishment of Entry Load :
Post ruling of SEBI that AMC's will not charge any entry load which was initially
in the tune of 2.25% of Invested amount and was primarily used for paying
distributor's commission, it was perceived that it will impact heavily the
distribution business of Mutual Fund
The step taken by SEBI was keeping the interest of Mutual Fund Investor, to
understand the impact on Mutual Fund distribution business opinion of both
distributor and employees of AMC were taken
The Securities and Exchange Board of India (SEBI) has undertaken a number of
initiatives and brought in new regulations for the mutual fund industry in the last
two years, the most important change being the abolition of entry load for selling
mutual fund products since August 2009. The effect of this rule change has been
widely debated. Some argue the impact of this change has not been significant as
fund flows have registered year on year growth in 2009, while others argue that in
absence of upfront commission distributors are now less motivated to sell mutual
funds. On analysing sales data of equity mutual funds to analyze the effect. Sales
of equity funds, which constitute a third of industry AuM, is a good proxy to
understand retail investor buying behavior, because the retail (including HNI)
segment accounts for around 85% of total equity fund assets.
According to data from AMFI, sales have been steady since the second quarter of
2009, and higher than they were in 2008. However, one needs to decouple the
effects of the crisis that hit the markets in 2008. From that one can conclude that
though equity fund sales grew after the rule change, they are still far below the
trends observed during 2006–2007. The decline in 2008 was due to market
conditions, but subsequent recovery has not been commensurate with overall
market improvement. Equity fund sales moved in tandem with SENSEX in the
pre-2008 period, but post-2008 the gap has widened.
263
Table 5.89
Cross Tabulation of Distributor’s AUM with Impact of Abolishment of
Entry load
Crosstab
1
8
16
% within AUM
43.8%
6.3%
50.0%
100.0%
% within Impact
29.2%
4.5%
21.6%
19.3%
% of Total
8.4%
1.2%
9.6%
19.3%
7
4
9
20
% within AUM
35.0%
20.0%
45.0%
100.0%
% within Impact
29.2%
18.2%
24.3%
24.1%
% of Total
8.4%
4.8%
10.8%
24.1%
5
12
8
25
% within AUM
20.0%
48.0%
32.0%
100.0%
% within Impact
20.8%
54.5%
21.6%
30.1%
% of Total
6.0%
14.5%
9.6%
30.1%
5
5
12
22
% within AUM
22.7%
22.7%
54.5%
100.0%
% within Impact
20.8%
22.7%
32.4%
26.5%
% of Total
6.0%
6.0%
14.5%
26.5%
24
22
37
83
% within AUM
28.9%
26.5%
44.6%
100.0%
% within Impact
100.0%
100.0%
100.0%
100.0%
% of Total
28.9%
26.5%
44.6%
100.0%
Less than 50
lakhs
7
Count
Between 50
lakh -1 crore
Total
Count
Between 1
crore - 5 crore
High
Negative
Impact
Will
impact
for short
term
only
Count
More than 5
crore
AUM
Impact of Abolishment of Entry
Load
Count
Count
Total
Very
High
negative
Impact
264
Chi-Square Tests
Value
df
Asymp. Sig. (2-sided)
Pearson Chi-Square
11.208a
6
.082
Likelihood Ratio
11.492
6
.074
Linear-by-Linear
.866
1
.352
Association
N of Valid Cases
83
a. 2 cells (16.7%) have expected count less than 5. The minimum expected count is 4.24.
Null Hypothesis: Impact of abolishment of entry load is independent of AUM size
of distributor
Alternate Hypothesis: Impact of abolishment of entry load is dependent of AUM
size of distributor
Chi Square Value 11.208 < Table Value 12.592 at 6 dof Thus we accept the null
Hypothesis and can conclude that Impact of abolishment of entry load is felt by all
investor irrespective of AUM size
265
Table 5.90
Cross distribution of Class with Impact of Abolishment of Entry Load
CLASS * IMPACTOFABOLISHMENTOFENRYLOAD Crosstabulation
IMPACTOFABOLISHMENTOFENR
YLOAD
DISTRIBUTOR
CLASS
EMPLOYEE
Very
Impact
Total
High
High
for
No
Negative Negative Short Impact
Impact
Term
Total
Count
2
7
38
11
% within CLASS
3.4%
12.1%
65.5% 19.0%
% within IMPACT
OF
ABOLISHMENT
OF ENTRY LOAD
7.7%
24.1%
50.7% 100.0% 41.1%
% of Total
1.4%
5.0%
27.0% 7.8%
41.1%
Count
24
22
37
83
% within CLASS
28.9%
26.5%
44.6% .0%
100.0%
% within IMPACT
OF
ABOLISHMENT
OF ENTRY LOAD
92.3%
75.9%
49.3% .0%
58.9%
% of Total
17.0%
15.6%
26.2% .0%
58.9%
Count
26
29
75
141
% within CLASS
18.4%
20.6%
53.2% 7.8%
% within IMPACT
OF
ABOLISHMENT
OF ENTRY LOAD
100.0%
100.0%
100.0
%
% of Total
18.4%
20.6%
53.2% 7.8%
0
11
58
100.0%
100.0%
100.0% 100.0%
100.0%
266
Fig 5.91
Fig 5.92
267
Fig 5.93

On analyzing the results , 44.6% of the advisors were of view that this
change will impact there business only for short term as they viewed that
this will remove unwanted players from the market and by creating good
advice and upgrading their skill they will be able to regain the trust of their
investors

It was also observed that advisors having higher AUM are more optimistic
and are confident of overcoming this regulation whereas advisors with
lesser AUM(less than Rs 50 Lakhs) 43.8% viewed that te move will have
very negative impact on the business

While testing the hypothesis also it was observed that as the AUM of
advisor changes , his view toward impact of abolishment of entry load
changes

65.5% of Employees of AMC also opined that this change will impact only
for short term only
Transparency in Mutual Fund Business: SEBI is of the view that post
abolishment of entry load there will be more transparency in Business as investor's
entire money will be invested and will not be shared with distributor and investor
will get the service for the seperate fees he will pay for getting right advice and
servicing
268
Table 5.94
Cross Tabulation of AUM of Distributor with Transparency in
Business
Crosstab
Transparency
4
5
16
% within AUM
43.8%
25.0%
31.3%
100.0%
% within
Transparency
13.5%
25.0%
33.3%
19.3%
% of Total
8.4%
4.8%
6.0%
19.3%
10
5
5
20
% within AUM
50.0%
25.0%
25.0%
100.0%
% within
Transparency
19.2%
31.3%
33.3%
24.1%
% of Total
12.0%
6.0%
6.0%
24.1%
15
6
4
25
% within AUM
60.0%
24.0%
16.0%
100.0%
% within
Transparency
28.8%
37.5%
26.7%
30.1%
% of Total
18.1%
7.2%
4.8%
30.1%
20
1
1
22
% within AUM
90.9%
4.5%
4.5%
100.0%
% within
Transparency
38.5%
6.3%
6.7%
26.5%
% of Total
24.1%
1.2%
1.2%
26.5%
52
16
15
83
% within AUM
62.7%
19.3%
18.1%
100.0%
% within
Transparency
100.0%
100.0%
100.0%
100.0%
% of Total
62.7%
19.3%
18.1%
100.0%
Less than 50 lakhs
7
Count
Between 50 lakh -1
crore
Cant Say
Count
Between 1 crore - 5
crore
No
Count
More than 5 crore
AUM
Total
Yes
Count
Count
Total
269
Chi-Square Tests
Value
df
Asymp. Sig. (2-sided)
Pearson Chi-Square
11.988a
6
.062
Likelihood Ratio
13.462
6
.036
Linear-by-Linear
Association
9.321
1
.002
N of Valid Cases
83
a. 8 cells (66.7%) have expected count less than 5. The minimum expected count is 2.89.
Null Hypothesis : Mutual Fund distribution business will be more transparent and
it is independent of AUM of Advisor
Alternative Hypothesis : Mutual Fund distribution business
will be more
transparent and it is dependent on AUM of Advisor
Chi Square Test 11.988 < Table Value 12.592
Hence Null Hypothesis is accepted which also implies that that irrespective of
AUM of advisor it is belief that there will be more transparency in Mutual fund
Business
Fig 5.95
270
SEBI was of view that by abolishing the entry load , it will bring more
transparency in the business of Mutual fund distribution and unscrupulous
elements and distributor for short term gain will be wiped from the market and
only serious advisors will stay in the market
 While analyzing the opinion of distributor 62.7% of advisers agreed that this
will bring transparency in Mutual fund business and in the long run this will
benefit the distribution business
 Advisors who have large AUM are more convince that this will bring more
transparency in the mutual fund distribution business as (AUM> 5 Crore ),
90.9% agreed on this
Research thus conducted has tested various hypothesis for identifying various
factors which have impacted the business of Mutual Fund and study has identified
this from taking viewpoints of major stake holders primarily investor , distributor
and employees of AMC for fulfilling the objectives
271
References :

AMFI India

Klarman, Seth; Williams, Joseph (1991). "Beta". Journal of Financial
Economics

SEBI

Sharpe, William F. (1964). Capital asset prices: A theory of market
equilibrium under conditions of risk, Journal of Finance, 19 (3), 425-442
-------:0:-------
FINDINGS, RECOMMENDATIONS &
FUTURE SCOPE OF RESEARCH
The research which was conducted over a period of time and opinion of investor's,
distributors and employees of AMC were
taken from major cities of Uttar
Pradesh on which statistical tools were applied to get some inferences and
hypothesis were tested and findings of that study on various parameters which
will eventually help AMC's and distributor’s to frame their marketing and
distribution strategies in changing environment
1. The period for which the study was conducted 2008 – 2012 has witnessed a
very turmoil phase in equity market and it has shown its repercussion on Mutual
Fund Industry which had a dream run from 2002- 2007 as the market had.
2. Most of the investors rely on the past performance of scheme and brand while
choosing their AMC for investments
3. Even distributors also rely on past performance of scheme when choosing
AMC and brand and incentive scheme also are important factors for choosing
their preferred AMC
4. Reliance Mutual Fund has been the preferred AMC for both investors and
advisors in the region where the survey was conducted and one of the major
reason identified for it was the engagement programs for their distributor such
as imparting regular training and workshops which helped to keep reliance as
top of the mind AMC and had also the highest recall value
However analyzing the PAN India data ,The number of fund houses are
increasing each year in the fast growing Indian economy but when it comes
about the size, the top five players control over half of the country's mutual
fund business.
An analysis of average assets under management (AUM) by over 40 fund
houses shows that the top
five players - Reliance MF, HDFC MF, ICICI MF,
UTI MF, and Birla Sun Life - together control more than half of the total
assets managed by the MF industry in India.
273
The Indian mutual fund industry is valued worth Rs 7 lakh crore April ,2011
available with the industry association of Mutual Funds in India (AMFI).
And putting together, these top six fund houses own assets worth nearly Rs 4
lakh crore, which is about 55 per cent of the average AUM of all the fund
houses. A number of new players are entering the field each year.
Only recently, capital market regulator SEBI gave its green signal to financial
houses like Union Bank of India, India Infoline and Indiabulls to operate MF
business.
Total assets under management (AUM) of 41 fund houses in the country rose
to Rs 7,00,538 crore at the end of March 2011, according to AMFI data.
At the end month March 2011, the AUM of the largest MF in India, Reliance
MF stood at Rs 1,01,576.60 crore. This was followed by HDFC MF whose
average assets was Rs 86,282.24 and ICICI Prudential MF with an AUM of Rs
73,466.10 crore.
Besides, UTI MF's assets stood at Rs 67,188.82 crore and Birla Sun Life at Rs
63,696.2 crore in end-March, 2011.
The total AUM of the remaining 36 fund houses currently stands at about Rs
3.09 lakh crore.The MF industry, which is facing withdrawal pressure, saw
their asset base dwindle over the last year. The average AUMs of the industry
declined by over 6 per cent in March-end, from Rs 7.47 lakh crore at the end
of March 31, 2010.
5. Equity has been an asset which has generated return when invested for long
term and as seen from historical performance that over a period of more than
10 years probability of loosing money is zero
6. Most of the investors in the region expect returns in the region of 15 – 20% p.a
and this is in range of long term return generated by market over a period of
time as seen from table. However analyzing deeply it was seen that rich
investors having income of more than Rs 10 lacs expect more than 20% on
their investments which is also primarily due to fact that they have more
274
investment options such as Portfolio Management Services , Private Equity
and more importantly Real Estate
7. Most of the investor invest in Mutual fund for wealth creation for fulfilling
various financial goal in life and for this they need an asset class which can
generate good positive real return (inflation linked return) which is not
possible through conventional instrument such as FD,PPF and post office
schemes.
8. Investor's are generally risk averse and they desire high return with less
downside risk as most of the investors cannot tolerate loss of more than 15% .
This also shows that the investments are not aligned with the goal
of
investment , Equity being an investment for long term only it should not be
perturbed with fluctuations of short term
9. As also observed with average time horizon of investor in mutual fund is 3-5
yrs and only 28.7% have horizon of more than 5 yrs which again shows that
investors choose mutual for more of a short and medium term horizon and in
this period the market has not been favorable for this period which has
resulted in negative sentiments
10. This phase of five years have shown the attitude of investors towards their
investments in equity mutual fund as with the rise and fall in the markets the
investor has shown its inclination towards the market and after crest fall in
2008 they have become very pessimist in their investments towards equity
mutual fund ironically as according to distributor , investors are showing
more pessimism and they have shifted towards conventional products like FD
and PPF which have some guarantee in built in it
11. Prior to year 2007 there was flood of NFO's (New Fund Offer) from AMC's to
take advantage of disbelief of investors that NAV at Rs 10 is cheap and is good
for investing however with SEBI coming strongly on NFO's , Systematic
Investment Plan(SIP) has become the most common mode of investment
which gives advantage of Rupee Cost Averaging in this volatile market . Most
of the investor's were unaware of STP(Systematic Transfer Plan) option in
275
Mutual Fund Scheme which implies about awareness issue in investors
12. IFA's are undoubtedly are the most popular distributor in this region however
there have been some unscrupulous selling by some advisers and brokers and
at the time when markets were down these advisors and brokers were missing
from the scene to discuss investment with their client which led to developing
of mistrust among investor. Post SEBI ruling of allowing investors directly
buying mutual fund most of the AMC's have allowed investment through
direct and online also
13. With the abolishment of entry load which impacted the commission payed by
AMC's to distributor , the regulator was of opinion that distributor to move
towards Fee base Advisory Model. However in the era where there have been
extensive practice of pass back it is difficult for advisor to move towards Fee
based Model. There has been a sea saw changes in the distribution of Mutual
Fund schemes to retail Investor as prior to January 2008 there was entry load
levied on equity scheme which was primarily meant for commission of
distributor , which got abolished by the regulator. More importantly the entry
barrier for IFA's have been made more tough with the change in the
examination pattern and raising the fees To Rs 5000/- taking code for
distribution business. Due to all these regulatory changes many MF distributor
left the market as regulator insisted on fee based model rather than AMC
paying commission to advisor's .Most of the Investors have continued with
their advisors which reflects that the trust between investors and advisors to a
large extent was intact , however investors in high income slab have shifted
their inclination to other advisors which are primarily banks which have a
professional wealth management section to cater needs of HNI
14. Investors at large are still not convinced of paying separate fees to advisers for
the services even though people of age more than 60 and investors having
income more than 10 lacs opined that they will pay separate fees if they get
good service and advice from their advisors. Even the distributors were
divided , as Advisers having AUM of more than a crore were convinced that
they investors will pay fees however it is a breed of new advisers who are
276
finding difficult to charge fees for their services
15. Most of the big distributors and Employees of AMC believe that changes
made by Regulator with the abolishment of entry load there has been more
transparency in Mutual Fund distribution business as it will remove
unscrupulous advisers from the system
Two points are worth considering here. The crisis of 2008 may have made
investors more risk averse. While they were buying heavily during the bull run of
2006-07, post-crisis they have become apprehensive of investing in mutual funds.
Another reason for lack of investor participation can be the lower returns
generated by the fund managers.
In summary, it can be said that the recovery of the Indian mutual fund industry
since the crisis of 2008 has not been commensurate with the overall market
recovery. The abolition of entry load has had an impact on sales from the retail
segment, but it is not the only reason. Failure to outperform benchmark indices is
another equally important issue afflicting the industry.
Suggestion and Recommendation
The research which is conducted in major cities of Uttar Pradesh for
understanding Investor's and distributor's perception in changing dynamics of
mutual fund industry and volatile market have yielded certain findings on which
certain suggestions and recommendation are made for regulators, Asset
Management companies and distributor so that they can align themselves with
changing needs of investor
An assessment of investing drivers would give direction to the initiative of
spreading awareness…
Mapping the requirements of investors today to a hierarchy of needs (akin to
Maslow’s model), the new age investor demands higher rate of returns, more
transparency and most importantly the freedom to choose from a wide range of
product alternatives.
Moreover, it is essential to gauge that investor needs differ in urban cities to
277
smaller towns, hence investor awareness programs need to be designed
accordingly.
Hence, while selling to “first time” customers, it is of utmost importance that all
the terms and conditions attached are plainly laid out before them. Investors need
to be guided towards buying products which will fulfill their long term goals and
also match their risk-taking appetite.
Fig 6.1
Investor’s Need Analysis
Repositioning Business Models in Mutual Fund to sustain
profitability
The restriction of entry load on existing and new mutual funds marked a turning
point in the functioning of the mutual fund industry. This in effect, has spelt out a
huge impact on the commission structure of distributors, leading fund houses and
distributors to restructure their business and operating models in order to arrive at
a profitable solution. The way the distributor community is reacting is manifold:
Repositioning as Financial Adviser
Inter mediation has become painful for distributors who are making the best of
this current situation by turning themselves into financial advisors, which would
278
act as a positive step towards financial literacy of investors.
Another measure which is being adopted by distributors is that of deeper
segmentation of clients, wherein the lower rung of revenue earners is being
encouraged to transact on line. In addition, retail strategies are being modified to
generate optimum efficiencies. There is also another category of distributors
which is using this regulatory change as a stepping stone to acquiring new
clientèle by luring them with attractive mutual funds and then selling them high
margin products.
The various options for Business models that are currently being explored are:
•
Discount Brokers - They will serve customers at a nominal fee, earning
commissions from the AMC in addition to receiving trail commissions
•
Directly from AMC - This model is apt if the customer is able to identify the
type of fund that he wants to invest in.
•
Advisory Model - This model functions on fees paid to financial advisors for
advice rendered by them. Liaison with an advisory model is more likely to
pave the way for long term benefits, aiding in gaining more market share
However, distributors seem to be daunted by a common concern of lack of
adequate investor education, impacting all these models, as their success will
depend extensively on the levels of financial literacy among investors.
Exploring Distribution Networks from Other Sectors
It may be worthwhile to cite examples from other sectors, which have shown
exemplary growth, predominantly relying on the strength of their distribution
networks.
Increasing Distribution Base
Other avenues for AMCs to diversify their distribution base could include an
examination of distribution channels prevalent in other industries, especially those
that involve a low distribution cost such as the FMCG industry. Customers in Tier2 and lower cities could also be tapped by leveraging on the reach of PSU banks
in these areas, which could be mutually beneficial. Alternate technology-based
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channels including the Internet and mobile banking could also be further explored
with the aim of reaching a larger customer base at lower costs.
Given the widespread use of mobile phones and secure payment gateways, it is
expected that this channel will be used to directly reach investors for reasons other
than merely communicating the daily NAV.
Another suggestion that could be considered is to lighten the fees for AMFI
certification requirement for distributors with sales or collection below a certain
threshold. This will encourage sub distributors in the far flung areas to distribute
mutual fund products to investors with smaller investible surpluses.
Building Strong Distribution Network
Hindustan Unilever – Project Shakti
A strong case here would be of that of Hindustan Unilever, which has an enviable
distribution network, reaching out to the rural populace. The company aims to
align its offerings to the needs of this segment, after assessing their buying
behavior. The company’s popular initiative, “Project Shakti” has been devised to
target villages with a population of less than 5000. The broad objectives of this
program are –
•
Reaching out to new consumers in rural areas
•
Conduct consumer education programs to develop markets
•
Creation of employment opportunities
•
Establish a sustainable business model
This program is adequately supported by “Shakti Entrepreneurship program”,
which offers suitable investment opportunities and sustainable income for the
people. To bring in efficiencies in their supply chain network, adequate amount of
investment in technology like SAP application systems, has been made, to create
better logistics.
These strategies and initiatives have served their purpose, as a result of which,
Hindustan Unilever showcases a customer base of over 700 million, having a
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reach of 6.3 million retail outlets, with over 2,000 suppliers and associates. In
addition, “Project Shakti” has succeeded in equipping 45,000 Shakti entrepreneurs
in rural areas, spanning 15 states, across 100,000 villages and enabled income
generating opportunities.
Demat Holdings : Another example to the context, would be the case of demat
accounts and the slow and steady journey of growth. The number of investor
accounts as of April 2010 stands at 105.57 lakhs, up from 63\lakhs reported in
April 2005. This increase is attributed to the growing awareness of the depository
system, the tangible benefits of a “paper-less” but secure environment and the
addition of an increasing number of instruments to the list of dematerialized
securities, resulting in higher participation. The overall performance of the
markets has also contributed to this trend.
Credit Cards: The number of Credit Cards in India has grown at a CAGR of over
18% between 2001 and 2010, from 4.87 million to 22.6 million, while Debit
Cards in India has witnessed a compounded growth of over 37% between 2005
and 2010, from 35.5 million in 2005 to 173.2 million in 2010. Complementing
this, the number of ATM outlets, have grown at a CAGR of 34% between2002 and
2010. The reach of such cards is gradually expanding, with coverage extending
beyond Tier 1 and Tier 2 cities. Interestingly, among prime concerns faced by the
“card industry” in penetrating the smaller towns and cities are lack of awareness
of secure online transactions, logistics of card distribution and high cost of
acquiring a merchant establishment. It is time perhaps for the asset management
industry to look to these sectors, and pick up a few pointers on strengthening
distribution, with a focus on inclusive growth, considering that the challenges
faced to capture the market beyond Tier 1 & Tier 2 cities, would be somewhat
similar.
While fund houses concentrate on the above mentioned areas, it would also be
important for the market regulator to continuously help create a favorable
environment for growth of the industry. The nature and the cost of disclosures to
retail clients need to be looked at simultaneously, to help determine a more
effective model and enhance levels of financial literacy.
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Regulation for MF Distributors
Currently, distributors of MF schemes are not separately regulated by any
authority in India. Further, many of them though certified by AMFI still leave a lot
to be desired so as to render professional advice to investor and reduce mis-selling
of the MF products. MFs need distributors who are able to inform the investors
about the efficacy of the product for a particular risk profile and stage in their life
cycle
SEBI is planning to put in place a compliance certification examination (by
NISM). Further, SEBI is also expected to soon come out with a new set of
guidelines for MF distributors. As the affluence of Indians increase, the range of
financial products to meet people’s need will expand and with it the need for
professional financial advice from the MF distributors will increase.
Recommendations to re-visit the eligibility norms of AMCs
SEBI had constituted the “Committee on Review of Eligibility Norms” (CORE) to
re-visit the eligibility norms and other functional aspects prescribed for various
intermediaries. Amongst other recommendations, the key ones are relating to
increase in the minimum networth of AMCs from the existing Rs. 10 crores to Rs.
50 crores, change in the definition of net worth, sponsor to be a regulated entity
and change in definition of control.
The objective of the proposed recommendations is to allow only the serious
players to enter/ remain in the market. The proposed changes can lead to a better
governance of the MF players, thereby boosting investor confidence in the
industry.
High Focus on increasing investor awareness
In the midst of this entire ambit of distribution, the investor undoubtedly stands to
reap long term gains, as all the alternatives in one way or other urge investors to
move towards better awareness and product education. It has become increasingly
important for the distributor to spread financial literacy among
the investor
community as they depend hugely on volumes generated, and this can only
happen, when investors are assured that investing in mutual funds yield realistic
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returns vis a vis the risk, and the ticket size of the investment is manageable.
Although investor education is being harped upon continuously, segmenting the
client base, and aligning product offerings to cater to requirements of customers
are also key to redefine the business and operating models to enhance key
investment related value proposition.
Educating Consumers
Investor awareness has to spread its wings to lead sustainable growth of the
industry …
In today’s dynamic environment, spreading financial literacy is the most critical
imperative for spearheading growth in the mutual fund industry. Measures and
initiatives undertaken should be structured with a long term horizon in mind,
aiming to introduce innovation in products. Also, the investor education programs
should be customer oriented with emphasis on the risk appetite of investors rather
than simply a demonstration of the range of products.
Although, in the metros, investors are more familiar with mutual funds as a
profitable investment, people in smaller towns and cities still have inhibitions
about investing into mutual funds.
The rural strata of society looks for investment alternatives which primarily have a
nominal initial investment, and the terms and conditions attached are simple to
grasp. Most of the investors in this segment are not in a position to consider the
pros and cons of the investment schemes, along with the risks attached to it, and
therefore disclosures should be made very clear and apparent to the investors. In
addition, products should be designed to bolster income levels of the rural
segment and also increase their spending capacity. Taking a step towards inclusive
growth, Fund houses have agreed to conduct investor awareness programmes
from time to time.
There is a global buzz around an emerging area that goes by many names:
financial literacy, financial competence, financial education or financial ability.
The names are many, but the goal is the same: a population that has the
knowledge, understanding, skills and competence to deal with everyday financial
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matters and make informed choices in selecting products that meet their needs.
There is a proliferation in the number and complexity of financial products. Risk
is being transferred to the household. A large population bulge in newly developed
or developing countries is being exposed to formal banking and financial
products, as well as smart sales practices, for the first time. All these make a base
level of understanding of money, its management and use a basic life skill.
The lack of this skill has the potential to fritter away economic gains made at an
aggregate level by nations, resulting in wealth transfer from the financially
illiterate to a small sliver of the financially literate. Organisation of Economic
Corporation & Development (OECD) research shows that a financially literate
population promotes economic growth and well-being by expanding the quality of
available financial services, and by enhancing the ability of individuals to more
effectively use the services in their best interests.
Work on the topic by financial literacy scholar Annamaria Lusardi, Professor of
Economics at Dartmouth College and a Research Associate at the National Bureau
of Economic Research (NBER), shows that individuals with low levels of
financial literacy tend not to plan for retirement and borrow at high rates of
interest. No wonder, there is a rush to get citizens financially literate, sparking off
an article in The Economist calling it the “global crusade”.
With a household saving rate of over 30 per cent, India understands the merits of
saving over current consumption. Unlike much of the west, where getting people
to save is an issue, the bottleneck for India is the efficient conversion of this
saving into investment. A large part of this money is in low-yielding assets like
bank deposits and traditional insurance, but there is a clear trend of individuals
preferring security-based investments as they go up the income ladder.
One part of the population, due to advantages of birth, location and education, has
benefited from the growth spurt in the Indian economy. It has moved into the
population bracket with cash incomes that are large enough to allow a surplus
after taking care of all expenses.
Estimated at 321 million, this population segment is usually the first to begin
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buying financial products other than bank deposits and real assets like gold and
property.
The share of mutual funds in household saving wallet more than doubling from
3.7 per cent in 2005-06 to 7.80 per cent in 2007-0826 points to the emerging
better-off population looking for avenues, other than those traditionally available,
to target a better return. The growth in the number of market-linked insurance
plans and home loans, too, point in the direction of the newly emerged middleclass experimenting with financial products and credit.
Focused Advertising on Investor Education
Clearly, advertising and the agent network have worked positively to create
awareness, but not knowledge. A coordinated approach is now needed to convert
this awareness into knowledge. Interviews with the industry confirm the need for
such an effort that is beyond what an individual company, association, regulator or
non-profit can do. While spontaneous efforts have been initiated by government
departments, regulators and associations, each looks at the world with a limited
view of the part of the market they serve. For instance, the Reserve Bank of India
(RBI) has taken a lead in the financial literacy space, and its efforts are mainly in
the banking space. The Ministry of Corporate Affairs too has programmes on the
ground, including the setting up of the Investor Education and Protection Fund
(IEPF), and this is mainly in the securities market space.
However, for the consumer, the piecemeal approach does not work. Individuals
are not looking to learn markets, banking and insurance as separate modules that
they will later put together and connect the dots. Rather, while buying a product,
they feel the need to get a quick shot of information that will help they choose.
They want a big-picture view of their money life and then specific information for
the part of the market they choose to go to for product transactions.
If this is the story of the largely urban investor, the rural consumer possibly needs
the literacy effort even more urgently, though at a different scale and content level.
While more than 80 per cent of the agricultural wage labour is still unbanked28,
due to reasons of location, society, caste, religion and poverty, micro-finance
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institutions have been able to reach 86 million of the poorest Indians (80 per cent
being women) with tiny loans.
Handling a lump sum for the first time, this population needs a basic course in
money management, cash-flow rhythms and budgeting, agree the micro-finance
companies.
Educating Advisers. They are a key piece of the literacy work. They are the
lowest-cost, highest-impact way to get the attention of investors at atime when
they are most open to education. The time of a product sale is a well-documented,
‘teachable-moment’. This is a crucial piece of the financial literacy plan. There are
around 3 million insurance and mutual fund agents. Add the banking staff that
sells products and the direct selling agents to this, and this army of product sellers
reaches over 188 million consumers today. It will reach another 200 million in
some years. If financial advisers can be made a participant in financial education,
we have one of the least-cost ways to achieving a financially capable population.
But for advisers to do this, a set of changes is needed in the incentive structures
that motivate them. India will have to move from a model of the product
manufacturer, using the customer’s money to compensate the agent, to the
customer paying directly for the service.
Government Programmes. There are mass outreach programmes of the
government that, if willing, can be embedded with financial education to increase
financial inclusion along with continuing the efforts to embed financial education
in the school curriculum. By simply converting the relevant maths problems into
financial literacy-embedded problems, children could be introduced to financial
literacy in a non-intrusive way. Educationists and financial sector experts will
need to work together to construct these problems.
Post-Class XII. SEBI and AMC's through NISM to work with universities and
nodal higher education points to encourage young adults to become financially
literate. The method, again, is demand-pull, rather than push.
HR Departments
NISM to
work with HR departments of willing large
corporations to embed into their existing training and HR programmes. Special
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modules for those entering the work force, considering a job change or retirement
will be developed.
Life Transition Points. A person is most open to financial education at a lifetransition point, like getting married, having a child, first job, job loss, retirement
or even taking a home loan. These are the best ‘teachable moments’. NISM along
with SEBI to work on developing some of these as channel partners to carry
financial education.
Cost management, a key element of operating models
All business and operating models are central to meeting customer needs while
streamlining their business processes. In order to establish a sustainable model,
which will yield profits in the long run, cost management needs to be dealt with a
firm hand.
The three major cost components of fund houses are as follows:
•
Distribution cost - Managing the cost of distribution especially in Tier 2 and
Tier 3 cities, has always posed a challenge, eroding the profit margins of
AMCs. To curtail this to the maximum extent possible, technology needs to
play a crucial role in enabling distributors to increase reach to the smaller
towns, and help curb costs. Considering the explosion of mobile (e-commerce
related) technology in India, which helps propagate this huge opportunity, the
task should not prove to be as daunting.
•
Hiring spend - Manpower hiring costs which has typically been a prominent
contributor to the overall cost of fund houses, has had to undergo sizeable
reviews to maintain its efficiency levels. More recently, it has become
increasingly challenging to retain the right kind of talent in the organization.
•
Marketing Expenses - Sales and Marketing expenses, which primarily
comprises brokerage, claims a large proportion of total costs for AMCs, purely
because the industry is still in a growth stage. Direction of profits can be
identified better if these costs are managed efficiently. Further, ensuing from
the restriction on entry loads, cost of sales and marketing has spiraled, as
AMCs are now forced to pay out of their own pockets.
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Reaching out to Tier 2 & Tier 3 cities
As defined by the RBI, Tier 2 cities are those that have a population base of
50,000 and above, while Tier 3 cities have a population base upto 50,000. A
survey conducted by National Council of Applied Economic Research (NCAER)
in 2008 suggested that although Indians have a positive attitude towards increased
savings, around 65 percent of savings are with banks or post office deposits and
cash at home, while 23 percent are invested in real estate and gold and only 12
percent is channelized towards financial instruments. This manifests tremendous
opportunity for growth in mutual funds, while indicating that penetration level of
mutual funds in the smaller towns is lagging behind that of urban cities. As per
RBI statistics, the household financial savings (net) was 10.9% of GDP in 2009,
lower
than
11.5%
in
2008.
Household
investment
in
shares
and
debentures(inclusive of mutual funds), was 1.9% of GDP in 2008, which declined
to 0.4% in 2009, reflecting a reduction in investor confidence in these instruments.
Steadily rising disposable income in the Tier 2 and Tier 3 cities, have showcased
the latent potential for investments in mutual funds. Investors in these cities are
gradually awakening to other potential investment areas like equity and mutual
funds, apart from the traditional bank fixed deposits, national savings certificates
from GoI, gold and real estate. It has also been observed that the HNI segment in
these cities is slowly expanding, with very large amounts of investible income at
their disposal.
Diversity of Indian culture implies that different models need to be explored and
executed in order to make a breakthrough in these smaller towns. A few banks
intend to adopt the hub-and-spoke model, gradually adding locations to each hub,
where the hub could perhaps cater to 2-3 locations each.
Emergence of Stock Exchange platforms is seen as a suitable means to increase
penetration levels of financial assets and thus mutual funds. Currently, it serves as
an alternate mechanism for performing mutual fund transactions.
This method although not all pervasive, allows investors to carry out basic
transactions. Cost implications point favorably towards investing directly through
the investment portals (stock exchange platforms). As this mechanism gains
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popularity, further improvements and modifications are expected in the system,
which will inevitably enhance efficiency, and provide several amenities to both
investors and distributors.
Targeting the HNI segment
Some organizations plan to introduce “Wealth Cafes” across the nation, catering
solely to the requirements of HNI’s. To lure customers into the capital market,
AMCs are pursuing investors to look upon gold Exchange Traded Funds (ETF) as
an exciting option. Gold fund-of-funds are being introduced, which will invest
back into their own exchange traded funds.
Technological Evolution
Here again, technology needs to pave the way for bringing investors within reach
of the available investment options. Various mobile applications and online
services having integrated user-friendly web tools, can facilitate the spread of
investor awareness in a faster and more efficient manner. Today AMC's have to
reach to Investor and distributor rather than they trying to reach them and the way
goes through technology by building Web Based application which can be made
easily accessible especially in Tier 2 & Tier 3 cities and Investors and distributors
have to be made comfortable in using the same Fund houses need to assign an
increased budget for investment in technology, which will help them streamline
their distribution networks and increase efficiencies in their business. Use of
technology, is a must to come up with a feasible cost-benefit business model and
participate in financial inclusion, more effectively.
Diverse Range of Products
There is a need for Indian MFs to come out with innovative products that cater to
the ever changing customer requirements. In US, MFs provide products that cater
to the entire life cycle of the investor. Diversified products will keep the present
momentum going for the industry in a more competitive and efficient manner.
Further, MFs have to compete with bank deposits and government securities for
their share of consumer savings. Thus, in order to make MFs more acceptable to
the retail investors, the MF would have to mature to offering comprehensive life
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cycle financial planning and not products alone.
Attractive Product offerings - Asset management companies need to introduce
a new range of offerings in the market in order to attract investments. The new age
investor today looks for returns higher than the traditional bank deposits. Fund
houses should be encouraged to design products to suit investor requirements of a
higher return and with better diversification of risk.
Exchange Traded Funds - Exchange Traded Funds should be given a boost and
brought into increased focus for the investor. Gold ETFs serve as a good
investment option in times of market volatility. These products prove to be a
viable solution for risk averse investors, without diluting the urge to have the
physical asset.
Real Estate Mutual Funds
Real Estate Mutual Funds could be the next big thing for the industry provided the
regulators bring in more clarity on the tax and regulatory aspects.
Trading through stock exchange platforms
Recently, SEBI has permitted trading of MF units on recognised stock exchanges.
Subsequently, Bombay Stock Exchange and National Stock Exchange have
launched trading platforms enabling investors to invest by availing services of
stock brokers. While trading through the stock exchange, the investor would get to
know about the validity of his order and the value at which the units would get
credited/ redeemed to his account by the end of the day. Whereas, while
investing through MF distributor or directly with the MF, the investor gets
information of the subscription and redemption details only in the form of direct
communication from the MF/ AMC. Thus, by trading through the stock exchange,
the investor would be able to optimize his investment decisions due to the reduced
time lag in the movement of funds. This transparency in knowing the status of
order till completion helps in reducing disputes. Further, the investor would able
toget a single view of his portfolio across multiple assets like securities, MF units
etc.
Asset management companies today need to stay focused on a few aspects in
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order to ensure that the industry meets its growth objectives.
Appropriate Selling - The selling of mutual funds does not have a specific set
of regulations outlined to follow. Measures should be initiated to avoid misselling
of products, with guidelines communicated to all distributors, whether they are
banks, distribution houses or IFAs.
Increased Transparency - Disclosure requirements should hold consistently
across all asset management companies in order to institutionalize greater
transparency in the system. Information should be readily available and
communicated effectively to investors, for them to take informed decisions.
Future Scope of the Study for Mutual Fund Industry
Performance of the industry has been strong and it is well-placed to achieve
sustainable growth levels. The way forward for the next couple of years for the
mutual fund industry would be influenced hugely by the journey undertaken till
this point of time and the changing demographic profile of investors.
Inclusive growth to define the pace and pattern of growth in the Industry. We
can in effect conclude by saying that all efforts at the moment are being
synchronized towards attaining the objective of financial inclusion. The drive to
expand reach beyond Tier 1 cities and make mutual fund offerings available to
people in smaller towns and cities has indeed taken up the attention of the
industry.
However, several components of such an initiative, like investor awareness,
broadening investor participation and product innovation, need to be aligned in
order to fully establish inclusive growth. The industry needs to give due emphasis
on the above factors, drawing out an efficient business and operating model to
ensure that the inherent challenges that the industry is facing is efficiently dealt
with. Designing a competent and all pervasive business model has all the more
become important in the current scenario of changing business and regulatory
legislation. At a time when amendments to key regulations are being analyzed in
terms of impact on the business of the industry, it remains to be seen, how the
pace and pattern of growth of the industry takes shape.
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Challenges Ahead & Dynamics of Mutual Fund Industry
The first roadblock in buying a financial services is the difficulty in establishing
the proof of concept. If one buy a cup of coffee, the first sip tells whether it is a
right product or not , but when one buys a financial service one does not know
what to expect and find out whether one has made the right decision much later in
future. When one pay a financial advisor a person has no idea if the advice is of
good quality and it is worth paying and if discovered later on the damage is
already done and the worse case the advisor has already made money and that
individual has lost. The reluctance to pay comes primarily from the difficulty in
identifying, trusting and buying a mere promise, whose quality is untested.
The second problem is identification and differentiation. The delayed benefit
means financial services are highly amenable to misselling. Unscrupulous players
may aggressively push false promises. Since the service involves money and
return greed takes over and the person is conned. This makes it tough for the good
financial advisers to differentiate themselves. Usually industry associations and
regulatory bodies step in to ensure that bad quality advisor are kept out (these are
called gate keeping regulations that prescribe minimum qualifications and
standards). In India financial advisers have been in operations for much longer
than financial regulators and associations. This means vested interest of
incumbents tend to influence policy standards are set low enough to protect the
existing players. One may like to pick and pay a genuinely competent financial
advisors but do not know where to find and verify credential
The third problem arising from the first two is the widely prevalent suspicion. If a
financial advisor approaches with his proposition customer may already be
cynical, wary and cautious. This means that customer typically deals with multiple
advisor and are unwilling to consolidate and provide complete data to a single
advisor who can manage his wealth to meet goals and needs and that customer is
also suspicious that he is selling products not advice. This suspicion increased
significantly after financial advisors rampantly mis- sold bad mutual fund NFO's
PMS Products, structured products, real estate funds and insurance products to
large number of gullible investors. The proof of concept of these duds is now with
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investors, who have lost money and are unwilling to engage with the advisor let
alone pay him
It is in this negative environment that advisors are trying to build a reputation and
earn a fee. The advisors who are charging fees have build trust and reputation over
a period of time . They tend to work with a few client in a role similar to that of a
family doctor . The value they add comes from the ability to offer a range of
solutions . Some do not execute deals for the customers and are fee only financial
advisers. They do not look for scale but operate as a boutiques with staff that
manages the processes and paperwork. This model takes time and referral before
a client base can be built . It is also not amenable to scale . This is because the
value proposition of customized solution gets diluted with numbers.
The next set is the new breed of financial advisors which has set up with the intent
to scale . They have not build reputation, but they lean on the processes to build
trust. The most easily proposition today is financial planning and investing for
goals These advisers offer a process based investing approach that works to a
standardized format for collecting data, creating a plan and executing it. The
investor is reluctant to pay not because the process or proposition is weak but
because it is so easily replicated by competition.
Recently, SEBI has made some of the biggest changes in mutual fund regulations
to revive the mutual fund industry. Some of the measures which are made are said
to be helping AMCs and distributors more than investors.
1. Higher expense Ratio allowed
Close to 45% of mutual funds money comes just from Mumbai. Around 87% of
AUM in mutual funds comes from top 15 cities in India, which means that only a
minuscule 13% of the mutual funds money belongs to small cities in India.
Penetration in other parts of country is very, very small and not encouraging. Now
SEBI has proposed to increase the Expense ratio by 30 basis points (0.3%) if the
mutual funds are able to increase their reach to smaller towns in India and increase
their contribution to 30% . In short, if a mutual funds is able to get more than 30%
of its AUM from other than top 15 cities in India, they can charge a 30 basis
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points expense ratio higher than its current expense ratio. Lower contribution
means proportionately lower expense ratios.
The big effect, is that now there will be higher expense ratio for everyone. So
inflow from smaller cities will affect investors from bigger cities. Investors from
big cities will have to bear the burden of increased expense ratio.
2. No internal limits in Expense Ratio
A very big change which goes in favor of AMCs is the removal of internal limits
on the expense ratio and for what it can be used. Earlier there was a limit on the
AMC to charge up to 2.5% expense ratio (up to 100 crores AUM), but it was
allowed to charge only 1.25% as Fund Management Charge and 0.5% as
distribution charges. The rest was taken as their profits. So earlier suppose a
Mutual Fund charged 2.25% as the expense ratio, then they compulsorily had to
allocate 1.25% as Fund Management Charge and 0.5% for distribution.
But now, that sum limit has been removed and mutual funds are allowed to
allocate expenses the way they want. This means you can now see more
advertisements, more commissions to the distributors and more aggressive selling.
While this is a very big change which will make AMCs happy, they will still have
to keep a check on the expense ratio because of competition from other AMCs.
3. Putting Exit Loads back into the scheme
When a investor got out of a mutual funds , he was charged an exit load if he quit
before 1 year. That money was not transferred back to mutual fund, nor was it the
profit of the mutual fund. It was actually transferred to a separate fund, which was
used for sales, distribution and marketing. But now, when a investors exits
prematurely, the entire exit load money will be credited back to the scheme
account and will not be treated as AMC profit. However an equal amount (capped
at 20 basis points) can be included in expense ratio back to compensate the AMC
loss due to outgoing investors, which means that overall, for the investors on one
hand, the AUM gets increased (NAV increased marginally because of exit load
money coming back to them), while at the same time they’re paying more in
expense ratios, so the net effect of this would be, no gain no loss to both the
parties.
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4. Direct Plans with lower expense ratio
SEBI has directed that for each mutual fund, there has to be a equivalent Direct
Plan with a lower expense ratio. So for every mutual fund XYZ, now you will see
XYZ and XYZ-Direct options. So XYZ will come with higher expense ratio, and
XYZ-Direct will have lower expense ratio. Many people who research mutual
funds and like to buy it on their own directly from AMC by passing agents and
other online distributors, this option will be cheaper and makes sense. However,
many distributors are not happy with this move and think this will “kill” their
business, all because investors will then just invest into the direct options.
Note, SEBI has not yet clarified by how much lower, the expense ratio of the
Direct plans will be and if it will be mandatory for each and every plan or just
some categories.
5. Service Charge will be paid by Investors directly
Earlier the service tax was borne by mutual funds themselves. But now service tax
can be passed to investors and charged from the AUM of the Fund
6. Financial Advisers and Distributors separation
Very soon, financial advisor regulation will come into effect. This means, now
there will be some minimum qualification, registration and guidelines for financial
advisers. They will have to register with SEBI and a separate body of regulators
will soon be created for this. A financial advisor is a professional who advises his
clients on investments for a “fee.” The important distinction being, he wont be
able to earn any money from commissions by selling financial products. If a
person wants to sell financial products and earn commissions out of it, then he
will not be able to “advise” the clients. But CA, MBA, and several other
professionals are kept out of this rule and even mutual fund agents who have a
valid ARN code are kept out of this rule because their basic advice is seen as the
extention of their work.
No registration fee for new ARN registration: To waive registration fees for all
the distributors registering for the first time in the categories of Individuals
(including Senior Citizen) and new cadre of Distributors during the period from
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1st February, 2013 to 30th June, 2013subject to fulfilling the certain conditions
These steps taken by SEBI is aimed at boosting the Industry , the impact of which
has to been seen in times to come .However the industry being still in very nascent
phase has still a long way to go.
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References

Financial Education. Business Economics, January 2007

Getting it Right on the Money, 3 April, 2008, The Economist

Handbook of Statistics October 2008, RBI

Improving Financial Literacy: Analysis of Issues and Policies. OECD 2005

Indian Retail Finance Markets, 2007, IIMS Dataworks

Lusardi, Annamaria and Olivia S. Mitchell (2007b): Financial Literacy and
Retirement Preparedness: Evidence and Implications for

Sa-Dhan, the Bharat Microfinance Report-Quick Data 2008
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BIBLIOGRAPHY
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
amfiindia.com
304
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www.sebi.gov.in/sebiweb/investment/statistics.jsp?s=mf
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305
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
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
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
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306

www.licnomuramf.com

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
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
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
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
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Appendix 1
For Investor's
Name:
Location:
Age:
a) <30 years;
b) Between 30 – 45 yrs c) between 45 – 60 yrs d) Above 60 yrs
Occupation : a) Govt Service
b) Pvt Service
Retired
Annual Income
a) Less than Rs 3 lacs
c) Between Rs 5lacs – Rs 10lacs
Q.1)
c) Business/Professional
b) Between Rs 3 lacs – Rs 5 lacs
d) More than Rs 10 lacs
List your 5 most preferred AMC' s
a) --------------------------------------------- (b) -------------------------------------------c) ---------------------------------------------- (d)-------------------------------------------e)-----------------------------------------------Q.2)
Major preferred criterion while choosing any AMC (Choose (1-5) 5 most
preferred 1-least preferred
Parameter
Score
Brand
Advice given by Advisor
Promoter's Credibility & Background
Service & Branch Network
Past Track Records of Fund
Q.3)
What is the most preferred objective for investment?(Choose (1-4) 4 most
preferred 1-least preferred
Parameter
Score
High Return
Safety of Capital
Tax Benefit
Long term Wealth Creation/Child
Education/Retirement
Q.4)
How much return do you expect per annum?
a) 10 – 15%
b) 15-20%
d)
d) More than 20% pa
308
Q.5)
How much downside risk(negative return) can you tolerate before redeeming
your units?
a) less than 10%
b) between10 – 15%
c) More than 15%
d) Will hold till it become profitable
e) Will hold till the goal for which investment is made is near
Q.6)
List your 5 most preferred Schemes(Name) where you have invested?
a)_______________________
b)__________________________
c)_______________________
d)________________________
e)__________________________
Q.7)
What is a time horizon for your investments in Mutual Fund?
a) Less than year
b) 1 – 3 years
c) 3 -5 years
d) More than 5 years
Q.8)
Has there been any change in your Investment pattern in last three years because
of fluctuations in market?
a) Yes Portfolio has become more conservative(Less Equity Exposure)
b) Yes ,Portfolio now more aggressive(More Equity Exposure)
c) No Change in Portfolio Allocation
Q.9)
What is your preferred mode of Investing in a Mutual Fund?
a) SIP
b) Lump Sum
c) NFO's
d) STP
Q.10) Who is your preferred distributor/Advisor for buying Mutual Fund?
a) Corporate Brokers
b) Banks
c) Independent Financial Advisor
d) Direct/online
Q.11) From where do you take advice for investing in Mutual Fund?
a) Independent Financial Advisor
b) Brokers
c) Banks
d) Friends/Colleagues
e) Self Research
Q.12) After the abolishment of entry load for investor from AMC have you still
continued with your Advisor/Distributor?
a) Yes
b) No
c) Partly
Q.13) Will you be ready to pay separate advisory fees to your Advisor/Broker for
investing in Mutual Fund through him
a) Yes
b) No
c) Cant' say
The above data is purely confidential in nature and will be used only for academic research
purpose.
309
Appendix 2
For Employees of AMC
Name:
Name of AMC:
Designation:
Total Experience in Mutual fund industry:
Q.1)
2.
a) Less than 3 years
b) 3-5 years
3.
c) 5 – 10 years
d) More than10 years
What according to you are the investor's preference while investing in the
mutual fund Choose (1-5) 5 most preferred 1-least preferred
Parameter
Score
Stability of Fund
Objective & Theme of Scheme
Fund Manager's Track Record
Brand of AMC
On Advice of Advisor
Q.2)
Do you think that there has been change in Investor's Attitude towards
investment in recent years because of fluctuations in market?
a) Yes More Conservative
b) Yes More Aggressive
c) No Change
Q.3)
What are the most popular method of investments in your AMC's by
retail investor?
a) SIP
b) NFO
c) Lump Sum
d) Any Other
310
Q.3)
Has the abolition of entry load impacted business of your AMC?
a) Very High negative Impact
b) High Negative Impact
c) Will Impact for short term only
d) No impact
Q.4)
Do you agree that the client will pay extra service charge to distributors if
good service and advice is given to them
a) Yes
Q.5)
b) No
c) Can't Say
Do you agree that abolition of Entry Load will help to bring more
transparency in market by stopping rebating and non serious advisors?
a) Yes
Q.6)
b) No
What is the preferred mode of advertising of your AMC?
a) Digital Media
b) Print Media
d) Through Independent Advisors
Q.7)
c) Can't Say
c) Broker's Channel
e) Any Other
Post Abolishment of Entry Load and reduction of advisor commission
what has been the strategy of your AMC's to increase business?
311
Appendix 3
For Distributors
1)
Name:
2)
Years of Experience in Mutual Fund :
3)
Total AUM:
a) less than 50lacs
c) 1crore – 5 Crore
4)
b) 50lacs- 1crore
d) More than 5 Crore
List your 5 most preferred AMC' s
a) --------------------------------------------- (b) -----------------------------------c) ---------------------------------------------- (d)-----------------------------------e)------------------------------------------------
5)
Major preferred criterion while choosing any AMC (Choose (1-5) 5 most
preferred 1-least preferred
Parameter
Score
Brand
Earning & Incentive Opportunity
Promoter's Credibility & Background
Service & Branch Network
Past Track Records of Funds
6)
What according to you are the investor's preference while investing in the
mutual fund Choose (1-5) 5 most preferred 1-least preferred
Parameter
Stability of Fund
Objective & Theme of Scheme
Fund Manager's Track Record
Brand of AMC
On Advice of Advisor
Score
312
7)
Do you think that there has been change in Investor's Attitude towards
investment in recent years because of fluctuations in market?
a) Yes , More Conservative
b) Yes ,More Aggressive
c) No Change
8)
What are the most popular type of schemes which your are advising to
your clients ?
9)
a)_____________________
b)_______________________
c)_____________________
d)_______________________
How do you primarily promote Mutual Fund to your customer?
a) NFO
b) Lumpsum
c) SIP
d) STP
10)
Has the abolition of entry load impacted your business?
a) Very High negative Impact
b) High Negative Impact
c) Will Impact for short term only
d) No impact
11)
Do you agree that the client will pay extra service charge if good service
and advice is given to them
a) Yes
12)
b) No
c) Can't Say
Do you agree that abolition of Entry Load will help to bring more
transparency in market by stopping rebating and non serious advisors?
a) Yes
13)
b) No
c) Can't Say
What has been your strategy post abolishment of direct commission to
increase your business?
14)
Any Other Comment about the Mutual Fund Distribution Business.
The above mentioned information is purely for academic and research purpose and will remain
confidential
-------:0:-------
166,170-179,183,185-188,191-196,200-205,209-210,214-219,223-228,232-237,241-246,250254,261-265,268,270-271