Welcome Barry Smith Deputy President, CII Introduction Dr Alexander Scott CEO, CII.
CII-KPMG Report on Mutual Fund Industry 2009
Transcript of CII-KPMG Report on Mutual Fund Industry 2009
Indian�Mutual�Fund�Industry�–�The�Future�in�a�Dynamic�EnvironmentOutlook�for�2015
JUNE 20 09
Table of Contents
1. Executive Summary 01
2. The Indian Mutual Fund Industry - Current State 03
3. Challenges and Issues 10
4. Voice of the Customer 15
5. Future Outlook in a Dynamic Environment 20
6. Action Plan for Achieving Transformational Growth 26
7. Summary 32
©�2009�KPMG,�an�Indian�Partnership�and�a�member�firm�of�the�KPMG�network�of�independent�member�firms�affiliated�with�KPMG�International,�a�Swisscooperative.�All�rights�reserved.
The�Indian�mutual�fund�industry�has�witnessed�significant�growth�in�the
past�few�years�driven�by�several�favourable�economic�and�demographic
factors�such�as�rising�income�levels�and�the�increasing�reach�of�Asset
Management�Companies�(AMCs)�and�distributors.�However,�after�several
years�of�relentless�growth,�the�industry�witnessed�a�fall�of�8�percent�in
the�assets�under�management�in�the�financial�year�2008-09�that�has
impacted�revenues�and�profitability.�
Recent�developments�triggered�by�the�global�economic�crisis�have
served�to�highlight�the�vulnerability�of�the�Indian�mutual�fund�industry�to
global�economic�turbulence�and�exposed�our�increased�dependence�on
corporate�customers�and�the�retail�distribution�system.�It�is�therefore�an
opportune�time�for�the�industry�to�dwell�on�the�experiences�and�develop
a�roadmap�through�a�collaborative�effort�across�all�stakeholders,�to
achieve�sustained�profitable�growth�and�strengthen�investor�faith�and
confidence�in�the�health�of�the�industry.�Innovative�strategies�of�AMCs
and�distributors,�enabling�support�from�the�regulator�SEBI,�and�pro-active
initiatives�from�the�industry�bodies�CII�and�AMFI�are�likely�to�be�the�key
components�in�defining�the�future�shape�of�the�industry.
This�report�summarises�the�current�state�of�the�Indian�mutual�fund
industry�highlighting�the�key�challenges�and�issues.�We�have�also
presented�the�‘Voice�of�Customers’�to�understand�their�needs�and
priorities�as�the�industry�defines�the�future�roadmap�for�2015.�The�report
outlines�an�action�plan�for�key�stakeholders�so�as�to�surpass�expectations
of�industry�growth�and�profitability.
KPMG�acknowledges�the�inputs�received�from�AMCs,�distributors,
customers�and�service�providers�for�this�report.
KPMG�is�privileged�to�be�associated�with�the�CII�Mutual�Fund�Summit
2009�as�Knowledge�Partner�on�the�theme�’Indian�Mutual�Fund�Industry�–
The�Future�in�a�Dynamic�Environment’.
Abizer DiwanjiHead – Financial Services KPMG in India
Preface
Relatively�low�penetration�levels�combined�with�rapid�growth�in�the
assets�under�management�in�recent�years�point�to�the�high�growth
potential�of�the�Indian�mutual�fund�industry.
The�recent�developments�of�the�past�few�months,�triggered�by�the�global
economic�crisis,�have�shown�that�the�Indian�mutual�fund�industry�is�not
decoupled�from�global�developments.�The�financial�turmoil�has�served�to
highlight�the�benefits�of�investing�in�mutual�funds,�in�particular,�in
comparison�with�directly�investing�in�stocks.�
Going�forward,�the�Indian�mutual�fund�industry�is�expected�to�secure
growth�by�catering�to�the�evolving�aspirations�of�retail�customers.�The
industry�seeks�to�target�an�increased�share�of�the�customer�wallet
through�product�innovation�combined�with�deeper�retail�penetration�by
expanding�reach�into�Tier�2�and�Tier�3�towns.�The�industry�will�need�to
incorporate�capital�safety�features�in�product�design,�build�strong�brands
that�are�hallmarks�of�financial�integrity,�service�orientation�and�sustained
fund�performance.�Building�investors’�trust�and�increased�customer
awareness�through�initiatives�aimed�at�promoting�financial�literacy�will�be
critical�factors�towards�building�greater�retail�participation.
It�is�therefore�an�opportune�time�for�the�industry�to�introspect�on�the
learnings�and�experiences�of�the�past�decade�and�develop�a�roadmap
through�a�collaborative�effort�across�all�stakeholders,�to�achieve�sustained
profitable�growth.�
We�hope�you�will�find�this�report�interesting�and�useful.
©�2009�KPMG,�an�Indian�Partnership�and�a�member�firm�of�the�KPMG�network�of�independent�member�firms�affiliated�with�KPMG�International,�a�Swisscooperative.�All�rights�reserved.
U K SinhaChairman – CII National Committee on Mutual Funds Chairman & Managing Director, UTI Asset Management Company Limited
Foreword
Current State
India�has�been�amongst�the�fastest�growing�markets�for�mutual�funds�since�2004,�witnessing�a�CAGR�of�29percent�in�the�five-year�period�from�2004�to�2008�as�against�the�global�average�of�4�percent.�The�increase�inrevenue�and�profitability,�however,�has�not�been�commensurate�with�the�AUM�growth�in�the�last�five�years.�
Low�share�of�global�assets�under�management,�low�penetration�levels,�limited�share�of�mutual�funds�in�thehousehold�financial�savings�and�the�climbing�growth�rates�in�the�last�few�years�that�are�amongst�the�highest�inthe�world,�all�point�to�the�future�potential�of�the�Indian�mutual�fund�industry.
Challenges and Issues
Low�customer�awareness�levels�and�financial�literacy�pose�the�biggest�challenge�to�channelising�householdsavings�into�mutual�funds.�Further,�fund�houses�have�shown�limited�focus�on�increasing�retail�penetration�andbuilding�retail�AUM.�Most�AMCs�and�distributors�have�a�limited�focus�beyond�the�top�20�cities�that�ismanifested�in�limited�distribution�channels�and�investor�servicing.�The�Indian�mutual�fund�industry�has�largelybeen�product-led�and�not�sufficiently�customer�focused�with�limited�focus�being�accorded�by�players�toinnovation�and�new�product�development.�Further�there�is�limited�flexibility�in�fees�and�pricing�structurescurrently.�
Distributors�and�the�mutual�fund�houses�have�exhibited�limited�interest�in�continuously�engaging�withcustomers�post�closure�of�sale�as�the�commissions�and�incentives�have�been�largely�in�the�form�of�upfrontfees�from�product�sales.�Limited�focus�of�the�public�sector�network�including�public�sector�banks,�India�Postetc�on�distribution�of�mutual�funds�has�also�impeded�the�growth�of�the�industry.�Further�multiple�regulatoryframeworks�govern�different�verticals�within�the�financial�services�sector,�such�as�differential�policies�pertainingto�the�PAN�card�requirement,�mode�of�payment�(cash�vs�cheque),�funds�management�by�insurance�companiesand�commission�structures,�among�others.
Voice of the Customer
CII-KPMG�conducted�a�‘Voice�of�the�Customer’�survey�to�help�understand�the�buying�behaviour�of�existing�andpotential�investors�in�mutual�funds,�and�to�obtain�feedback�on�their�wish-list�from�various�stakeholders�includingfund�houses,�distributors,�service�providers�and�the�regulator.
Factors�that�are�impediments�to�mutual�fund�investing�are�availability�of�a�large�number�of�mutual�fundsschemes�that�makes�investment�decision�complex�and�difficult,�complicated�KYC�norms�that�restrict�potential
©�2009�KPMG,�an�Indian�Partnership�and�a�member�firm�of�the�KPMG�network�of�independent�member�firms�affiliated�with�KPMG�International,�a�Swisscooperative.�All�rights�reserved.
1. Executive Summary
Page�1
investors,�and�quality�of�advice�provided.�After�sales�service�and�ongoing�follow�up�have�been�identified�bycustomers�as�the�key�differentiators�in�assessing�the�capabilities�of�distributors.�
Drivers�for�purchase�of�mutual�funds�include�tax�benefits�of�mutual�fund�investments,�consistency�in�fundperformance�and�brand�equity.�Simplification�of�processes�such�as�the�application�and�redemption�processcould�potentially�increase�the�quantum�of�investments�in�mutual�funds.
Future Outlook in a Dynamic Environment
KPMG�in�India�is�of�the�view�that�the�industry�AUM�is�likely�to�continue�to�grow�in�the�range�of�15�to�25percent�from�the�period�2010�to�2015�based�on�the�pace�of�economic�growth.�In�the�event�of�a�quick�economicrevival�and�positive�reinforcement�of�growth�drivers�identified,�KPMG�in�India�is�of�the�view�that�the�Indianmutual�fund�industry�may�grow�at�the�rate�of�22�to�25�percent�in�the�period�from�2010�to�2015,�resulting�inAUM�of�INR�16,000�to�18,000�billion�in�2015.�In�the�event�of�a�relatively�slower�economic�revival�resulting�in�theidentified�growth�drivers�not�reaching�their�full�potential,�KPMG�in�India�is�of�the�view�that�the�Indian�mutualfund�industry�may�grow�in�the�range�of�15�to�18�percent�in�the�period�from�2010�to�2015,�resulting�in�AUM�ofINR�15,000�to�17,000�billion�in�2015.�
Industry�profitability�may�reduce�further�as�revenues�shrink�and�operating�costs�escalate.�Product�innovation�isexpected�to�be�limited.�Market�deepening�and�widening�is�expected�with�the�objective�of�increased�retailpenetration�and�participation�in�mutual�funds.�The�regulatory�and�compliance�framework�for�mutual�funds�islikely�to�get�aligned�with�the�other�frameworks�across�the�financial�services�sector.
Action Plan for Achieving Transformational Growth
There�is�a�need�for�a�collaborative�effort�across�all�key�stakeholders�to�harness�the�future�growth�potential�andreach�out�to�the�customer.
Given�that�customer�awareness�is�the�pre-requisite�for�the�achievement�of�the�industry�growth�potential,�thereis�a�need�for�planning,�financing�and�executing�initiatives�aimed�at�increasing�financial�literacy�and�enhancinginvestor�education�across�the�country�through�a�sustained�collaborative�effort�across�all�stakeholders,�that�isexpected�to�result�in�a�massive�increase�in�mutual�fund�penetration.�AMCs�should�focus�on�product�innovationand�introduction�of�flexibility�in�pricing.�
Public�sector�thrust�into�mutual�funds�distribution�and�focus�on�strengthening�presence�beyond�Tier�2�cities�willentail�training�of�the�public�sector�employee�base�through�the�“Train�the�Trainer”�approach,�so�that�they�may�beinducted�as�trainers�to�support�customer�awareness�campaigns�to�be�facilitated�by�CII,�NISM�and�AMFI.
Opening�up�of�the�public�sector�branch�network�in�Tier�3�and�Tier�4�towns�will�include�India�Post,�NationalisedBanks,�Regional�Rural�Banks�and�Cooperative�Banks.�This�will�also�require�a�boost�to�be�provided�to�InvestorService�Centres�(ISCs)�through�R&T�Agents�should�be�given�a�thrust.
Focus�on�increasing�customer�engagement�pre�and�post�completion�of�the�investment�will�be�beneficial.�CIIand�AMFI�should�help�to�steer�the�industry�vision.�The�recognition�of�the�Association�of�Distributors�by�SEBIwould�also�be�beneficial�for�the�long�term�wellbeing�of�the�industry.
It�is�proposed�that�harmonisation�of�policies�across�multiple�regulatory�frameworks�in�the�financial�servicessector�must�be�taken�up�on�high�priority�through�constitution�of�a�Steering�Committee�under�the�aegis�of�theMinistry�of�Finance,�comprising�the�Financial�Services�Regulators�for�mutual�funds�and�capital�markets,pension,�insurance,�banking�and�other�verticals�along�with�representation�from�the�CBDT.�
Given�that�the�industry�needs�to�collectively�work�towards�riding�over�the�dynamic�and�relatively�less�favourableeconomic�environment�at�present,�the�next�phase�for�the�industry�is�likely�to�be�characterised�by�a�strongerfocus�on�customer�centricity,�cost�management�and�robust�governance�and�regulatory�framework�-�all�aimed�atenabling�the�industry�to�achieve�sustained,�profitable�growth,�going�forward.
©�2009�KPMG,�an�Indian�Partnership�and�a�member�firm�of�the�KPMG�network�of�independent�member�firms�affiliated�with�KPMG�International,�a�Swisscooperative.�All�rights�reserved.
Page�2
The�Indian�mutual�fund�industry�has�evolved�from�a
single�player�monopoly�in�1964�to�a�fast�growing,
competitive�market�on�the�back�of�a�strong�regulatory
framework.
AUM GrowthThe�Assets�under�Management�(AUM)�have�grown�at�a
rapid�pace�over�the�past�few�years,�at�a�CAGR�of�35
percent�for�the�five-year�period�from�31�March�2005�to
31�March�20091.�Over�the�10-year�period�from�1999�to
2009�encompassing�varied�economic�cycles,�the
industry�grew�at�22�percent�CAGR2.�This�growth�was
despite�two�falls�in�the�AUM�-�the�first�being�after�the
year�2001�due�to�the�dotcom�bubble�burst,�and�the
second�in�2008�consequent�to�the�global�economic
crisis�(the�first�fall�in�AUM�in�March�2003�arising�from
the�UTI�split).
©�2009�KPMG,�an�Indian�Partnership�and�a�member�firm�of�the�KPMG�network�of�independent�member�firms�affiliated�with�KPMG�International,�a�Swisscooperative.�All�rights�reserved.
2. The Indian Mutual Fund Industry – The Current State
Note: As of 31 March for each yearSource: AMFI data
Growth in AUM in the Indian Mutual Fund Industry (Average AUM in INR Billion)
1�AMFI�data2�AMFI�data
Page�3
AUM Base and Growth Relative To the GlobalIndustryIndia�has�been�amongst�the�fastest�growing�markets
for�mutual�funds�since�2004;�in�the�five-year�period
from�2004�to�2008�(as�of�December)�the�Indian�mutual
fund�industry�grew�at�29�percent�CAGR�as�against�the
global�average�of�4�percent3.�Over�this�period,�the
mutual�fund�industry�in�mature�markets�like�the�US�and
France�grew�at�4�percent,�while�some�of�the�emerging
markets�viz.�China�and�Brazil�exceeded�the�growth
witnessed�in�the�Indian�market.
However,�despite�clocking�growth�rates�that�are
amongst�the�highest�in�the�world,�the�Indian�mutual
fund�industry�continues�to�be�a�very�small�market;
comprising�0.32�percent�share�of�the�global�AUM�of
USD�18.97�trillion�as�of�December�20084.
AUM to GDP RatioThe�ratio�of�AUM�to�India’s�GDP,�gradually�increased
from�6�percent�in�2005�to�11�percent�in�2009.�Despite
this�however,�this�continues�to�be�significantly�lower
than�the�ratio�in�developed�countries,�where�the�AUM
accounts�for�20-70�percent�of�the�GDP5.
Share of Mutual Funds in Household FinancialSavingsInvestment�in�mutual�funds�in�India�comprised�7.7
percent�of�the�gross�household�financial�savings�in�FY
2008,�a�significant�increase�from�1.2�percent�in�FY
2004.�The�households�in�India�continue�to�hold�55
percent�of�their�savings�in�fixed�deposits�with�banks,
18�percent�in�insurance�and�10�percent�in�currency�as
of�FY�20086.
In�2008,�the�UK�had�more�than�thrice�the�investments
into�mutual�funds�as�a�factor�of�total�household�savings
(26�percent),�than�India�had�in�the�same�time�period.
As�of�December�2008,�UK�households�held�61�percent
of�the�total�savings�in�bank�deposits,�11.6�percent�in
equities�and�1�percent�in�bonds7.
©�2009�KPMG,�an�Indian�Partnership�and�a�member�firm�of�the�KPMG�network�of�independent�member�firms�affiliated�with�KPMG�International,�a�Swisscooperative.�All�rights�reserved.
Source: ICI Factbook 2009, AMFI dataNote: Based on AUM as of 31 December
AUM Growth Rate in Select Countries (CAGR for 2004-2008)
Source: AMFI data, CSONote: Based on AUM as of 31 December of each year
AUM to GDP Ratio for India
Source: RBI dataNote: As of 31 March for every year
Share of Mutual Funds in Households’ Gross FinancialSavings in India
3�ICI�data4�ICI�and�AMFI�data5�AMFI�and�CSO�data
6�RBI�data7�Datamonitor�Report,�December�2008
Page�4
Source: RBI data
Composition of Households’ Gross Financial Savings inIndia in FY 2008
ProfitabilityThe�increase�in�revenue�and�profitability�in�the�Indian
mutual�fund�industry�has�not�been�commensurate�with
the�AUM�growth�in�the�last�5�years.�The�AUM�grew�at
35�percent�CAGR�in�the�period�from�March�2005�to
2009,�while�the�profitability�of�AMCs�-�which�is�defined
as�PBT�as�a�percentage�of�the�AUM�-�declined�from�24
bps�in�FY�2004�to�14�bps�in�FY�20088.�
During�FY�2004�and�FY�2008,�the�investment
management�fee�as�a�percent�of�average�AUM�was�in
the�range�of�55�to�58�bps�(small�increase�to�64�bps�in
FY�2006)�due�to�the�industry�focus�on�the�underlying
asset�mix�comprising�relatively�low�margin�products
being�targeted�at�the�institutional�segment9.
The�operating�expenses,�as�a�percentage�of�AUM,�rose
from�41�bps�in�FY�2004�to�113�bps�in�FY�2008�largely
due�to�the�increased�spend�on�marketing,�distribution
and�administrative�expenses�impacting�AMC�margins10.
Rising�cost�pressures�and�decline�in�profitability�have
impacted�the�entry�plans�of�global�players�eyeing�an
Indian�presence.�
The�growth�in�AUM�accompanied�by�a�decline�in
profitability�necessitates�an�analysis�of�the�underlying
characteristics�that�have�a�bearing�on�the�growth�and
profitability�of�the�Indian�mutual�fund�industry.
The Indian Mutual Fund Industry – KeyCharacteristics
Customers
The�Indian�mutual�fund�industry�has�significantly�high
ownership�from�the�institutional�investors.�Retail
investors�comprising�96.86�percent�in�number�terms
held�approximately�37�percent�of�the�total�industry
AUM�as�at�the�end�of�March�200811,�significantly�lower
than�the�retail�participation�in�the�US�at�82�percent�of
AUM�as�at�December�200812.�
©�2009�KPMG,�an�Indian�Partnership�and�a�member�firm�of�the�KPMG�network�of�independent�member�firms�affiliated�with�KPMG�International,�a�Swisscooperative.�All�rights�reserved.
Source: KPMG Analysis based on published financials of AMCs
Industry Profitability as a percentage of AUM
Source: SEBI data
Indian Mutual Fund Industry – Industry Investor Mix
8�KPMG�Analysis�of�published�financial�statements�of�AMCs�with�AUM�datafrom�AMFI9�KPMG�Analysis�
10�KPMG�Analysis�11�SEBI12�ICI
Page�5
Out�of�a�total�population�of�1.15�billion,�the�total
number�of�mutual�fund�investor�accounts�in�India�as�of
31�March�2008�was�42�million�(the�actual�number�of
investors�is�estimated�to�be�lower�as�investors�hold
multiple�folios)13.�In�the�US,�an�estimated�92�million
individual�investors�owned�mutual�funds�out�of�a�total
population�of�305�million14 in�2008.
As�per�the�Invest�India�Incomes�and�Savings�Survey
2007�of�individual�wage�earners�in�the�age�group�18�to
59�years�conducted�by�IIMS�Dataworks,�only�1.6
percent�invested�in�mutual�funds.�Ninety�percent�of�the
savers�interviewed�were�not�aware�of�mutual�funds�or
of�investing�in�mutual�funds�through�a�Systematic
Investment�Plan�(SIP).�The�mutual�fund�penetration
among�the�paid�Indian�workforce�with�annual
household�income�less�than�INR�90,000�was�0.1
percent.
In�the�last�few�years,�the�retail�investor�participation,�in
particular,�in�Tier�2�and�Tier�3�towns,�has�been�on�the
rise�aided�by�the�buoyant�equity�markets.
Products
The�Indian�mutual�fund�industry�is�in�a�relatively
nascent�stage�in�terms�of�its�product�offerings,�and
tends�to�compete�with�products�offered�by�the
Government�providing�fixed�guaranteed�returns.�As�of
December�2008,�the�total�number�of�mutual�fund
schemes�was�1,002�in�comparison�to�10,349�funds�in
the�US.
Debt�products�dominate�the�product�mix�and
comprised�49�percent�of�the�total�industry�AUM�as�of
FY�200915,�while�the�equity�and�liquid�funds�comprised
26�percent�and�22�percent�respectively.�Open-ended
funds�comprised�99�percent�of�the�total�industry�AUM
as�of�March�2009.
As�of�December�2008,�the�US�mutual�fund�market
comprised�money�market�funds,�equity�funds,�debt/
bond�funds�and�hybrid�funds�at�40,�39,�16�and�5
percent�of�the�total�AUM�respectively16.�
©�2009�KPMG,�an�Indian�Partnership�and�a�member�firm�of�the�KPMG�network�of�independent�member�firms�affiliated�with�KPMG�International,�a�Swisscooperative.�All�rights�reserved.
Source: AMFI data
Growth Rate (Five year CAGR) across Fund Categories
13�SEBI14�ICI,�CIA15�SEBI16�ICI�Factbook�2009
Page�6
While�traditional�vanilla�products�dominate�in�India,�new
product�categories�viz.�Exchange�Traded�Funds�(ETFs),
Gold�ETFs,�Capital�Protection�and�Overseas�Funds�have
gradually�been�gaining�popularity.�As�of�March�2009,
India�had�a�total�of�16�ETFs�(0.3�percent�of�total�AUM)
while�the�US�had�a�total�of�728�ETFs�as�of�December
200817.
Markets
While�the�mutual�fund�industry�in�India�continues�to�be
metro�and�urban�centric,�the�mutual�funds�are
beginning�to�tap�Tier�2�and�Tier�3�towns�as�a�vital
component�of�their�growth�strategy.�The�contribution�of
the�Top�10�cities�to�total�AUM�has�gradually�declined
from�approximately�92�percent�in�2005�to
approximately�80�percent�currently18.�
Distribution Channels
As�of�March�2009,�the�mutual�fund�industry�had�92,499
registered�distributors�as�compared�to�approximately
2.5�million�insurance�agents19.�The�Independent
Financial�Advisors�(IFAs)�or�Individual�distributors,
corporate�employees�and�corporates�comprised�73,�21
and�6�percent�respectively�of�the�total�distributor�base.
Banks�in�general,�foreign�banks�and�the�leading�new
private�sector�banks�in�particular,�dominate�the�mutual
fund�distribution�with�over�30�percent�AUM�share.
National�and�Regional�Distributors�(including�broker-
dealers)�together�with�IFAs�comprised�57�percent�of
the�total�AUM�as�of�2007.�The�public�sector�banks�are
gradually�enhancing�focus�on�mutual�fund�distribution
to�boost�their�fee�income20.
Industry Structure
The�Indian�mutual�fund�industry�currently�consists�of�38
players�that�have�been�given�regulatory�approval�by
SEBI.�The�industry�has�witnessed�a�shift�has�changed
drastically�in�favour�of�private�sector�players,�as�the
number�of�public�sector�players�reduced�from�11�in
2001�to�5�in�2009.�
©�2009�KPMG,�an�Indian�Partnership�and�a�member�firm�of�the�KPMG�network�of�independent�member�firms�affiliated�with�KPMG�International,�a�Swisscooperative.�All�rights�reserved.
Source: AMFI dataNote: Data as of 31 March for every year except for December 2002
Number of Distributors by Category Registered Annually byAMFI
Source: CII Mutual Fund Summit 2008 quoted from Cerulli Associates
Distribution Channel Mix
Source: AMFI data
Growth in the Number of AMCs in India
17�AMFI�data,�ICI�Factbook�200918�Industry�discussions19�AMFI�and�IRDA�data
20�CII�Mutual�Fund�Summit�2008�quoted�from�Cerulli�Associates21�AMFI�data
Page�7
The�public�sector�has�gradually�ceded�market�share�to
the�private�sector.�Public�sector�mutual�funds
comprised�21�percent�of�the�AUM�in�2009�as�against
72�percent�AUM�share�in�200122.
The�industry�concentration�has�been�stagnant�in�the
four-year�period�from�2005�to�2008;�the�top�5�players
comprising�50-52�percent�of�industry�AUM.�However,
as�of�March�2009,�the�share�of�Top�5�players�increased
to�58�percent,�as�against�38�percent�in�the�US.�The
AUM�share�of�the�Top�10�players�has�consistently�been
in�the�vicinity�of�75�percent.23
The�mutual�fund�houses�based�on�product�portfolio�and
distribution�strategy,�the�key�elements�of�competitive
strategy,�can�be�segmented�into�three�categories:
•�The�market�leaders�having�presence�across�all
product�segments
•�Players�having�dominant�focus�on�a�single�product
segment�-�debt�or�equity�
•�Players�having�niche�focus�on�an�emerging�product
category�or�distribution�channels.
The�market�leaders�have�focused�across�product
categories�for�a�more�diversified�AUM�base�with�an
equitable�product�mix�that�helps�maintain�a�consistent
AUM�size.
Although�the�Indian�market�has�relatively�low�entry
barriers�given�the�low�minimum�networth�required�to
venture�into�mutual�fund�business,�existence�of�a
strong�local�brand�and�a�wide�and�deep�distribution
footprint�are�the�key�differentiators.�
Operations
The�Indian�mutual�fund�industry�while�on�a�high�growth
path�needs�to�address�efficiency�and�customer
centricity.�AMCs�have�successfully�been�using
outsourced�service�providers�such�as�custodians,
Registrar�and�Transfer�Agents�(R&T)�and�more�recently,
fund�accountants,�so�that�mutual�funds�can�focus�on
©�2009�KPMG,�an�Indian�Partnership�and�a�member�firm�of�the�KPMG�network�of�independent�member�firms�affiliated�with�KPMG�International,�a�Swisscooperative.�All�rights�reserved.
Source: AMFI data
Market Share of Players as of March 2009
Source: KPMG analysis based on AMFI data
Market Share Trend of the Top 5 and Top 10 players in India
Source: KPMG analysis based on public financials of AMCs
Administrative & Other Expenses as a percentage of AUM
22�AMFI�data23�AMFI�data
Page�8
core�aspects�of�their�business�such�as�product�development�and
distribution.�Functions�that�have�been�outsourced�are�custody�services,
fund�services,�registrar�and�transfer�services�aimed�at�investor�servicing
and�cash�management.�Managing�costs�and�ensuring�investor
satisfaction�continue�to�be�the�key�goals�for�all�mutual�funds�today.
However,�there�is�likely�to�be�scope�for�optimising�operations�costs�given
the�trend�of�rising�administrative�and�associated�costs�as�a�percentage�of
AUM.
Regulatory Framework
The�Indian�mutual�fund�industry�in�terms�of�regulatory�framework�is
believed�to�match�up�to�the�most�developed�markets�globally.�The
regulator,�Securities�and�Exchange�Board�of�India�(SEBI),�has�consistently
introduced�several�regulatory�measures�and�amendments�aimed�at
protecting�the�interests�of�the�small�investor�that�augurs�well�for�the�long
term�growth�of�the�industry.�
The�implementation�of�Prevention�of�Money�Laundering�(PMLA)�Rules,
the�latest�guidelines�issued�in�December�2008,�as�part�of�the�risk
management�practices�and�procedures�is�expected�to�gain�further
momentum.�The�current�Anti�Money�Laundering�(AML)�and�Combating
Financing�of�Terrorism�(CFT)�measures�cover�two�main�aspects�of�Know
Your�Customer�(KYC)�and�‘suspicious�transaction�monitoring�and
reporting’.�
The�regulatory�and�compliance�ambit�seeks�to�dwell�on�a�range�of�issues
including�the�financial�capability�of�the�players�to�ensure�resilience�and
sustainability�through�increase�in�minimum�networth�and�capital
adequacy,�investor�protection�and�education�through�disclosure�norms�for
more�information�to�investors,�distribution�related�regulations�aimed�at
introducing�more�transparency�in�the�distribution�system�by�reducing�the
information�gap�between�investors�and�distributors,�and�by�improving�the
mechanism�for�distributor�remuneration.
The�success�of�the�relatively�nascent�mutual�fund�industry�in�India,�in�its
march�forward,�will�be�contingent�on�further�evolving�a�robust�regulatory
and�compliance�framework�that�in�supporting�the�growth�needs�of�the
industry�ensures�that�only�the�fittest�and�the�most�prudent�players
survive.�
©�2009�KPMG,�an�Indian�Partnership�and�a�member�firm�of�the�KPMG�network�of�independent�member�firms�affiliated�with�KPMG�International,�a�Swisscooperative.�All�rights�reserved.
Page�9
©�2009�KPMG,�an�Indian�Partnership�and�a�member�firm�of�the�KPMG�network�of�independent�member�firms�affiliated�with�KPMG�International,�a�Swisscooperative.�All�rights�reserved.
Context SettingWhile�the�Indian�mutual�fund�industry�has�grown�at�an�impressive�rate�in
the�last�few�years,�the�recent�developments�of�the�past�few�months
triggered�by�the�global�financial�crisis�have�impacted�the�fortunes�of�the
industry�resulting�in�AUM�decline,�adversely�impacting�the�revenue�and
profitability.�
KPMG,�through�discussions�with�the�industry�participants,�has�attempted
to�identify�and�highlight�some�of�the�key�issues�and�challenges�being
faced�by�the�industry�participants�that�are�preventing�the�industry�from
harnessing�its�true�growth�potential.
3. Challenges and Issues
“Mutual funds are still sold,not bought.”- A large national distributor
Page�10
Low Levels of Customer Awareness Low�customer�awareness�levels�and�financial�literacy�pose�the�biggest
challenge�to�channelising�household�savings�into�mutual�funds.�IIMS
Dataworks�data�released�in�2007�establishes�that�low�awareness�levels
among�retail�investors�has�a�direct�bearing�on�the�low�mutual�fund
offtake�in�the�retail�segment.�
The�general�lack�of�understanding�of�mutual�fund�products�amongst
Indian�investors�is�pervasive�in�metros�and�Tier�2�cities�alike�and�majority
of�them�draw�little�distinction�in�their�approach�to�investing�in�mutual
funds�and�direct�stock�market�investments.�A�large�majority�of�retail
investors�lack�an�understanding�of�risk-return,�asset�allocation�and
portfolio�diversification�concepts.
Low�awareness�of�SIPs�in�India�has�resulted�in�a�majority�of�the
customers�investing�in�a�lump�sum�manner.
Limited Focus on Increasing Retail PenetrationThe�Indian�mutual�fund�industry�had�limited�focus�on�building�retail�AUM
and�has�only�recently�stepped�up�efforts�to�augment�branch�presence�in
Tier�2�and�Tier�3�towns.�Players�have�historically�garnered�AUM�by
targeting�the�institutional�segment�that�comprises�63�percent�AUM�share
as�at�March�2008.�
Large�ticket�size,�tax�arbitrage�available�to�corporates�on�investing�in
money�market�mutual�funds,�easy�accessibility�to�institutional�cutomers
concentrated�in�Tier�1�cities�are�the�factors�instrumental�in�mutual�fund
houses�focussing�on�the�institutional�segment.�Building�retail�AUM
requires�significant�distribution�capability�and�a�wide�footprint�to�be�able
to�penetrate�into�Tier�2�and�Tier�3�towns,�which�AMCs�have�recently
started�focusing�on.�Institutional�AUM,�however,�makes�the�industry
vulnerable�to�the�possibility�of�sudden�redemption�pressures�that�impact
the�fund�performance.
Limited Focus Beyond the Top 20 Cities The�mutual�fund�industry�has�continues�to�have�limited�penetration
beyond�the�top�20�cities.�Cities�beyond�Top�20�only�comprise
approximately�10�percent�of�the�industry�AUM�as�per�industry
practitioners.�The�retail�population�residing�in�Tier�2�and�Tier�3�towns,
even�if�aware�and�willing,�are�unable�to�invest�in�mutual�funds�owing�to
limited�access�to�suitable�distribution�channels�and�investor�servicing.
The�distribution�network�of�most�mutual�fund�houses�is�largely�focused
on�the�Top�20�cities�given�the�high�cost�associated�with�deeper
penetration�into�Tier�2�and�Tier�3�towns.�However,�some�of�the�mutual
fund�houses�have�begun�focussing�on�cities�beyond�the�Top�20�by
©�2009�KPMG,�an�Indian�Partnership�and�a�member�firm�of�the�KPMG�network�of�independent�member�firms�affiliated�with�KPMG�International,�a�Swisscooperative.�All�rights�reserved.
“Perhaps most frustrating hasbeen the reality that mutualfunds have made relatively littleimpact in attracting newhousehold financial savings.”- A leading mutual fund in India
“Investor education andawareness has made limitedinroads in increasing customerinvestments in mutual fundsEfforts across AMCs anddistributors have largelyremained disjointed.” - A mid-sized mutual fund in India
“Most AMCs have focused ongrowing AUMs primarily throughinstitutional clients which ismuch easier than penetrating theretail base.” - A large national distributor
“Investor education by AMCs isprimarily on focused on metros.”- A large IFA
“AMCs must focus on investoreducation so that they canchallenge distributors.”- A large AMC
“We need to focus beyond theTop 20 cities to increase retailpenetration.”- A leading national distributor
Page�11
building�their�branch�presence�and�strengthening�distribution�reach
through�non-branch�channels.
Limited Innovation in Product OfferingsThe�Indian�mutual�fund�industry�has�largely�been�product-led�and�not
sufficiently�customer�focused.�The�popularity�of�NFOs�triggered�a
proliferation�of�schemes�with�a�large�number�of�non-differentiated
products.�The�industry�has�had�a�limited�focus�on�innovation�and�new
product�development,�thereby�catering�to�the�limited�needs�of�the
customer.�Products�that�cater�specifically�to�customer�life�stage�needs
such�as�education,�marriage,�and�housing�are�yet�to�find�their�way�in�the
Indian�market.
Despite�the�regulations�for�Real�Estate�Mutual�Funds�(REMF)�being
introduced�in�2008,�the�market�is�still�awaiting�the�first�REMF�launch.
Further,�relatively�nascent�product�categories�viz.�multi-manager�funds
that�are�among�the�most�popular�hybrid�funds�globally�have�not�grown�in
India�owing�to�the�prevailing�taxation�structure.
The�Indian�mutual�fund�industry�offers�limited�investment�options�viz.
capital�guarantee�products�for�the�Indian�investors,�a�large�majority�of
whom�are�risk�averse.�The�Indian�market�is�still�to�witness�the�launch�of
green�funds,�socially�responsible�investments,�fund�of�hedge�funds,
enhanced�money�market�funds,�renewable�and�energy/�climate�change
funds.
Limited Flexibility in Fees and Pricing StructuresThe�fee�structure�in�the�Indian�mutual�fund�industry�enjoys�little�flexibility
unlike�developed�markets�where�the�level�of�management�fees�depend
on�a�variety�of�factors�such�as�the�investment�objective�of�the�fund,�fund
assets,�fund�performance,�the�nature�and�number�of�services�that�a�fund
offers.�While�the�expenses�have�continuously�risen,�the�management�fee
levels�have�remained�stagnant.
Distributors�are�compensated�for�their�services�through�a�fixed�charge�in
the�form�of�entry�load�and�additional�fees�as�considered�appropriate�by
the�AMC.�Regardless�of�the�quality�of�advice�and�service�provided,�the
commission�payable�by�the�mutual�fund�customer�to�the�distributors�is
fixed.�
Limited Customer EngagementMutual�fund�distributors�have�been�facing�questions�on�their
competence,�degree�of�engagement�with�customer�and�the�value
provided�to�the�customer.�
©�2009�KPMG,�an�Indian�Partnership�and�a�member�firm�of�the�KPMG�network�of�independent�member�firms�affiliated�with�KPMG�International,�a�Swisscooperative.�All�rights�reserved.
“Fees should only be on trailbasis so that advisors arecompensated based on ongoingadvice and service provided.”- A large IFA
“There is a tendency to pushselect products during specificeconomic cycles. Debt productsare seldom sold during a stockmarket boom.”- A large regional distributor
“AMCs must focus on investoreducation so that they canchallenge distributors.” - A large AMC
Source: ICI
Fee structures in the US Mutual Fund
Market - A case study
In�the�US�mutual�fund�market,�financialadvisors�are�professionals�who�helpinvestors�define�their�investment�goals,select�suitable�funds�based�on�riskappetite,�and�provide�ongoing�advice�andservice.�These�financial�advisors�arecompensated�for�their�services,�in�part,through�a�specific�fee,�known�as�a�12b-1fee,�which�is�included�in�a�fund’sexpense�ratio.�In�addition,�no-load�fundsare�sold�directly�to�investors�or�are�soldto�investors�through�financial�advisorswho�charge�investors�separately�for�theinvestment�advice�and�service�provided,thereby�providing�flexibility�to�theinvestor,�based�on�the�level�of�adviceand�service�sought.�
Advisors�are�compensated�for�providingthese�services�through�a�combination�offront-end�or�back-end�loads�and
12b-1�fees.�Investors�who�opt�not�to�usea�financial�advisor�or�those�who�pay�thefinancial�advisor�directly�for�servicesrendered,�purchase�no-load�funds,�whichhave�neither�front�-�nor�back-end�loadsand�have�either�low�or�no�12b-1�fees.
Page�12
In�the�absence�of�a�framework�to�regulate�distributors,�both�the
distributors�and�the�mutual�fund�houses�have�exhibited�limited�interest�in
continuously�engaging�with�customers�post�closure�of�sale�as�the
commissions�and�incentives�had�been�largely�in�the�form�of�upfront�fees
from�product�sales�(although�trail�commissions�have�also�been�paid�in
limited�instances�regardless�of�the�service�rendered).�As�a�result�of�the
limited�engagement,�there�have�been�rising�instances�of�mis-selling�to
customers.�
Limited Focus of the Public Sector Network on Distribution of MutualFundsPublic�sector�banks�with�a�large�captive�customer�base,�significant�reach
beyond�the�Top�20�cities�in�semi-urban�and�rural�areas,�and�the�potential
to�build�the�retail�investor�base,�have�so�far�played�a�very�limited�role�in
mutual�funds�distribution.�
The�India�Post�network�operating�the�largest�postal�network�in�the�world
majority�of�which�is�in�rural�areas,�is�stated�to�have�250�post�offices
selling�mutual�funds�of�five�AMCs�only;�further�most�of�the�post�offices
selling�mutual�funds�are�located�in�Tier�1�and�Tier�2�cities�which�are
already�been�catered�to,�by�national�level�and�other�distributors24.�India
Post�with�its�customer�base�of�170�million�account�holders�and�branch
network�of�over�154,000�branches,�doubling�the�size�of�all�bank�branches
put�together�is�a�formidable�channel�which�has�been�under�utilised�to
date�for�mutual�fund�distribution25.�The�postal�network�also�serves�as�a
means�to�facilitate�inclusive�and�equitable�growth�to�all�regions�and�social
groups�by�providing�them�with�access�to�financial�products�such�as
mutual�funds.
Further�the�credibility�enjoyed�by�the�Nationalised�Banks,�Regional�Rural
Banks�and�Cooperative�Banks�in�the�rural�hinterland�has�not�been�fully
leveraged�to�target�the�retail�segment.
Multiple Regulatory Frameworks Governing Financial Services SectorVerticalsThe�regulatory�and�compliance�requirements�vary�across�verticals�within
the�financial�services�sector�specifically�mutual�funds,�insurance�and
pension�funds�each�of�which�are�governed�by�an�independent�regulatory
framework�and�are�competing�for�the�same�share�of�the�customer’s
wallet.�The�mutual�fund�industry�lacks�a�level�playing�field�in�comparison
with�other�verticals�within�the�financial�services�sector.
©�2009�KPMG,�an�Indian�Partnership�and�a�member�firm�of�the�KPMG�network�of�independent�member�firms�affiliated�with�KPMG�International,�a�Swisscooperative.�All�rights�reserved.
“AMFI must focus on definingthe industry vision and long-termstrategic direction.” - A mid-sized AMC
“Valuations in the Indian mutualfund industry should be based onEBITDA multiples and not on thebasis of AUM alone.” - A large AMC
“PAN card being mademandatory is a deterrent toindustry growth.”- A large national distributor
“AMCs do not contribute totraining costs for distributors.”- A mid-sized national distributor
“Manufacturers need toincrease the level of engagementwith customers and play a muchlarger role beyond sales.”- A small AMC
Page�13
The�mandatory�PAN�card�requirement�for�investing�in�mutual�funds�is
perceived�to�restrict�significant�potential�of�the�mutual�fund�industry�in
being�able�to�tap�small�ticket�investors�from�investing�in�mutual�funds.
On�the�other�hand,�ULIPs�which�are�deemed�to�be�competing�products
do�not�have�the�mandatory�PAN�requirement.
While�the�payment�for�investment�into�mutual�funds�can�be�made�only
through�banking�facilities,�the�purchase�of�ULIPs�can�be�undertaken
through�cash.�
The�recently�introduced�NPS�regulations�requiring�the�AMCs�to�create�a
separate�legal�entity�for�pension�funds�management�has�created�an
additional�cost�structure�for�the�mutual�fund�players.
Outsourcing�funds�management�in�excess�of�INR�80�billion�by�insurance
companies�is�not�permitted�and�thus�restricts�an�additional�revenue
opportunity�for�the�mutual�fund�industry.�
In�summary,�the�challenges�and�issues�faced�by�the�Indian�mutual�fund
industry�will�need�to�be�addressed�at�the�earliest�to�ensure�long�term
sustained,�profitable�growth�of�the�industry.
©�2009�KPMG,�an�Indian�Partnership�and�a�member�firm�of�the�KPMG�network�of�independent�member�firms�affiliated�with�KPMG�International,�a�Swisscooperative.�All�rights�reserved.
24�India�Post25�India�Post
Page�14
©�2009�KPMG,�an�Indian�Partnership�and�a�member�firm�of�the�KPMG�network�of�independent�member�firms�affiliated�with�KPMG�International,�a�Swisscooperative.�All�rights�reserved.
The�endeavour�of�mutual�fund�investments�is�to�leverage�professional
and�prudent�fund�management�techniques�and�thereby�maximise�returns
for�the�investors�while�minimising�risk.�While�mutual�funds�are�often�the
preferred�avenue�for�investment�over�direct�investments�into�the�capital
markets�by�risk�averse�investors,�customers�have�had�widely�varying
experiences�with�purchase�of�mutual�funds.�Thus,�it�is�critical�for�the
industry�to�understand�the�perspectives�of�Indian�investors�so�as�to�use
their�inputs�to�further�enhance�the�customer�experience�with�mutual
funds.
MethodologyTo�understand�the�voice�of�the�Indian�investors,�CII-KPMG�conducted�an
investor�survey�across�the�Top�10�cities�in�India�in�May�2009.�As�part�of
this�survey,�CII-KPMG�facilitated�interviews�with�a�large�representative
sample�of�population�from�diverse�backgrounds�(education,�age,
occupation�and�gender)�to�understand�their�preferences�and�perspective
on�investment�in�mutual�funds.
4. Voice of the Customer
Page�15
The�survey�revealed�several�interesting�observationsand�resulted�in�a�long�customer’s�wish-list�pointing�tothe�expectations�from�the�AMCs,�distributors,�serviceproviders�and�regulators.�While�a�significant�portion�ofcustomers�are�aware�of�and�also�invest�in�mutualfunds,�there�was�a�diverse�set�of�views�obtained,�bothnegative�and�positive.�This�warrants�a�need�toimmediately�tackle�some�of�the�negative�perceptionsand�capitalise�on�the�positive�ones.
Impediments to Mutual Fund InvestingCustomers�believe�that�the�mutual�fund�industry�fallsshort�of�expectations�in�meeting�their�needs�at�time�ofeconomic�uncertainty�and�market�volatility.
The�survey�has�highlighted�several�reasons�thatrespondents�have�cited�for�not�buying�mutual�funds.Some�of�the�prominent�challenges�highlighted�by�therespondents�have�been�listed�below.
Availability of a large number of mutual funds
schemes makes investment decision complex and
difficult
The�Indian�investor�witnessed�significant�rise�in�NewFund�Offers�(NFOs)�over�the�last�two�to�three�yearsfrom�AMCs�seeking�to�augment�AUM�and�diversifyproduct�basket.�India�has�over�979�mutual�fundschemes�resulting�in�a�total�AUM�of�INR�4,173�billionas�on�31�March�200926.�The�ratio�of�the�assets�perscheme�is�one�of�the�highest�in�the�world.�Given�thatthere�is�a�plethora�of�options�with�limited�differentiationacross�mutual�fund�schemes,�the�respondents�perceivea�difficulty�in�investing�in�mutual�funds�in�the�absenceof�quality�advice.
Hence,�AMCs�need�to�design�simple�products�that�thetarget�segment�can�easily�understand�and�also�realigntheir�product�portfolio�to�merge/�close�schemes�withoverlapping�objectives.
Complicated KYC norms restrict potential investors
In�addition�to�the�PAN�card�requirement,�for�aninvestment�amount�of�INR�50,000�and�above�in�mutualfunds,�the�customers�are�required�to�procure�KYCacknowledgement.�This�requires�submission�of�severaldocuments�and�extensive�paper-work.�The�respondentsto�the�survey�expressed�difficulty�in�understanding�the
©�2009�KPMG,�an�Indian�Partnership�and�a�member�firm�of�the�KPMG�network�of�independent�member�firms�affiliated�with�KPMG�International,�a�Swisscooperative.�All�rights�reserved.
Source: CII-KPMG Survey in May 2009
Reasons provided by Survey Respondents for NotInvesting in Mutual Funds
26�AMFI�data
“I want to invest in mutual funds, but I donot have a PAN card, can I invest withoutit?”- Salaried personTier 1 cityNot an investor in mutual funds
Page�16
complex�terminology�and�the�paperwork�involved�inmutual�fund�investing.�
Further,�this�regulatory�directive�is�viewed�negatively�bypotential�customers�as�investments�in�insuranceproducts�can�be�undertaken�without�the�requirementfor�a�PAN�card.�Hence,�there�is�urgent�need�for�theGovernment�to�facilitate�harmonisation�of�policies�andprocesses�across�different�verticals�in�the�financialservices�sector�and�to�simplify�documentation�thatcould�thereby�ease�the�process�of�mutual�fundinvestments�for�retail�customers.
Banks and IFAs remain the preferred channel given
that investors trust them for their advice and after
sales service. However, the survey respondents
were not satisfied with the quality of advice.
Banks�and�IFAs�are�the�preferred�channel�for�investingin�mutual�funds.�Customers�expressed�confidence�inbanks�given�the�long�standing�relationship�and�the�trustbuilt�with�the�banks�over�the�years.�Similarly,�thecustomers�have�become�accustomed�to�dealing�withIFAs�to�seek�independent�advice�on�a�wide�range�ofinvestment�and�financial�planning�issues.�This�comfortis�expected�to�play�a�key�role�in�according�priority�tothe�growth�of�the�IFA�channel.�IFAs�have�demonstratedflexibility�in�providing�customised�offerings�to�thecustomers�at�the�household�level.
It�is�important�to�note�that�an�overwhelming�majority�ofthe�customers�have�not�been�satisfied�with�the�qualityof�advice�being�provided�to�them�by�the�advisors.Some�customers�are�of�the�view�that�the�IFAs�are�lessqualified�and�do�not�adopt�a�holistic�approach�tofinancial�planning.�In�some�cases,�customers�havereported�instances�of�mis-selling�that�has�affected�theperformance�of�their�portfolios�significantly.�Hence,�it�isimperative�for�distributors�to�re-look�at�their�strategy�forfinancial�planning�and�dispensing�advice�to�customers.After�sales�service�and�ongoing�follow�up�have�beenidentified�by�customers�as�a�key�differentiator�inassessing�the�capabilities�of�distributors.
Drivers for Investment in Mutual FundsThe�factors�that�can�incentivise�potential�customers�tocommence�and�gradually�increase�their�investment�inmutual�funds�are�discussed�below.
©�2009�KPMG,�an�Indian�Partnership�and�a�member�firm�of�the�KPMG�network�of�independent�member�firms�affiliated�with�KPMG�International,�a�Swisscooperative.�All�rights�reserved.
Source: CII-KPMG Survey in May 2009
Channels Preferred by Survey Respondents for Investing inMutual Funds
Preferred Channels for Investment
“Last time I wanted to invest somemoney in MF, the fund house asked mefor so many documents that I got totallyconfused and wondered why I shouldshare so much with them?”- BusinessmanTier 1 cityNot an investor in mutual funds
“I had some money in PPF and wanted toinvest in something which gives goodreturns with balanced risk, so I chose MF,it is working for me”- Salaried PersonTier 1 City Investor in Mutual Funds
Page�17
Investment in Mutual Funds is attractive to
customers owing to tax benefits
The�tax�benefits�associated�with�investment�in�mutualfunds�is�the�key�drivers�for�customers.�Customersconsider�mutual�funds�as�a�medium�of�ensuringfinancial�independence�and�security.�Since�most�mutualfund�schemes�carry�easy�liquidity�options,�customersbelieve�that�mutual�funds�are�a�avenue�of�savingsthereby�eliminating�the�need�for�borrowing�money�incase�of�financial�exigencies.�Liquidity�for�the�future�isdeemed�to�be�of�utmost�importance�in�making�anyinvestment�decision.
Consistency in fund performance and brand equity
influence customers to make relevant selection of
mutual fund schemes
Customers�believe�that�fund�performance�is�necessarybut�is�not�a�sufficient�condition�to�drive�their�selectionof�mutual�fund�products.�Selection�of�mutual�funds�by�acustomer�is�a�function�of�both�the�fund�performanceand�brand�equity�of�the�fund�house.�Customers�are�ofthe�view�that�the�key�differentiator�at�the�time�ofselection�of�a�fund�is�the�positive�outlook�onperformance�even�if�the�numbers�do�not�reveal�aspectacular�historic�performance.�The�brand�equity�of�amutual�fund�includes�factors�like�perception�of�thebrand�capability�drawn�from�its�performance�in�othersectors.�
Simplification of Processes to Increase the
Quantum of Investments
Customers�obtain�the�requisite�confidence�in�theirinvestment�process�when�distributors�explain�theconcepts�and�the�meaning�of�key�terms�used�in�mutualfund�application�forms�in�simple�terms.�Further,�thisreinforces�confidence�in�the�distributor’s�capabilitiesand�quality�of�advice�provided�that�facilitate�thedecision�process�for�investment�in�a�mutual�fundscheme.�Customers�also�expressed�the�view�that�asingle�common�application�form�could�be�used�for�allmutual�fund�investments�across�multiple�mutual�fundhouses.�Simplifying�the�process�for�redemption�offunds�was�also�identified�as�a�means�for�furtherincreasing�investments�in�mutual�funds.
©�2009�KPMG,�an�Indian�Partnership�and�a�member�firm�of�the�KPMG�network�of�independent�member�firms�affiliated�with�KPMG�International,�a�Swisscooperative.�All�rights�reserved.
Source: CII-KPMG Survey in May 2009
Reasons provided by Survey Respondents on Selection ofMutual Funds for Investment Purposes
Reasons for selection of Mutual Funds
“I find it really difficult to understanddifferent forms of different fund houses,can I have a single form which can becentrally used for all fund houses.”- Salaried PersonTier 1 City Investor in Mutual Funds
“My investment in mutual fund providesme tax benefit as well as a regularsource of attractive returns”- Salaried PersonTier 1 City Investor in Mutual Funds
Page�18
©�2009�KPMG,�an�Indian�Partnership�and�a�member�firm�of�the�KPMG�network�of�independent�member�firms�affiliated�with�KPMG�International,�a�Swisscooperative.�All�rights�reserved.
Mutual Fund Products
• I�want�protective�products�with�guaranteed�income�and�good�absolute�returns.
• As�a�retired�person,�I�want�more�debt�funds�options�with�a�safe�mechanism�of�regular�saving�along�with�the�variedpension�options.
• I�want�assured�returns�schemes�that�are�a�mix�of�risk-free�and�high-risk�portfolio�where�I�can�invest�small�sums�ofmoney.
• I�want�a�clear�and�easy�explanation�of�various�schemes.
Funds Management
• I�want�to�listen�to�fund�managers’�views�on�outlook�for�various�sectors,�industry�performance,�fund�performance,�etc.but�have�never�been�invited�by�any�fund�house�for�this.�
• AMCs�should�not�depend�on�the�Fund�Manager�but�its�process�for�the�success�of�their�products.
Investor Servicing
• I�want�easy�access�to�the�Fund�House�for�direct�subscription�since�I�do�not�want�to�pay�entry�load.
• I�want�better�service�from�the�fund�house�in�terms�of�NAV�updates�through�weekly�SMS�alerts�so�that�I�know�thevalue�of�my�investments.
• I�want�all�the�services�at�my�door�step�-�right�from�getting�help�in�filling�in�the�application�form�to�depositing�a�chequefor�my�investments.
• We�want�to�interact�with�more�knowledgeable�people�at�the�call�centers�to�attend�to�our�complaints�from�a�technicalperspective,�and�not�just�to�handle�routine�operational�level�problems.
• AMCs�should�send�a�report�to�me�on�my�investment�status�and�performance�on�a�timely�and�regular�basis
• I�believe�agents�commission�should�be�linked�to�investor�satisfaction�and�attractiveness�of�the�fund�suggested,�whichshould�be�payable�in�phases,�depending�upon�the�success�of�the�advice�provided�
• Please�reduce�and�simplify�the�documentation�required�and�the�processes�involved�and�help�me�to�understand�thepurpose�for�which�this�will�be�used.
Investment Advice
• Since�I�make�my�own�investment�decisions�without�relying�on�anyone’s�advice,�I�want�a�single�platform�for�transactingand�performance�monitoring,�to�track�my�mutual�fund�investments�across�various�AMCs.
• I�want�objective�advice�that’s�best�suited�to�my�needs�and�which�is�not�driven�by�commissions�received�by�my�advisor.
• As�long�as�the�fund�house�pays�the�commission�to�the�advisor,�there�is�always�a�conflict.�How�can�anyone�provideunbiased�advice�if�they�are�paid�by�the�fund�house�for�advising�me?�This�ensures�that�the�advisor�is�acting�in�the�favorof�the�fund�house�and�is�not�driven�by�my�interests�and�needs.
Regulator Intervention
• Can�SEBI�provide�me�with�Certification�of�Fund�managers,�to�assure�me�of�high�quality�management�of�my�funds?
• I�want�SEBI�to�provide�me�with�a�list�of�registered�distributors�on�their�website�since�I�do�not�know�if�my�advisor�iscertified�and�qualified�to�advise�me.
• Can�SEBI�put�in�place�a�mechanism�through�which�we�can�rely�upon�the�advice�provided�by�the�Mutual�Fund�agent?
• My�advisor�has�given�me�incorrect�advice�owing�to�which�I�have�lost�money.�How�do�I�ensure�that�he�gets�penalisedfor�the�loss�caused�with�his�incorrect�advice?
Tax Benefits
• Why�am�I�required�to�pay�Securities�Transaction�Tax?
• Why�should�I�be�required�to�pay�long-term�capital�gain�tax�on�my�debt�funds�when�I�am�not�required�to�pay�this�onequity�funds?
• The�Government�must�provide�a�favourable�tax�regime�for�Fund�of�Funds�that�implies�extending�tax�benefits�toinvestors�and�also�to�the�funds.
• The�Government�must�provide�tax�sops�to�encourage�investment�in�equity�(including�overseas�equity)�as�a�long�termsaving�and�to�encourage�investments�in�the�infrastructure�sector�(debt�as�well�as�equity);�tax�sops�should�also�beextended�to�schemes�investing�in�these�areas�as�well.
Customers’ Wish-list from Mutual Funds, Distributors, Regulator and Government - In the Words of Customers27
27�CII-KPMG�Survey�on�Mutual�Funds,�May�2009
““
Page�19
©�2009�KPMG,�an�Indian�Partnership�and�a�member�firm�of�the�KPMG�network�of�independent�member�firms�affiliated�with�KPMG�International,�a�Swisscooperative.�All�rights�reserved.
This�section�contains�a�summary�of�the�expected�drivers�for�future
growth,�expected�industry�growth�projections�and�overall�future�outlook
across�various�dimensions�–�customers,�markets,�products,�distribution
channels�and�regulatory�frameworks.
Growth DriversAlthough�several�macroeconomic�and�demographic�factors�affect�the
growth�of�the�industry,�the�key�underlying�driver�for�all�the�categories�of
funds�is�the�key�economic�indicator�–�the�GDP�growth�rate.�
The�growth�drivers�for�customer�segments�have�been�listed�in�the�table
below�along�with�the�expected�impact�of�each�on�the�AUM.
5. Future Outlook in a Dynamic Environment
Page�20
In�the�event�of�a�quick�economic�revival�and�positivereinforcement�of�growth�drivers�identified,�KPMG�inIndia�is�of�the�view�that�the�Indian�mutual�fund�industrymay�grow�at�the�rate�of�22-25�percent�in�the�periodfrom�2010�to�2015,�resulting�in�AUM�of�INR�16,000�to18,000�billion�in�2015.�
Key�growth�drivers�for�this�scenario�include:�
•�Increased�retail�investor�participation�with�apreference�for�mutual�funds�over�other�assetclasses�perceived�to�be�more�risky.�This�could�resultin�the�fulfilment�of�growing�financial�aspirations,enabled�by�rising�disposable�incomes�and�increasedfinancial�savings
• Innovations�in�distribution�driven�by�increase�in�thenumber�of�certified�IFAs�and�banks�selling�mutualfunds�focusing�on�Tier�2�and�Tier�3�towns
©�2009�KPMG,�an�Indian�Partnership�and�a�member�firm�of�the�KPMG�network�of�independent�member�firms�affiliated�with�KPMG�International,�a�Swisscooperative.�All�rights�reserved.
Customer Segment Key Growth Drivers Expected Impact
Retail�Segment� • Rising�disposable�incomes�andsavings
• Favourable�demographics�suchas�increasing�proportion�ofworking�population�(20-59years)�and�increasingurbanisation�resulting�inincreased�levels�of�financialsavviness
• Innovations�in�distribution�
• Increased�awareness�levels
• Quality�financial�planning
• Increase�in�disposable�incomes�and�household�financialsavings�may�result�in�households�seeking�alternateavenues�for�investments�to�yield�higher�returns�withreasonable�risk
• Favourable�demographics�like�urbanisation�and�a�relativelyyoung�population�having�an�increased�risk�appetite,�arelikely�to�save�more�and�seek�to�invest�a�higher�proportionof�those�savings�in�market-linked�instruments�such�asmutual�funds
• Distribution�innovations�are�expected�to�increased�mutualfund�penetration�specifically�in�Tier�2�and�Tier�3�townsthereby�expanding�the�mutual�fund�customer�base
• Improved�awareness�levels�and�enhanced�financial�literacyis�expected�to�aid�the�understanding�of�mutual�fundproducts
• Appropriate�asset�allocation�and�potential�for�wealthcreation
InstitutionalSegment
• Rising�corporate�earnings
• Maturing�capital�markets�
• Interest�rate�cycle
• Call�money�market�rates�
• Corporate�debt�andcommercial�papers
• Increased�demand�for�sophisticated�treasury�managementproducts
• A�better�economic�situation�in�the�country�is�likely�toensure�a�steady�fall�in�the�interest�rates
Our Point of View on the Future Outlook28
Industry AUM is likely to continue to grow in the range of 15 to 25 percent from the period 2010 to 2015
Source: KPMG analysis
Projected AUM Growth from 2010 to 2015Scenario 1: Favourable growth scenario with quickeconomic revival
This�section�on�the�“Point�of�view�on�the�Future�Outlook”�is�based�onour�discussions�with�key�stakeholders�and�expected�trends�in�the�Indianmutual�fund�industry,�based�on�the�global�experiences.
28�Discussions�with�key�industry�stakeholders�and�customers
Page�21
• Increase�in�institutional�participation�triggered�byrising�corporate�revenues�with�increased�economicactivity.
In�the�event�of�a�relatively�slower�economic�revivalresulting�in�the�identified�growth�drivers�not�reachingtheir�full�potential,�KPMG�in�India�is�of�the�view�thatthe�Indian�mutual�fund�industry�may�grow�in�the�rangeof�15-18�percent�in�the�period�from�2010�to�2015,resulting�in�AUM�of�INR�15,000�to�17,000�billion�in2015.
Key�factors�driving�the�growth�inspite�of�the�slowrevival�of�the�economy�include:
•�Incremental�increase�in�retail�investor�participationowing�to�limited�focus�beyond�Tier�2�towns�andlimited�efforts�to�draw�risk�averse�customers�oftraditional�products�under�the�fold�of�mutual�funds
• Tightening�of�liquidity�leading�to�better�yields�oninstruments�liquid�funds�invest�in,�thereby�drivinginvestments�from�the�institutional�investors.�
©�2009�KPMG,�an�Indian�Partnership�and�a�member�firm�of�the�KPMG�network�of�independent�member�firms�affiliated�with�KPMG�International,�a�Swisscooperative.�All�rights�reserved.
Industry�profitability�is�expected�to�gradually�reduce�asrevenues�of�AMCs�shrink�due�to�focus�on�low�marginproducts�to�attract�risk�averse�investors,�and�also�asoperating�costs�escalate�due�to�the�focus�onpenetrating�retail�population�beyond�Tier�2�cities.
•�Decline�in�investment�management�fees�is�expectedas�risk�averse�customers�prefer�investments�in�debtproducts
• Increase�in�distribution�costs�as�players�attempt�toset�up�their�own�branch�presence�in�smaller�towns
• Existing�players�are�likely�to�review�businessstrategy�and�explore�exit/�mergers�in�case�of�nosignificant�competitive�advantage,�thereby�resultingin�industry�consolidation
• Competition�is�expected�to�intensify�further�with�theentry�of�global�players�who�are�facing�stagnantgrowth�in�global�markets.�This�is�expected�to�resultin�a�fall�in�market�shares�of�the�Top�10�players�andresult�in�a�further�squeeze�on�margins
• Co-existence�of�large�players�with�diversifiedportfolios�and�some�niche�plays�expected.�
Industry profitability may reduce further as
revenues shrink and operating costs escalate
Source: KPMG analysis
Scenario 2: Relatively lower growth scenario with sloweconomic revival
Page�22
©�2009�KPMG,�an�Indian�Partnership�and�a�member�firm�of�the�KPMG�network�of�independent�member�firms�affiliated�with�KPMG�International,�a�Swisscooperative.�All�rights�reserved.
Retail Segment
•�Increased�focus�on�growing�investor�awareness�and�increasingfinancial�literacy�is�expected,�resulting�in�an�increase�in�thecontribution�of�the�retail�segment�to�the�industry�AUM�in�the�range�of46-48�percent�by�2015,�from�36�percent�as�of�2008�as�mentionedearlier�
• Domestic�players�expected�to�tap�the�overseas�markets�to�grow�theirAUM�through�alliances�with�global�players
• HNIs�and�Mass�Affluent�segments�may�dominate�the�retail�segment
• Average�holding�period�for�mutual�funds�and�average�ticket�size�ofinvestments�in�mutual�funds�likely�to�remain�unchanged.
Institutional Segment
•�Institutional�segment�likely�to�witness�the�emergence�of�a�newcategory�of�SMEs�seeking�advice�on�managing�their�funds.
Market focus
•�Greater�participation�expected�from�Tier�2�cities�and�Tier�3�towns,including�rural�centres
• Share�of�top�10�cities�in�total�AUM�expected�to�decline�as�retailinvestors�from�smaller�cities,�towns�and�rural�areas�join�the�mutualfund�fold.
Market deepening and widening is expected with the objective of
increased retail penetration and participation in mutual funds
•�High�margin�products�such�as�equity�and�select�debt�products�likely�to
continue�to�contribute�a�significant�share�of�industry�AUM
• Flexibility�in�product�pricing�by�AMCs�expected�to�be�permitted�based
on�the�type�of�services�offered
• Emerging�product�categories�such�as�ETFs,�Multi�manager�funds,
REMFs,�outcome-oriented�funds�such�as�principal-protected,�tax-
managed�and�inflation-indexed�funds,�expected�to�have�marginal�share
of�AUM�inspite�of�rapid�growth.
• Possibility�of�introducing�mandatory�rating�for�mutual�fund�products
through�Rating�agencies�likely�to�increase�investor�confidence
• Efforts�expected�to�be�undertaken�for�developing�a�well�structured
and�well�managed�regulated,�debt�market�which�should�increase�in
depth.
Product innovation is expected to be limited
Page�23
©�2009�KPMG,�an�Indian�Partnership�and�a�member�firm�of�the�KPMG�network�of�independent�member�firms�affiliated�with�KPMG�International,�a�Swisscooperative.�All�rights�reserved.
Banks
•�The�public�sector�network�of�nationalised�banks�and�post�offices�likelyto�increase�their�focus�on�the�distribution�of�mutual�funds�
• Entry�of�public�sector�banks�as�mutual�fund�manufacturers�expectedto�increase�their�focus�on�mutual�fund�distribution
• Private�banks�providing�financial�advice�to�HNIs�expected�to�marginallyincrease�their�market�share.
IFAs
•�IFAs�expected�to�emerge�as�a�dominant�channel�in�a�scenario�ofrobust�stock�market�growth,�focusing�on�increasing�penetration,�andwill�therefore�have�to�focus�on�initiatives�to�develop�and�support�thischannel�(for�example,�recruitment�and�training�support).
Other channels
•�India�likely�to�witness�the�entry�of�global�fund�super-markets�enabledby�regulatory�changes
• Cooperative�sector,�though�beset�with�internal�administrative�issues,likely�to�emerge�as�another�channel�which�should�be�tapped�byMutual�Funds
• Tapping�the�large�network�of�NGOs,�recognised�by�local�authorities�tointeract�and�reach�out�to�the�lower�middle�class�and�poorer�segmentsof�population�to�increase�mutual�fund�penetration
• Distributors�likely�to�explore�the�possibility�of�innovations�such�as�acommon�online�platform�and�the�usage�of�debit�and�credit�cards�fortransactions.
•�The�public�sector�network�of�nationalised�banks�and�post�offices�are
likely�to�increase�their�focus�on�the�distribution�of�mutual�funds�
• Entry�of�public�sector�banks�as�mutual�fund�manufacturers�are
expected�to�increase�their�focus�on�mutual�fund�distribution
• IFAs�are�expected�to�emerge�as�a�dominant�channel�focused�on
increasing�penetration,�and�will�therefore�have�to�focus�on�initiatives
to�develop�and�support�this�channel�(for�example,�recruitment�and
training�support)
• IFA�channels�are�expected�to�witness�growth�at�a�faster�pace�than
banks
• Private�banks�providing�financial�advice�to�HNIs�expected�to�marginally
increase�their�market�share
Massive expansion is expected in the mutual fund distribution
network
Page�24
©�2009�KPMG,�an�Indian�Partnership�and�a�member�firm�of�the�KPMG�network�of�independent�member�firms�affiliated�with�KPMG�International,�a�Swisscooperative.�All�rights�reserved.
•�Regulators�across�Financial�services�spectrum�viz.�mutual�funds�and
capital�markets,�pension,�insurance�and�banking�expected�to�work
towards�harmonisation�of�policies,�with�support�from�industry�bodies
like�the�CII�and�the�respective�industry�associations
• Thrust�of�the�regulatory�and�compliance�framework�expected�to�be�on
enhancing�resilience�and�sustainability,�investor�protection�and�good
governance�going�forward.
The regulatory and compliance framework for mutual funds is likely to
get aligned with the frameworks across the financial services spectrum
In summary, the Indian mutual fund industry is expected towitness rapid growth in AUM over the next few years. Theindustry, however, faces the challenge of achieving sustainedprofitable growth while increasing retail penetration andexpanding the reach of mutual funds into rural areas.
• Distributors�likely�to�explore�the�possibility�of�innovations�such�as�a
common�online�platform�and�the�usage�of�debit�and�credit�cards�for
transactions
• AMCs�are�expected�to�invest�in�channel�innovation�such�as�Mobile
and�Internet�services.�Mobile�telephony�enabling�mobile�transactions
for�the�purchase�and�sale�of�mutual�funds�and�SMS-based�services�is
expected�to�revolutionise�the�industry.
Page�25
©�2009�KPMG,�an�Indian�Partnership�and�a�member�firm�of�the�KPMG�network�of�independent�member�firms�affiliated�with�KPMG�International,�a�Swisscooperative.�All�rights�reserved.
Based�on�discussions�with�key�industry�stakeholders,
KPMG�in�India�is�of�the�view�that�opportunities�exist�for
surpassing�the�growth�potential�of�the�Indian�mutual
fund�industry�and�making�the�industry�more�profitable
through�a�collaborative�effort�across�all�the�key
stakeholders�to�reach�out�to�the�customer,�viz.�AMCs,
distribution�channel�partners,�service�providers�such�as
R&T�Agents,�custodians�and�fund�accountants,�CII,
AMFI,�the�regulator�SEBI�and�the�media,�among�others.
This�section�seeks�to�identify�and�prioritise�key
initiatives�that�are�required�to�be�undertaken�for�the
Indian�mutual�fund�industry�to�grow�and�effectively
compete�in�a�dynamic�environment.
6. Action Plan for Achieving Transformational Growth
CII
Key stakeholders of the mutual fund industry
Source: CII-KPMG analysis
Page�26
©�2009�KPMG,�an�Indian�Partnership�and�a�member�firm�of�the�KPMG�network�of�independent�member�firms�affiliated�with�KPMG�International,�a�Swisscooperative.�All�rights�reserved.
Massive Increase in Mutual Fund Penetration Through Customer Awareness Campaigns
Given�that�customer�awareness�is�the�pre-requisite�for�the�achievement�of�the�industry�growth�potential,
there�is�a�need�for�planning,�financing�and�executing�initiatives�aimed�at�increasing�financial�literacy�and
enhancing�investor�education�across�the�entire�country�through�a�sustained�collaborative�effort�across�all
stakeholders.
Financing a Sustainable Nationwide Customer Awareness Program
• Creation�of�the�‘Mutual�Fund�Education�Fund’�–�a�common�corpus�of�funds�from�AMCs�and�distributors
through�mandatory�levy�on�the�investment�management�fee�earned�by�AMCs�and�on�the�commissions
earned�by�distributors�from�mutual�fund�sales
• This�Fund�should�be�suitably�ring-fenced�and�managed/�administered�by�the�industry�association.
Conducting a Nationwide Customer Awareness Program
• NISM�along�with�the�industry�association�to�design�the�content�for�promoting�customer�awareness
programs�on�mutual�funds
• AMCs�with�support�from�CII,�AMFI�and�NISM�should�rollout�customer�awareness�campaigns�and�provide
infrastructure,�content�and�speakers�for�running�the�campaigns�on�a�pan-India�basis�over�a�sustained
period�of�five�years
• Social�marketing�firms�and�media�companies�to�design�effective�and�meaningful�mass�media�campaigns
in�multiple�languages�using�television,�hoardings,�flyers,�street�plays�and�other�mechanisms�to�reach�the
masses.�
Promoting Financial Planning Awareness in Educational Institutions
• NISM�to�take�the�lead�in�developing�and�finalising�a�Financial�Planning�course�within�the�next�three
months.�The�course�should�encompass�modules�on�mutual�funds,�and�other�financial�products�along�with
concepts�like�risk�management,�asset�allocation�and�portfolio�diversification�to�meet�multiple�needs.�This
course�should�be�incorporated�in�the�curriculum�across�all�schools�and�colleges,�as�a�mandatory�course
starting�from�Class�8�upto�the�graduation�level,�followed�by�an�examination.�This�will�require�a�directive
from�the�Ministry�of�HRD,�Government�of�India,�and�will�need�to�be�facilitated�by�the�education�boards
and�the�universities�
• NISM�should�be�the�nodal�agency�and�should�work�in�a�collaborative�manner�with�AMCs,�CII�and�AMFI
by�adopting�the�‘train�the�trainer’�concept�to�train�teaching�faculty�in�schools�and�colleges�across�India
• The�India�Post�and�public�sector�banks�could�also�be�used�to�promote�customer�awareness�by�using�their
infrastructure�for�conducting�awareness�programs�and�campaigns
• Investor�associations,�self�help�groups�and�other�affinity�groups�should�be�identified�to�facilitate�investor
workshops�in�cities�and�towns�across�the�country.
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©�2009�KPMG,�an�Indian�Partnership�and�a�member�firm�of�the�KPMG�network�of�independent�member�firms�affiliated�with�KPMG�International,�a�Swisscooperative.�All�rights�reserved.
New Products and Pricing to Attract Risk Averse Customers
The�objective�of�product�innovation�by�AMCs�should�be�driven�by�the�need�to�introduce�simple�products�to
attract�and�retain�risk�averse�and�first�time�investors�to�start�investing�in�mutual�funds.
Introduction of Customer-Friendly Products and Product Features
• AMCs�through�AMFI�should�conduct�a�nationwide�survey�of�customer�needs�across�liquidity,�risk,
frequency�and�quantum�of�contribution�to�determine�product�variants�and�features�that�meet�customer
needs
• Allow�investible�surplus�of�investors�to�be�invested�at�any�time�in�ongoing�schemes�with�a�flexible�SIP
option
• Introduce�simple�products�that�have�features�of�capital�protection�with�returns�that�are�higher�than
traditional�products�and�limit�market�risk
• Focus�on�design�of�products�around�women�and�children�related�needs,�given�the�growing�dominance�of
women�in�influencing�investment�decisions�in�households�across�the�country.�Further�commodity�related,
crop�related�and�agriculture�oriented�fund�products�may�be�conceptualised�and�developed�by�cater�to
segment�specific�needs
• Focus�on�product�appeal�for�the�low�income�group�by�keeping�ease�of�investment�and�minimum
thresholds�within�affordable�limits
• Encourage�the�introduction�of�customised�ETFs�for�retail�and�institutional�customers�
• Regulatory�framework�to�allow�niche�players�to�co-exist�with�players�having�a�diversified�product�portfolio
without�raising�requirements�for�minimum�networth.�These�requirements�are�common�at�the�industry
level,�irrespective�of�product�portfolio�mix
• Enable�mutual�fund�investments�through�mobile�telephony.�
Pricing Flexibility
• Pricing�innovations�should�focus�on�distributor�compensation�and�administration
• Enable�flexibility�in�regulations�to�allow�customers�to�pay�for�the�advice�and�service�rendered�by�the
distributors�through�varying�arrangements�based�on�the�method�of�purchase,�degree�of�service�provided
and�the�timeframe�for�payment.�Some�options�include�exploring�the�possibility�of�introducing�a�multiple
share�class�structure�with�pricing�options�for�front-end�load,�back-end�load�and�fixed�annual�fee�as�a
percentage�of�all�investments.
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©�2009�KPMG,�an�Indian�Partnership�and�a�member�firm�of�the�KPMG�network�of�independent�member�firms�affiliated�with�KPMG�International,�a�Swisscooperative.�All�rights�reserved.
Public Sector Thrust into Mutual Funds Distribution and Focus on Strengthening Presence Beyond Tier 2 Cities
Training of the Public Sector Employee Base
• Training�of�employees�in�the�public�sector�network�including�India�Post,�Nationalised�Banks,�Regional
Rural�Banks�and�Cooperative�Banks,�on�sale�of�mutual�funds�and�basic�financial�planning�concepts
through�the�“Train�the�Trainer”�approach,�so�that�they�may�be�inducted�as�trainers�to�support�customer
awareness�campaigns�run�by�NISM�and�AMFI.
Opening Up of the Public Sector Branch Network in Tier 3 and Tier 4 Towns
• Commence�sale�of�mutual�funds�through�the�branch�network�of�India�Post,�Nationalised�Banks,�Regional
Rural�Banks�and�Cooperative�Banks�by�focusing�on�Tier�2�and�Tier�3�towns�initially�
• India�Post�to�sell�mutual�fund�products�of�all�SEBI�registered�AMCs�instead�of�limiting�the�customer�to
five�AMCs�only�as�is�currently�prevalent
• Boost�the�presence�of�Investor�Service�Centres�(ISCs)�through�R&T�Agents�in�Tier�2�and�Tier�3�towns�and
utilise�their�presence�to�promote�customer�awareness�of�mutual�funds.
Focus on Increasing Customer Engagement Pre and Post Completion of the Investment
• AMCs�to�focus�on�growing�the�IFA�channel�and�encourage�them�to�reach�out�to�and�engage�with
customers�on�their�mutual�fund�needs�on�an�ongoing�basis�pre�and�post�completion�of�their�investment
• AMCs�to�focus�on�enhancing�the�marketing�and�advisory�capabilities�of�all�distributors�so�that�they�win
the�trust�and�confidence�of�customers
• AMCs�and�distributors�to�focus�on�establishing�base�level�financial�planning�capabilities�to�facilitate�the
transition�from�distribution�to�‘advice’.
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©�2009�KPMG,�an�Indian�Partnership�and�a�member�firm�of�the�KPMG�network�of�independent�member�firms�affiliated�with�KPMG�International,�a�Swisscooperative.�All�rights�reserved.
Strengthening of Associations
Strengthening of AMFI
• AMFI�to�play�an�active�role�in�bringing�all�the�stakeholders�together�and�evolving�a�strong�vision�for�the
mutual�fund�industry�across�all�dimensions�–�aspirational�AUM�growth�and�profitability,�retail�penetration,
products�and�pricing,�distribution�channels,�operations�and�customer�service,�enabled�by�a�supporting
regulatory�framework
• Augment�the�employee�base�of�AMFI�so�as�to�support�NISM�in�conducting�nation-wide�customer
awareness�campaigns.
Development of a Common Online Platform
• AMFI�to�coordinate�the�roll�out�of�a�common�online�platform�for�AMCs�which�will�result�in�increasing
reach,�reducing�distribution�costs�and�making�transactions�free�from�operational�issues.
Facilitating Distributor Education and Mandatory Certification
• CII�and�AMFI�to�support�NISM�in�the�promotion�of�distributor�awareness�programs�
• AMFI�to�include�additional�financial�planning�modules�in�the�distributor�certification�and�make�certification
valid�for�a�two-year�period,�thereby�necessitating�a�bi-annual�renewal�
• AMFI�to�facilitate�annual�updation�of�the�course�curriculum�in�line�with�the�latest�products�being�adopted
by�the�industry
• AMFI�to�facilitate�issue�of�identity�card�with�distributor�certification�which�should�be�mandated�to�be
provided�to�the�customer�at�the�time�of�closing�the�mutual�fund�sale.
Building an Industry Data Repository
• AMFI�to�build�a�data�warehouse�which�tracks�the�financial�performance�of�all�AMCs�in�India�across�key
parameters�such�as�revenue�and�profitability,�and�performance�of�all�mutual�funds�schemes�in�addition�to
tracking�AUM�growth�and�composition
• AMFI�to�publish�data�on�the�financial�health�of�all�AMCs�in�a�consolidated�manner�through�the�AMFI
website
• Provide�a�listing�on�the�AMFI�website�of�all�certified�distributors�who�have�received�AMFI�certification�and
update�the�list�based�on�certification�renewals.�
Creation of an Association of Distributors
• Creation�of�a�SEBI�recognised�association�of�distributors�of�mutual�fund�products�with�a�clearly�defined
charter�and�role.
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©�2009�KPMG,�an�Indian�Partnership�and�a�member�firm�of�the�KPMG�network�of�independent�member�firms�affiliated�with�KPMG�International,�a�Swisscooperative.�All�rights�reserved.
Harmonisation of Policies across Multiple Regulatory Frameworks in the Financial Services Sector
Constitution of a Steering Committee of Financial Services Regulators under the Ministry of Finance
• It�is�proposed�that�the�Government�of�India�should�constitute�a�Steering�Committee�under�the�aegis�of
the�Ministry�of�Finance�comprising�the�Financial�Services�Regulators�for�mutual�funds�and�capital
markets,�pension,�insurance,�banking�and�other�verticals�along�with�representation�from�CBDT.�The
Committee’s�objective�should�be�defined�as�achieving�harmonisation�in�policies�and�procedures�across
multiple�regulatory�frameworks�in�the�Financial�Services�Sector.
Areas Requiring Harmonisation
• Outsourcing�of�funds�management�by�insurance�companies�to�AMCs�independent�of�the�assets�under
management,�by�removing�the�threshold�of�INR�80�billion�which�exists�currently
• Allow�PSUs�to�invest�larger�surpluses�in�mutual�funds�and�open�up�investment�in�private�sector�and
foreign�mutual�funds.�
Acceptance and Rollout of the Unique Identification Card
• Implementation�of�the�Unique�Identification�Card�as�a�valid�document�for�KYC.�The�Government�has
announced�that�a�Unique�Identification�Card�would�be�issues�to�all�Citizens�(President's�speech�at�the
Joint�Session�of�Parliament�on�4th�June�2009).�This�should�be�implemented�and�the�card�should�be�a
valid�document�for�KYC.
This�will�entail�undertaking�public�awareness�campaign�to�make�holding�of�the�Unique�Identification�Card
mandatory�for�all�Indian�citizens�and�build�the�supporting�institutional�infrastructure�to�issue�these�cards�at�a
nominal�rate�through�the�public�sector�network.
The�Government�of�India�could�facilitate�issuance�of�the�Unique�Identification�Card�free�of�cost�to�all�Indian
citizens�below�a�specified�income�threshold�which�could�be�in�line�with�the�minimum�taxation�slab�limit.
Page�31
©�2009�KPMG,�an�Indian�Partnership�and�a�member�firm�of�the�KPMG�network�of�independent�member�firms�affiliated�with�KPMG�International,�a�Swisscooperative.�All�rights�reserved.
There�is�a�perceived�need�to�review�risk�and�performance�analysis�capabilities�and
governance�structures,�to�meet�fiduciary�responsibilities�and�the�increasing�demand�for
transparency.
AMCs�therefore�need�to�re-orient�their�business�towards�fulfilling�customer�needs.�As
customers�seek�trusted�advisors,�the�manufacturer-distributor-customer�relationship�is
expected�to�be�centered�not�on�the�sale�of�products,�but�for�collectively�promoting�the
financial�success�of�customers�across�all�facets�of�their�professional�and�personal�lives.�This
requires�creating�a�collaborative�network�of�experts�in�funds�management�and�financial
advice,�innovative�product�offerings,�efficient�service�delivery�and�supporting�technology.�The
mutual�fund�industry�today�needs�to�develop�products�to�fulfill�customer�needs�and�help
customers�understand�how�its�products�cater�to�their�needs.
Given�that�the�industry�needs�to�collectively�work�towards�riding�over�the�dynamic�and
relatively�less�favourable�economic�environment�at�present,�the�next�phase�for�the�industry�is
likely�to�be�characterised�by�a�stronger�focus�on�customer�centricity.�Other�areas�of�focus�are
likely�to�be�cost�management�and�enabling�strong�governance�and�regulatory�framework�-�all
aimed�at�helping�the�industry�achieve�sustained,�profitable�growth,�going�forward.
7. Summary
Page�32
©�2009�KPMG,�an�Indian�Partnership�and�a�member�firm�of�the�KPMG�network�of�independent�member�firms�affiliated�with�KPMG�International,�a�Swisscooperative.�All�rights�reserved.
List of Abbreviations
AMC Asset�Management�Company
AMFI Association�of�Mutual�Funds�in�India
AML Anti�Money�Laundering
AUM Assets�Under�Management
bps Basis�Points
CAGR Compounded�Annual�Growth�Rate
CBDT Central�Board�of�Direct�Taxes
CFT Combating�Financing�of�Terrorism�
CII Confederation�of�Indian�Industry
CSO Central�Statistical�Organisation
ETF Exchange�Traded�Fund
FY Financial�Year
GDP Gross�Domestic�Product
HNI High�Networth�Individual
HRD Human�Resource�Development
ICI Investment�Company�Institute
IFA Independent�Financial�Advisor
IIMS Invest�India�Market�Solutions
INR Indian�Rupee
ISC Investor�Service�Center
KYC Know�Your�Customer
MF Mutual�Fund
NAV Net�Asset�Value
NFO New�Fund�Offer
NGO Non-Governmental�Organisation
NISM National�Institute�of�Securities�Markets
NPS New�Pension�Scheme
PMLA Prevention�of�Money�Laundering
PSU Public�Sector�Undertaking
PAN Permanent�Account�Number
PBT Profit�Before�Tax
R&T Registrar�&�Transfer�Agent
RBI Reserve�Bank�of�India
REMF Real�Estate�Mutual�Fund
SEBI Securities�&�Exchange�Board�of�India
SIP Systematic�Investment�Plan
SMS Short�Messaging�Service
UK United�Kingdom
ULIP Unit�Linked�Insurance�Plan
USA United�States�of�America
UTI Unit�Trust�of�India
KPMG�International�is�a�global�network�of�professional�services�firms
with�over�135,000�people�working�together�to�deliver�value�in�more�than
140�countries.�KPMG�in�India�draws�on�our�firms'�deep�industry
experience�to�provide�Audit,�Tax�&�Advisory�services.�The�independent
member�firms�of�the�KPMG�network�are�affiliated�with�KPMG
International,�a�Swiss�cooperative.�Each�KPMG�firm�is�a�legally�distinct
and�separate�entity�and�describes�itself�as�such.
The�Indian�member�firms�affiliated�with�KPMG�International�were
established�in�September�1993.�As�members�of�a�cohesive�business�unit
they�respond�to�a�client�service�environment�by�leveraging�the�resources
of�a�global�network�of�firms,�providing�detailed�knowledge�of�local�laws,
regulations,�markets�and�competition.�We�provide�services�to�over�5,000
international�and�national�clients,�in�India.�KPMG�has�offices�in�India�in
Mumbai,�Delhi,�Bangalore,�Chennai,�Hyderabad,�Kolkata�and�Pune.�The
firms�in�India�have�access�to�more�than�3000�Indian�and�expatriate
professionals,�many�of�whom�are�internationally�trained.�We�strive�to
provide�rapid,�performance-based,�industry-focused�and�technology-
enabled�services,�which�reflect�a�shared�knowledge�of�global�and�local
industries�and�our�experience�of�the�Indian�business�environment.
©�2009�KPMG,�an�Indian�Partnership�and�a�member�firm�of�the�KPMG�network�of�independent�member�firms�affiliated�with�KPMG�International,�a�Swisscooperative.�All�rights�reserved.
KPMG in India
The�Confederation�of�Indian�Industry�(CII)�works�to�create�and�sustain�an
environment�conducive�to�the�growth�of�industry�in�India,�partnering
industry�and�government�alike�through�advisory�and�consultative
processes.�
CII�is�a�non-government,�not-for-profit,�industry�led�and�industry�managed
organisation,�playing�a�proactive�role�in�India’s�development�process.
Founded�over�114�years�ago,�it�is�India’s�premier�business�association,
with�a�direct�membership�of�over�7800�organisations�from�the�private�as
well�as�public�sectors,�including�SMEs�and�MNCs,�and�an�indirect
membership�of�over�90,000�companies�from�around�385�national�and
regional�sectoral�associations.�
CII�catalyses�change�by�working�closely�with�government�on�policy
issues,�enhancing�efficiency,�competitiveness�and�expanding�business
opportunities�for�industry�through�a�range�of�specialised�services�and
global�linkages.�It�also�provides�a�platform�for�sectoral�consensus�building
and�networking.�Major�emphasis�is�laid�on�projecting�a�positive�image�of
business,�assisting�industry�to�identify�and�execute�corporate�citizenship
programmes.�Partnerships�with�over�120�NGOs�across�the�country�carry
forward�our�initiatives�in�integrated�and�inclusive�development,�which
include�health,�education,�livelihood,�diversity�management,�skill
development�and�water,�to�name�a�few.�
Complementing�this�vision,�CII’s�theme�for�2009-10�is�‘India@75:
Economy,�Infrastructure�and�Governance.’�Within�the�overarching�agenda
to�facilitate�India’s�transformation�into�an�economically�vital,
technologically�innovative,�socially�and�ethically�vibrant�global�leader�by
year�2022,�CII’s�focus�this�year�is�on�revival�of�the�Economy,�fast�tracking
Infrastructure�and�improved�Governance.�
With�64�offices�in�India,�9�overseas�in�Australia,�Austria,�China,�France,
Germany,�Japan,�Singapore,�UK,�and�USA,�and�institutional�partnerships
with�213�counterpart�organisations�in�88�countries,�CII�serves�as�a
reference�point�for�Indian�industry�and�the�international�business
community.
©�2009�KPMG,�an�Indian�Partnership�and�a�member�firm�of�the�KPMG�network�of�independent�member�firms�affiliated�with�KPMG�International,�a�Swisscooperative.�All�rights�reserved.
Confederation of Indian Industry (CII)
©�2009�KPMG,�an�Indian�Partnership�and�a�member�firm�of�the�KPMG�network�of�independent�member�firms�affiliated�with�KPMG�International,�a�Swisscooperative.�All�rights�reserved.
AcknowledgementsWe express our sincere gratitude to Mr U K Sinha, Chairman – CII National Committee on Mutual Funds and Chairman & ManagingDirector, UTI Asset Management Company Limited for his guidance in preparation of this report.
We are also grateful to Mr A P Kurian, Chairman, AMFI for sharing his perspective and supporting us with data as required.
We would sincerely like to acknowledge and thank the following industry leaders for providing their valuable views for this report (inalphabetical order):
• Mr Achal Kumar Gupta, Managing Director, SBI Funds Management Private Limited
• Ms Ashu Suyash, Managing Director and Country Head, Fidelity Fund Management
• Mr Harshendu Bindal, President, Franklin Templeton Asset Management (India) Private Limited
• Mr John Mathews, Senior Vice President and Head - Client Servicing, HDFC Asset Management Company Limited
• Mr Navin Suri, Chief Executive Officer, ING Investment Management (India) Private Limited
• Mr Nilesh Shah, Deputy Managing Director, ICICI Prudential Asset Management Company Limited
• Mr Nitin Jain, Director – Personal Financial Services, Religare Finvest Limited
• Mr N P Ghanekar, Managing Director and Chief Executive Officer, JM Financial Asset Management Private Limited
• Mr Paul Armstrong, Advisor, ING Investment Management (India) Private Limited
• Mr Rajiv Deep Bajaj, Vice Chairman & Managing Director, Bajaj Capital Limited
• Mr R S Srinivas Jain, Senior Vice President, Chief Marketing Officer, SBI Funds Management Private Limited
• Mr Sandesh Kirkire, Chief Executive Officer, Kotak Mahindra Asset Management Company Limited
• Mr Sanjay Parikh, Chief Operations Officer, Taurus Asset Management Company Limited
• Mr Sanjiv Shah, Executive Director, Benchmark Asset Management Company Private Limited
• Mr Sundeep Sikka, Chief Executive Officer, Reliance Capital Asset Management Limited
• Mr Suresh Babu V, Senior Vice President and Head - Operations, HDFC Asset Management Company Limited
• Mr Ved Prakash Chaturvedi, Managing Director, Tata Asset Management Limited
• Mr Vikramaaditya, Chief Executive Officer, HSBC Asset Management (India) Private Limited
• Mr Vivek Kudva, Managing Director - India & CEEMEA, Franklin Templeton Investments
• Mr Vipul Jhaveri, Chief Operating Officer, JM Financial Asset Management Private Limited
We also thank other stakeholders in the industry who have supported us with their perspectives and all the respondents of the “Voice ofCustomer” survey conducted by KPMG.
This report has been written by P S Deepa and Vikas Arora with support from the KPMG team comprising Divya Arora, Kunal Jain, TasneemLakdawalla, Kunal Pande, Vinit Mehta, Shruti Rustagi, Aashutosh Chaudhari, Vikash Madhogaria, Sundar Ramaswamy, Vishnu Pillai, VinayGarodiya, Sowmya Anantharaman, Sneha Rohekar, Pranav Desai and Nisha Fernandes.
in.kpmg.com
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©�2009�KPMG,�an�Indian�Partnership�and�a�member�firmof�the�KPMG�network�of�independent�member�firmsaffiliated�with�KPMG�International,�a�Swiss�cooperative.All�rights�reserved.KPMG�and�the�KPMG�logo�are�registered�trademarks�ofKPMG�International,�a�Swiss�cooperative.�Printed�in�India.
The�information�contained�herein�is�of�a�general�nature�and�is�not�intended�to�address�the�circumstances�of�any�particular�individualor�entity.�Although�we�endeavor�to�provide�accurate�and�timely�information,�there�can�be�no�guarantee�that�such�information�isaccurate�as�of�the�date�it�is�received�or�that�it�will�continue�to�be�accurate�in�the�future.�No�one�should�act�on�such�informationwithout�appropriate�professional�advice�after�a�thorough�examination�of�the�particular�situation.
KPMG�in�India
Pradip KanakiaExecutive DirectorHead - Marketse-Mail: [email protected]: +91 80 3980 6100
Abizer DiwanjiExecutive DirectorHead - Financial Servicese-Mail: [email protected]: +91 22 3983 5301
Naresh MakhijaniExecutive DirectorHead - Fundse-Mail: [email protected]: +91 22 3983 5703
Manoj Kumar VijaiExecutive DirectorFinancial Servicese-Mail: [email protected]: +91 22 3983 5121
Ravi TrivedyExecutive DirectorBusiness Advisorye-Mail: [email protected]: +91 22 3983 6202
P S DeepaAssociate DirectorBusiness Advisorye-Mail: [email protected]: +91 22 3983 6293
Vikas AroraAssociate DirectorCorporate Financee-Mail: [email protected]: +91 22 3983 5321
KPMG�Contacts
Marut Sen GuptaSenior Directore-Mail: [email protected]
Abha SethDirectore-Mail: [email protected]
N V N SudhaDeputy Directore-Mail: [email protected]
CII�Head�Office
Confederation of Indian Industry23 Institutional AreaLodi RoadNew Delhi - 110 023 Tel:91-11-24629994-7 (4 lines) Fax: 91-11-24626419/24615693 Website:www.cii.in
CII�Contacts