Distribution of Mutual Funds in India

Distribution of Mutual Funds in India
Chapter 1 Introduction to Mutual Funds
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 this business, and it was in
1993 that the first of the private sector participants commenced its operations. 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. 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. It is, thus clear that all types of
intermediaries are required for the growth of the industry, and their well-being, quality
orientation and ways of doing business will have a significant impact on how the mutual
fund industry in India evolves in the future. Intermediaries play a pivotal role in promoting
sale of mutual fund schemes.
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1.1) Emergence Of Mutual Funds:
Mutual funds now represent perhaps the most appropriate investment opportunity for most
investors as financial markets become more sophisticated and complex, investors need a
financial intermediary who provides the required knowledge and professional expertise on
successful investing. It is no wonder then that in the birthplace of mutual funds- the U.S.A.-
the fund industry has already overtaken the banking industry, more funds with the mutual
fund management then deposited with banks.
The Indian mutual fund industry has already started opening up many of the existing
investment opportunities to Indian investors. We have started witnessing the phenomenon of
more savings now being entrusted to the funds than the banks. Despite the expected
continuing growth in the industry, mutual funds are still new financial intermediary in India.
Hence, it is important that the investors, mutual fund agents/distributors, the investment
advisors and even the fund employees acquire better knowledge of what mutual funds are,
what they can do for the investors and what they cannot, and how they function differently
from other intermediaries such as the banks.
1.2) The Concept Of Mutual Fund
A mutual fund is a common pool of money into which investors place their contributions
that are to be invested in accordance with a stated objective. The ownership of the fund is
thus joint or “mutual”; the fund belongs to all investors. A single investor’s ownership of the
fund is in the same proportion as the amount of the contribution made by him or her bears to
the total amount of the fund.
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Mutual Funds are trusts, which accept savings from investors and invest the same in
diversified financial instruments in terms of objectives set out in the trusts deed with the
view to reduce the risk and maximize the income and capital appreciation for distribution for
the members. A Mutual Fund is a corporation and the fund manager’s interest is to
professionally manage the funds provided by the investors and provide a return on them
after deducting reasonable management fees.
A mutual fund uses the money collected from the investors to buy those assets, which are
specifically permitted by its stated objective. Thus, an equity fund would buy equity assets-
ordinary shares, preference shares, warrants etc. A bond fund would buy debt instruments
such as debentures, bonds or government securities. It is these assets, which are owned by
the investor in the same proportion as their contribution bears to the total contributions of all
investors put together.
The objective sought to be achieved by Mutual Fund is to provide an opportunity for lower
income groups to acquire without much difficulty financial assets. They cater mainly to the
needs of the individual investor whose means are small and to manage investors portfolio in
a manner that provides a regular income, growth, safety, liquidity and diversification
opportunities.
When an investor subscribes to a mutual fund, he or she buys a part of the assets or the pool
of the funds that are outstanding at that time. It is no different from buying ‘shares’ of a joint
stock company, in which case the purchase make the investor a part owner of the company
and its assets. In the USA a mutual fund is constituted as an investment company and an
investor “ buys into the fund”, meaning he buys the shares of the fund. In India, mutual fund
is constituted as a trust and the investors subscribe to the “units” issued by the fund. Which
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is where the term Unit Trust comes from. However, whether the investor gets fund shares or
units is only a matter of legal assets. The term unit holder includes the mutual fund account
holder or close end fund holder. A unit-holder in Unit Trust of India US-64 scheme is the
same as a Unit Trust of India Mastershare-holder or an investor in an Alliance or DSP
Merrill lynch or SBI or any other fund manager’s open-end or close-end schemes.
Since each owner is a part owner of a mutual fund, it is necessary to establish the value of
his part. In other words, each share or unit that an investor holds needs to be assigned a
value. Since the units held by investor evidence the ownership of the fund’s assets, the value
of the total assets of the fund when divided by the total number of units issued by the mutual
fund gives us the value of one unit. This is generally called the Net Asset Value (NAV) of
one unit or one share. The value of an investor’s part ownership is thus determined by the
NAV of the number of units held.
Let us see an example. If the value of a fund’s assets stands at Rs. 100 and it has 10
investors who have bought 10 units each, the total numbers of units issued are 100, and the
value of one unit is Rs. 10.00 (1000/100). If a single investor in fact owns 3 units, the value
of his ownership of the fund will be Rs. 30.00(1000/100*3). Note that the value of the
fund’s investments will keep fluctuating with the market-price movements, causing the Net
Asset Value also to fluctuate. For example, if the value of our fund’s asset increased from
Rs. 1000 to 1200, the value of our investors holding of 3 units will now be (1200/100*3) Rs.
36. The investment value can go up or down, depending on the markets value of the fund’s
assets.
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1.3) Advantages Of Mutual Funds
If mutual funds are emerging as the favourite investment vehicle, it is because of the many
advantages they have over other forms and the avenues of investing, particularly for the
investor who has limited resources available in terms of capital and the ability to carry out
detailed research and market monitoring. The following are the major advantages offered by
mutual funds to all investors:
• Portfolio diversification: Each investor in the fund is a part owner of all the fund’s
assets, thus enabling him to hold a diversified investment portfolio even with a small
amount of investment that would otherwise require big capital.
• Professional management: even if an investor has a big amount of capital available to
him, he benefits from the professional management skills brought in by the fund in the
management of the investor’s portfolio. The investment management skills, along with
the needed research into available investment options, ensure a much better return than
what an investor can manage on his own. Few investors have the skill and resources of
their own to succeed in today’s fast moving, global and sophisticated markets.
• Reduction/Diversification of risk: when an investor invests directly, all the risk of
potential loss is his own, whether he places a deposit with a company or a bank, or he
buys a share or debenture on his own or in any other from. While investing in the pool of
funds with investors, the potential losses are also shared with other investors. The risk
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reduction is one of the most important benefits of a collective investment vehicle like the
mutual fund.
• Reduction of transaction costs: what is true of risk as also true of the transaction costs.
The investor bears all the costs of investing such as brokerage or custody of securities.
When going through a fund, he has the benefit of economies of scale; the funds pay
lesser costs because of larger volumes, a benefit passed on to its investors.
• Liquidity: often, investors hold shares or bonds they cannot directly, easily and quickly
sell. When they invest in the units of a fund, they can generally cash their investments
any time, by selling their units to the fund if open-ended, or selling them in the market if
the fund is close-end. Liquidity of investment is clearly a big benefit.
• Convience and flexibility: mutual fund management companies offer many investor
services that a direct market investor cannot get. Investors can easily transfer their
holding from one scheme to the other; get updated market information and so on.
1.4) Disadvantages Of Investing Through Mutual Funds:
• No control over costs: an investor in a mutual fund has no control of the overall costs of
investing. The investor pays investment management fees as long as he remains with the
fund, albeit in return for the professional management and research. Fees are payable
even if the value of his investments is declining. A mutual fund investor also pays fund
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distribution costs, which he would not incur in direct investing. However, this
shortcoming only means that there is a cost to obtain the mutual fund services.
• No Tailor-made portfolio: investors who invest on their own can build their own
portfolios of shares and bonds and other securities. Investing through fund means he
delegates this decision to the fund managers. The very-high-net-worth individuals or
large corporate investors may find this to be a constraint in achieving their objectives.
However, most mutual fund managers help investors overcome this constraint by
offering families of funds- a large number of different schemes- within their own
management company. An investor can choose from different investment plans and
constructs a portfolio to his choice.
• Managing a Portfolio of Funds: Availability of a large number of funds can actually
mean too much choice for the investor. He may again need advice on how to select a
fund to achieve his objectives, quite similar to the situation when he has individual
shares or bonds to select.
• The Wisdom of Professional Management. That's right, this is not an advantage. The
average mutual fund manager is no better at picking stocks than the average
nonprofessional, but charges fees
• No Control. Unlike picking your own individual stocks, a mutual fund puts you in the
passenger seat of somebody else's car
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• Dilution. Mutual funds generally have such small holdings of so many different stocks
that insanely great performance by a fund's top holdings still doesn't make much of a
difference in a mutual fund's total performance.
• Buried Costs. Many mutual funds specialize in burying their costs and in hiring
salesmen who do not make those costs clear to their clients.
1.5) Types Of Funds
There are many types of funds available to the investor. These different types of funds can
be grouped into certain classifications for better understanding.
From the investors perspective we could follow three basic classifications:
• Close end or Open end.
• Load funds or No-load funds.
• Tax exempt or Non-tax exempt funds.
Types of funds
Tax exempt or
Close end or Load funds or
Non-tax exempt
Open end No-load funds
funds
Figure 1.1 Types of Mutual Funds

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Funds are usually classified in terms of their constitution –as close end or open end. The
distinction depends upon whether they give the investors the option to redeem and buy units
at anytime from the fund itself (open end) or whether the investors have to await a given
maturity before they can redeem their units to the fund (close end).
Funds can also be grouped in terms of whether they collect from investors any charges at the
time of entry or exit or both, thus reducing the investible amount or the redemption proceed.
Funds that make these charges are classified as load funds, and the funds that do not make
any of these charges are classified as no-load funds.
Finally, funds can also be classified as being tax-exempt or non tax-exempt. Depending on
whether they invest in securities that give tax-exempt returns or not. Currently in India this
classification would be less important, given the recent tax exemptions given to investors
receiving dividends from virtually all mutual funds.
Broad Structural Classification
Open End Vs. Close End:
As open end is one that has units available for sale and repurchase at all times. An investor
can buy or redeem units from the fund itself at a price based on the net asset value (NAV)
per unit. NAV per unit is the market value of the fund’s asset plus accrues income minus the
fund’s liabilities divided by the number of units outstanding. The number of units
outstanding goes up or down every time the fund issues new units or repurchases existing
units. In other words ‘unit capital’ of an open-end mutual fund is not fixed but variable. The
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fund size and its total investment amount go up if more new subscriptions come in the form
of new investors than redemptions by existing investors; the fund shrinks when redemption
of units exceed fresh subscription.
Note that an open-end fund is not obligated to keep selling\issuing new units at all times,
and many successful funds stop issuing further subscription from new investors after they
reach a certain size and they think that they cannot manage a larger fund without adversely
affecting profitability. On the other hand, an open-end fund rarely denies to its investors the
facility to redeem existing units. Unlike an open-end fund, the unit capital of a close end
fund is fixed, as it makes a one-time sale of a fixed number of units. Later on, unlike open-
end funds, close end funds do not allow investors to buy or redeem units from the fund. To
provide the much-needed liquidity to investors, many close-end funds get listed on stock
exchange. Trading through a stock exchange enables investors to buy or sell units of a close-
end mutual fund from each other through a stockbroker in the same fashion as buying or
selling shares of a company. The funds units may be traded at a discount or premium to
NAV based on investor’s perception about the future performance of the fund and other
market factors affecting the demand for and supply of fund’s units.
Load and No Load Funds:
Marketing of a new Mutual Fund scheme involves initial expenses. These expenses may be
recovered from the investors in different ways at different times. Three usual ways in which
a fund’s sales expenses may be recovered from the investors are:
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1. At the time of investor’s entry into the fund, by deducting a specific amount from his
initial contribution, or
2. By charging the fund/scheme with a fixed amount each year, during the stated
number of years, or
3. At the time of the investor’s exit from the scheme, by deducting a specified amount
from the redemption proceeds payable to the investor.
These charges made by the fund managers to the investors to cover
distribution\sales\marketing expenses are often called ‘Loads’. The load charged to the
investor at the time of his entry into a scheme is called a “ front-end or entry load”. This is
the first case above. The load amount charged to the scheme over a period of time is called a
“Deferred loan”. This is the second case above. The load that the investor pays at the time
of his exit is called a “ back end or exit load”. This is the third case above. Some funds
may also charge different amounts of loads to the investors depending upon how many years
the investor has stayed with the fund; the longer the investor stays with the fund, less the
amount of exit load he is charged. This is called “ contingent deferred sales charge”.
Note that the front-end load amount is deducted from the initial contribution/purchase
amount paid by the incoming investor, thus reducing his initial investment amount.
Similarly exit loads would reduce the redemption proceeds paid out to the outgoing investor.
If the sales charge is made on a deferred basis directly to the scheme, the amount of the load
may not be apparent to the investor, as the scheme’s NAV would reflect the net amount after
the deferred load. In India, loads recovered from the investors are used by the fund managers
to pay for the initial issue expenses. SEBI as the markets regulator lays down the maximum
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amount of loads that can be charged by the fund managers. SEBI has defined a “Load” as
the one-time fee payable by the investor to allow the fund to meet the initial expense
including brokers’/agents’/distributors’ commissions, advertising and marketing expenses.
Funds that charge front-end, back-end or deferred loads are called Load funds. Funds that
make no such charges or loads for sales expenses are called No-Load funds.
A load fund’s NAV does not include the loads. Hence, a new investor must add any front-
end load amount per unit to the NAV per unit to calculate his purchase price. An outgoing
investor needs to deduct the amount of any back-end load per unit from his sale piece per
unit to get to know his net sales proceeds.
Tax-exempt Vs. Non-Tax-exempt Funds
The Mutual Fund’s whose dividends are exempted from tax are called Tax-exempt funds,
whereas others are called Non-Tax-Funds. In India, the current situation is that all the
dividend income received from any of the Mutual Fund is tax free in the hands of the
investor.
Specific Type of Mutual Fund:
All Mutual Fund would either be close-end or open-end, and either load or no-load funds.
These classifications are general. Once we have reviewed the fund classes, we now discuss
the funds by types. Funds are normally distinguished from each other by their investment
objectives and types of securities they invest in. The following are the major types of fund:
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Broad Fund type by nature of investments:
Mutual Funds may invest in equity, bonds or other fixed income securities or short term
many market securities. Therefore under this category we have Equity,
Bond, and Money market funds. All of them invest in financial assets. For
e.g. we may have gold or other precious Metals funds, or Real estate funds.
Broad fund types through investment objectives:
Investors and the mutual fund pursue different objectives while investing. Thus Growth fund
invests for medium to long-term capital appreciation. Income funds invest to generate
regular income and less for capital appreciation. Value funds invest equally in equity that are
considered under valued today, whose value will be unlocked in the future,
Broad Fund types by Risk profile:
The nature of a fund’s portfolio and its investment objective imply different levels of risk
undertaken. Funds are therefore often grouped in order of risk. Thus, Equity Funds have a
greater risk of capital loss than a Debt Fund that seeks to protect the capital while looking
for income. Money market fund are exposed to less risk than even the bond funds, since they
invest in short-term fixed income securities, as compared to loner-term portfolios of Bond
funds.
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Type of Mutual Fund Objective Scope of Investments

Money market Funds Income oriented, liquidity Treasury bills, certificate of
and safety for short term deposit , commercial papers
& inter-bank call money
market
Gilt Funds: Income oriented Government paper- dated
securities
Debt Funds (or Income Regular Income oriented Debt instruments issued by
Funds government and private
companies, banks and
financial institutions
Diversified Debt Funds Regular Income Oriented Debt securities, issued by
entities across all industries
and the sectors

Focused Debt Funds Regular income oriented Debt securities, issued by
entities across all industries
and the sectors

High Yield Debt Funds Regular Income Oriented debt instruments that are
considered “below
investment grades”.
Equity Funds Growth and income Equity shares of company
oriented
Aggressive Growth Fund Growth oriented Invest in less researched or
speculative shares and adopt
speculative investment
strategies to attain their
objective of higher returns
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Growth Funds: Capital Appreciation Companies whose earnings
are expected to rise at an
above average rate

Specialty Funds Capital Appreciation Invest in companies that
meet only pre-defined
criteria
Sector Funds Capital Appreciation Investments in only one
industry or sector of the
market
Offshore funds Capital Appreciation Invest in equities in one or
more foreign countries

Small-Cap Equity Funds Capital Appreciation Invest in shares of
companies with relatively
lower market capitalization

Diversified Equity Funds Capital Appreciation Invest only in equities,
except for a very small
portion in liquid money
market securities
Equity Index Funds Growth Invests in shares that
constitute the index

Value Funds Growth shares that are selling at a
low price-earnings ratios,
low market to book value
ratios and are undervalued
by other yardsticks
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Equity Income Fund: Growth and income Invest mainly in shares of
companies with high
dividends yields
RISK HIERARCHY OF MUTUAL FUNDS

Balanced Funds: Income, Moderate Capital Debt instruments,
Appreciation And convertible securities, and
Preservation Of Capital preference and equity shares

Equity Funds
Money Gilt Funds
Growth-and-Income Growth and Income Stocks of companies with
Hybrid Funds
Market Funds Debt Funds
Funds: good dividend paying
records and those withAggressive

Growth funds
potential for
Flexible Asset capital
Allocation
appreciation
Funds
Growth Funds
R
High Yield
I Debt Funds
S Diversified
K Equity Funds
Index Funds
L Value funds
Focused
E Debt Funds
V Growth and
Income Funds
E
Equity Income
L Funds
Balanced
Funds
Diversified
Debt Funds
Gilt Funds
Money Market
Funds 16
TYPE OF FUND
(Source: AMFI Workbook)
1.6) Structure Of A Mutual Fund:
India has a legal framework within which Mutual Fund have to be constituted. In India open
and close-end funds operate under the same regulatory structure i.e. as unit Trusts. A Mutual
Fund in India is allowed to issue open-end and close-end schemes under a common legal
structure. The structure that is required to be followed by any Mutual Fund in India is laid
down under SEBI (Mutual Fund) Regulations, 1996.
1.6.1) The Fund Sponsor:
Sponsor is defined under SEBI regulations as any person who, acting alone or in
combination of another corporate body establishes a Mutual Fund. The sponsor of the fund
is akin to the promoter of a company as he gets the fund registered with SEBI. The sponsor
forms a trust and appoints a Board of Trustees. The sponsor also appoints the Asset
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Management Company as fund managers. The sponsor either directly or acting through the
trustees will also appoint a custodian to hold funds assets. All these are made in accordance
with the regulation and guidelines of SEBI.
As per the SEBI regulations, for the person to qualify as a sponsor, he must contribute at
least 40% of the net worth of the Asset Management Company and possesses a sound
financial track record over 5 years prior to registration.
1.6.2) Mutual Funds as Trusts:
A Mutual Fund in India is constituted in the form of Public trust Act, 1882. The Fund
sponsor acts as a settlor of the Trust, contributing to its initial capital and appoints a trustee
to hold the assets of the trust for the benefit of the unit-holders, who are the beneficiaries of
the trust. The fund then invites investors to contribute their money in common pool, by
scribing to “units” issued by various schemes established by the Trusts as evidence of their
beneficial interest in the fund.
It should be understood that the fund should be just a “pass through” vehicle. Under the
Indian Trusts Act, the trust of the fund has no independent legal capacity itself, rather it is
the Trustee or the Trustees who have the legal capacity and therefore all acts in relation to
the trusts are taken on its behalf by the Trustees. In legal parlance the investors or the unit-
holders are the beneficial owners of the investment held by the Trusts, even as these
investments are held in the name of the Trustees on a day-to-day basis. Being public trusts,
Mutual Fund can invite any number of investors as beneficial owners in their investment
schemes.
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1.6.3) Trustees:
A Trust is created through a document called the Trust Deed that is executed by the fund
sponsor in favour of the trustees. The Trust- the Mutual Fund – may be managed by a board
of trustees- a body of individuals, or a trust company- a corporate body. Most of the funds in
India are managed by Boards of Trustees. While the boards of trustees are governed by the
Indian Trusts Act, where the trusts are a corporate body, it would also require to comply
with the Companies Act, 1956. The Board or the Trust company as an independent body,
acts as a protector of the of the unit-holders interests. The Trustees do not directly manage
the portfolio of securities. For this specialist function, the appoint an Asset Management
Company. They ensure that the Fund is managed by ht AMC as per the defined objectives
and in accordance with the trusts deeds and SEBI regulations.
1.6.4) The Asset Management Companies:
The role of an Asset Management Company (AMC) is to act as the investment manager of
the Trust under the board supervision and the guidance of the Trustees. The AMC is
required to be approved and registered with SEBI as an AMC. The AMC of a Mutual Fund
must have a net worth of at least Rs. 10 Crores at all times. Directors of the AMC, both
independent and non-independent, should have adequate professional expertise in financial
services and should be individuals of high morale standing, a condition also applicable to
other key personnel of the AMC. The AMC cannot act as a Trustee of any other Mutual
Fund. Besides its role as a fund manager, it may undertake specified activities such as
advisory services and financial consulting, provided these activities are run independent of
one another and the AMC’s resources (such as personnel, systems etc.) are properly
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segregated by the activity. The AMC must always act in the interest of the unit-holders and
reports to the trustees with respect to its activities.
1.6.5) Custodian and Depositories:
Mutual Fund is in the business of buying and selling of securities in large volumes.
Handling these securities in terms of physical delivery and eventual safekeeping is a
specialized activity. The custodian is appointed by the Board of Trustees for safekeeping of
securities or participating in any clearance system through approved depository companies
on behalf of the Mutual Fund and it must fulfill its responsibilities in accordance with its
agreement with the Mutual Fund. The custodian should be an entity independent of the
sponsors and is required to be registered with SEBI. With the introduction of the concept of
dematerialization of shares the dematerialized shares are kept with the Depository
participant while the custodian holds the physical securities. Thus, deliveries of a fund’s
securities are given or received by a custodian or a depository participant, at the instructions
of the AMC, although under the overall direction and responsibilities of the Trustees.
1.6.6) Bankers:
A Fund’s activities involve dealing in money on a continuous basis primarily with respect to
buying and selling units, paying for investment made, receiving the proceeds from sale of
the investments and discharging its obligations towards operating expenses. Thus the Fund’s
banker plays an important role to determine quality of service that the fund gives in timely
delivery of remittances etc.
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1.6.7) Transfer Agents:
Transfer agents are responsible for issuing and redeeming units of the Mutual Fund and
provide other related services such as preparation of transfer documents and updating
investor records. A fund may choose to carry out its activity in-house and charge the scheme
for the service at a competitive market rate. Where an outside Transfer agent is used, the
fund investor will find the agent to be an important interface to deal with, since all of the
investor services that a fund provides are going to be dependent on the transfer agent.
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1.7) History of Mutual Funds in India
The mutual fund industry in India started in 1963 with the formation of Unit Trust of India,
at the initiative of the Government of India and Reserve Bank the. The history of mutual
funds in India can be broadly divided into four distinct phases
First Phase – 1964-87
Unit Trust of India (UTI) was established on 1963 by an Act of Parliament. It was set up by
the Reserve Bank of India and functioned under the Regulatory and administrative control of
the Reserve Bank of India. In 1978 UTI was de-linked from the RBI and the Industrial
Development Bank of India (IDBI) took over the regulatory and administrative control in
place of RBI. The first scheme launched by UTI was Unit Scheme 1964. At the end of 1988
UTI had Rs.6,700 crores of assets under management.
Second Phase – 1987-1993 (Entry of Public Sector Funds)
1987 marked the entry of non- UTI, public sector mutual funds set up by public sector banks
and Life Insurance Corporation of India (LIC) and General Insurance Corporation of India
(GIC). SBI Mutual Fund was the first non- UTI Mutual Fund established in June 1987
followed by Canbank Mutual Fund (Dec 87), Punjab National Bank Mutual Fund (Aug 89),
Indian Bank Mutual Fund (Nov 89), Bank of India (Jun 90), Bank of Baroda Mutual Fund
(Oct 92). LIC established its mutual fund in June 1989 while GIC had set up its mutual fund
in December 1990. At the end of 1993, the mutual fund industry had assets under
management of Rs.47,004 crores.
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Third Phase – 1993-2003 (Entry of Private Sector Funds)
With the entry of private sector funds in 1993, a new era started in the Indian mutual fund
industry, giving the Indian investors a wider choice of fund families. Also, 1993 was the
year in which the first Mutual Fund Regulations came into being, under which all mutual
funds, except UTI were to be registered and governed. The erstwhile Kothari Pioneer (now
merged with Franklin Templeton) was the first private sector mutual fund registered in July
1993. The 1993 SEBI (Mutual Fund) Regulations were substituted by a more comprehensive
and revised Mutual Fund Regulations in 1996. The industry now functions under the SEBI
(Mutual Fund) Regulations 1996. The number of mutual fund houses went on increasing,
with many foreign mutual funds setting up funds in India and also the industry has witnessed
several mergers and acquisitions. As at the end of January 2003, there were 33 mutual funds
with total assets of Rs. 1,21,805 crores. The Unit Trust of India with Rs.44,541 crores of
assets under management was way ahead of other mutual funds.
Fourth Phase – since February 2003
In February 2003, following the repeal of the Unit Trust of India Act 1963 UTI was
bifurcated into two separate entities. One is the Specified Undertaking of the Unit Trust of
India with assets under management of Rs.29,835 crores as at the end of January 2003,
representing broadly, the assets of US 64 scheme, assured return and certain other schemes.
The Specified Undertaking of Unit Trust of India, functioning under an administrator and
under the rules framed by Government of India and does not come under the purview of the
Mutual Fund Regulations.
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The second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB, BOB and LIC. It is
registered with SEBI and functions under the Mutual Fund Regulations. With the bifurcation
of the erstwhile UTI which had in March 2000 more than Rs.76,000 crores of assets under
management and with the setting up of a UTI Mutual Fund, conforming to the SEBI Mutual
Fund Regulations, and with recent mergers taking place among different private sector
funds, the mutual fund industry has entered its current phase of consolidation and growth.
As at the end of September, 2004, there were 29 funds, which manage assets of Rs.153108
crores under 421 schemes.
The graph indicates the growth of assets under management over the years.
GROWTH IN ASSETS UNDER MANAGEMENT
(Source: www.amfiindia.com)
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Chapter Two Marketing and Distribution of Mutual Funds
2.1) Introduction:
Marketing is essentially the process of communication, more than physical activity.
Marketing means the correct assessment of the needs of the target group and the appropriate
designing of the product and services that fulfill these needs. Marketing is not a static
phenomenon but involves constant adjustment of the strategic input to suit the buyer’s
preferences. While marketing is a critical function in any industry, the role becomes more
pronounced in the financial services sector where the product offered is intangible, non-
distinct and not really sought after and requires a firm push to survive the competitive force.
The Marketer sells promises and commitment and he needs to convince people. In today’s
scenario Mutual Fund is the most competitive segment of the financial industries today. As
the size of the market shrank drastically during the last year there is exponential growth in
the number of players, thus making successful marketing the most important factor deciding
upon the fate of the fund. Mutual Fund are in the business of creating the conviction in the
minds of the investors that they are better equipped with the specialized skills to invest
money. They have to offer the trust that the fund managers – even if the returns on their
investments were inherently unpredictable- will act in the best interest of the investors. The
AMCs also try to convey from their marketing activities their USPs and that they offer the
best services in the industry. They try to portray and enhance their image of high integrity
and good world-class quality of service.
25
2.2) Investor Psychology:
Due to immense competition the Mutual Fund Industry is emerging to be more customer
oriented. All Fund managers are in the pursuit to attract the investor towards
his fund, by meeting and excelling his expectations. The Marketing effort of
the Funds would be the most successful factor for the funds success.
Therefore the marketing and distribution activity of the firm should be
designed keeping the customer and his behaviour in mind. The study of the
Indian customer and his psychology would enable the fund to devise
effective marketing mix. Thus before going on to the ‘Marketing and
Distribution aspect of Mutual Funds we should look at the Indian investor’s
psychology
2.2.1) A brief about the Indian investor’s psychology:
The following points can summarize the psyche of the Indian investor
 He is risk averse and is more passive than active.
 Equity is satisfied with safety and reasonable returns
 He is not interested in frequently changing his portfolio
 He understands more by emotions and sentiments than quantitative comparison of
funds performance with respect to an index.
 Mere growth prospect in an uncertain market does not attract him.
 He prefers one bird in the hand and two in the bush.
 He is happy if assured a rate of reasonable return that he would get on his
investments.
26
 The expectation of a typical investor is shown in the triangle, with the highest
priority being at the apex.
Safety
of
Funds
Reasonable return
Liquidity
Figure 2.1 Investor Expectation Hierarchy
• The investor is prepared to invest his money over a long period provided there is a
purpose attached to it which is linked to his social needs and therefore appeals his
sentiments and emotions
2.2.2) The Purchase Process
The psychology of the investors while purchasing a Mutual Fund can be better understood
by the following:
Attitudes of Others
Evaluation of Purchase
Purchase
Alternatives Intention
Unanticipated
situational factors
27
Figure 2.2 Purchase Process
Evaluation of alternatives: The Indian investor first evaluates various available options. He
would check out various financial instruments, if he wants to invest his money, and evaluate
each of the options.
• Purchase intention: after the evaluation of various alternatives he then decides on a
particular product and expresses his intention to purchase it. In executing a purchase
intention an investors makes the following 5 sub-decisions:
• Brand decision (which firms fund to buy, UTI/TATA Mutual Fund / Reliance)
• Vendor decision: decision about the preferred dealer/ which dealer/ agent to go to?
• Quantity Decision: how many units of the Mutual Fund should be purchased?
• Timing decision: when should these units be purchased. Should I wait for ht NAV to
slide down depending upon the market conditions?
• Payment method decision: which mode of payment to be used?
Attitudes of others: The Indian investors purchases the product only after in consultation
with other fellow friends or colleagues. The attitude and perception about others on the
investor purchase intention matter a lot. He can change his purchase intension based on the
advice
28
Unanticipated situational factors: these are factors such as loss of job, some other
expenditure that might be more urgent. These factors are unpredictable and the purchase
decision of the investors can change at the last moment because of these factors.
Purchase: Based on the advise, attitude of others and the unexpected situational factors the
investor makes his purchase decision and finally purchases the product of
his choice.
2.3) Key issues in Marketing and Distribution of Mutual Funds
The following are the recent issues that the Mutual Fund industry is facing:
2.3.1) Institutional v/s Retail selling:
The broad target segment of any Mutual Fund would be Institutional Investors and Retail
Investors. Institutional investors comprise of corporate bodies, FIIs, Insurance companies
etc. where as retail investors would comprise of residents, HUFs, Retired individuals etc.
one main characteristic of Institutional investors is that they have large amounts of investible
funds. They don’t park their funds in a single fund or a scheme for a long time. While
investing the Institutional investors look out for various tax-features and regulatory
decisions before making an investment. The main aim of the Corporates is to park their
occasional surplus funds that would earn a return than what they would have to pay on
account of holding them. Institutional investors some time account for 10-15% of the total
corpus of a fund. Thus if there is a heavy sell of by Institutional investors there would be a
large percentage of amounts would go out of the firm.
29
The marketing manager of a fund finds it more easy and also prefers to target this class
because this class is professional, well qualified and can understand the financial jargons
and the language in which the industry speaks. Thus it’s easy to convince this segment. The
number of Institutional investors is small as compared to the retail segment. The retail
segment base in India for Mutual Fund is more than 30 million. There is a huge potential of
business coming up from this area.
The marketing man would like to call up once to an Institutional investor and can get a
subscription of more than Rs. 1,00,000. But in the retail segment in order to meet the target
of 1,00,000 the marketing department will have to convince at least 10,000 individual
investors assuming their average investment capacity being Rs. 10,000. This would involve
more cost, time, effort and energy. In today’s competitive scenario an AMC would like to
have a steady inflow of subscription amounts, reduce costs where ever it would be possible.
The presence of Institutional investors brings in more funds along with liquidity and
volatility. It is very interesting to see that though the firms would like to put in more efforts
to get funds from Institutional investors they cannot ignore the retail segment. It is estimated
that the future business would come from the retail segment. So the firms need to balance
and divide their marketing efforts between the Institutional investors and the retail
customers. Thus on one hand the fund has Institutional investors where there is low cost of
procurement and high value and volumes. On the other hand they have retail investors with
large customer base, higher cost of procurement, small value of investments but a huge
untapped market. Both the segments have their own risks and advantages attached to it.
Thus the fund manager has to tradeoff between the two segments in order to get a
competitive edge in the market and stay ahead of its competitors.
30
2.3.2) Economies of distribution:
An Agent is a catalyst- he can help the investors choose the best products according to their
investment needs. He has the freedom to offer choice to the investors.
It is an ideal situation, if a Mutual Fund can develop an exclusive agent network, which
works only for it with absolute commitment, but past experiences in the industry proves that
agents do not work on exclusive basis. This is mainly because of economic reasons. An
agent requires to earn money to provide for his family and to live in reasonable security and
comfort. No Mutual Fund can provide this level of compensation to an agent because in a
competitive market the margin available to the AMC id limited. Moreover increase in the
number of players means no single Mutual Fund can dominate the market with large market
shares. In such circumstances, an exclusive agent will slowly get tempted to try and sell
other schemes because the market needs diversified products.
This can be understood from the following graph:
tc- Total cost

e e -Commission of the Agent
C
O C
e
S O
T tc S
O T
F O
S Total F
tc
A earnings S
L of the A Total
E agent L earnings
S E of the
S agent
SALES VOLUME
SALES VOLUME
I 31
II
Figure.2.3 Economies of Distribution
In Fig 3.2 I as you can see the agent is an exclusive dealer for a fund. Line e shows the
commission of the agent. Line tc is the total cost incurred by the agent. The gap between the
lines equity and tc shows the actual earnings or the profit of the agent. As we can see in case
of an exclusive dealer the commission would be less as the number of schemes or
subscription done under him would be limited to that particular Mutual Fund and the
locality. Thus the earnings of the agent would be less and may not be reasonable enough to
support more staff, expand, and live a life with reasonable comfort.
In the figure 3.2 II the total cost and earnings of an agent whose deals in various Mutual
Funds is given. In this case the gap between the commissions received and the total cost is
more and thus the agent would have more earnings. The sales turnover of the agent will be
more as he would cater to various Mutual Funds and the cost of the agent would be divided
among the various funds. Thus it is obvious that an agent would like to be a small funds
market rather than being an exclusive showroom of the company without any financial
support from the AMC.
Looking on the current situation more and more agents who sell multiple brands are coming
up. Many agent want to convert and expand themselves into a fund supermarket. This is an
important issue in marketing of Mutual Funds. In today’s competitive scenario will a firm
allow its dealers to deal in its competitor’s product? This can be asked by way of an
example:
32
An exclusive dealer in coke now wants to deal in Pepsi. Will Coke allow it, when Pepsi is
luring the dealer with higher incentives and scope of business. This is an important issue to
be discussed, as this would determine the structure of the Mutual Fund industry.
2.3.3) Size of the cake:
It’s very important to know whether the cake i.e. the industry has grown or it’s just the
number of players that have increased to increase competition and get the slice of the cake.
The answers of these questions would determine the structure of the Mutual Fund industry,
the future strategies of the AMCs. Increase/Decrease in the industry size can be inferred
from the Assets under Management (AuM). The net AuM of the Indian Mutual Fund
industry stood at Rs. 1,53,651 Crores at the end of February 2005. Since the entry of other
Mutual Funds in 1998, net assets of the industry have grown from Rs. 6,871 Crores to
Rs.103452 Crores, a compounded growth rate of 25.35% p.a. The figure in isolation
suggests that the Mutual Fund industry has grown substantially. But the figure in isolation
would not give us the right picture. We also nee to see the number of schemes offered that
have increased from that time that has increased tremendously.
Table 2.1 Number of Schemes
Category No. of new Sales Redemption Assets Under Management

schemes
launched New Existing Total Total as on Jan as on Inflow/
during the schemes schemes 31 , 2005 Dec 31 , Outflow
month 2004
B Bank 0 0 7535 7535 6890 28802 28358 444
Sponsored
C Institutions 0 0 872 872 712 3450 3288 162
D Private Sector & Joint Venture:
I Indian 3 482 17040 17522 16622 28883 28041 842
II 0 0 10513 10513 8992 30569 29344 1225
Predominantly
Indian
33
III 0 0 23765 23765 24428 60576 61506 -930

Predominantly
Foreign
Grand Total 3 482 59725 60207 57644 152280 150537 1743
(A+B+C+D)
We need to study the implications of these figures. The figures imply that though the
industry is growing substantially the rate of increase in the number of players is more than
the rate of the industry growth. Which means that there is increasing cutthroat competition
in the industry. It would be interesting to see as to what the big players do in order to cater to
competition, register growth in business in such a market, create brand loyalty and equity for
the fund.
2.3.4) Depth of product differentiation:
Product differentiation means the extent to which a particular company’s products and brand
differs or stands out from its competitors. In today’s competitive scenario all big Mutual
Fund players are the forerunners to introduce a new scheme if they feel that the investors
want such kind of a product. All the major players have all types of schemes/ funds to be
offered in their basket of offerings to suit the current needs of the investors. For E.g.
Prudential ICICI Mutual Fund in their basket of offerings have a liquid plan, a debt plan,
income plan, gilt plan etc. so does other players such as DSP Merrill Lynch, Tata Mutual
Fund, Unit Trust of India. Each and every fund house is trying to offer all the products and
try to become a generic brand. As the investor is exposed to an increasing number of Mutual
Fund products finds that all the available brands are rather identical, and cannot appreciate
any distinction. For E.g. the number of tax saving schemes in the first quarter was 20, which
were competing with each other. In such a situation the main issue would be how would a
34
Marketing manager of a Mutual Fund differentiate its products, services and brand from its
competitors with same product offerings? How to communicate the differentiation keeping
in mind the nature of the Indian investor? The common man just understands sentiments and
emotions rather than the financial performance. Thus this is one of the major issues that
needs to be discussed by the fund manager in order to stay and increase business.
2.3.5) Impact on external data and decision-making process of Indian Investor:-
Indian investor is one of its kind. He takes into consideration a lot of things and is affected
by a lot of factors. The Indian investor by and large is unaware and illiterate about the
concept and working of Mutual Fund. Before buying a Mutual Fund he would seek advice
from the local agent and his near and dear ones. Before investing he tries and seek more
information from various sources tough he may not understand the technicalities of the
product but he would ask somebody to explain him in simple language the meaning and
implications of those terms. To a great extent he depends and looks out for external data. He
is actually a risk averse person and generally follows the Bandwagon. Therefore his decision
to a great extent depends upon the agents, various TV shows and other credit rating
agencies. The Indian investor is susceptible to rumors. He gets scandalized and panicky by
rumors. He changes his decision based on rumors. Thus a fund manager must take utmost
care that there are no rumors about the fund in the market. The fund manager should keep all
these factors in mind and then decide upon the ad campaign and marketing strategies.
2.4) Fund distribution
We have already discussed the concept of Mutual Fund, types of Mutual Fund and the
structure of a Mutual Fund. Now we should know as to who can or who is eligible to invest
35
in a Mutual Fund. These form the target market for any AMC. So it is imperative for the
company to know about who constitutes their market. In India the following people can buy
a Mutual Fund:
Mutual Funds
Institutional Clients: -
Banks
Corporate
houses/companies
Insurance companies Individual/Retail clients:
NBFCs Figure 2.4 Who can Buy Mutual Indian
Funds residents
Provident funds Small firms
FIIs Hindu Undivided Family
Financial institutions Non-Resident Indians
OCBs
2.5) Role of distribution channels
Mutual Funds devise investment plans for the institutional and the individual investors.
Some funds target and contact the institutional investors directly, without using any external
distribution channels. For e.g. Unit Trust of India has some schemes targeted at provident
funds, which are contacted directly by their own sales force. Other funds work through
distributors for institutional clients as well as individual clients. The AMC in order to get
large volumes it targets the institutional clients by means of its own sales force. The
companies use the small distributors and agents and other intermediaries to get business
from the retail front. Mutual Fund are primarily vehicles of large collective investments,
working on the principle of pooling funds of a large number of investors. This is the reason
as to why majority of schemes are targeted at individual investors. A substantial portion of
36
investment takes place at retail level. Retail distribution channel is therefore a critical
element in the distribution of Mutual Funds. With the diverse nature of investor community
and vast geographical spread of the country, the agents and the distributors are a vital link
between the mutual funds and the investors.
2.6) A brief about the most type of distribution channels used:
Individual agents:
Use of agents has been the most widely prevalent practice for distribution of funds over the
years. An agent acts on behalf of the principal- the Mutual Fund. An agent is essentially a
broker between the fund and the investors. In India we have a system where in a broker has
a number of sub- brokers working under him. UTI Mutual Fund introduced this system of
selling their funds through sub broker network. The vast sub-broker network ensures a larger
geographic coverage than otherwise. According to AMFI, there are nearly 100,000 agents
selling Mutual Funds and other financial products. Of this number, 80-85,000 are a Unit
Trust of India agent. These agents are not exclusive agent but usually sell other financial
products as well. Thus the agent/distributor has a broader knowledge about financial
instruments and thus can provide advisory services. The individual investors rely on the
counseling done by these agents in order to make an investment decision. As financial
markets, investment option and the variety of Mutual Fund gets more and more
sophisticated, distributors need more and more information, knowledge and skills. Due to
this reason many Mutual Funds in India now prescribe a minimum qualification that a
person must possess to become an agent. These qualifications may be in terms of education,
experience or even registration on an exchange. Some funds even require their distributors
37
to pass the AMFI testing program. Private Mutual Funds also rely on agents for distributing
their schemes. Interaction with a large agent force is costly and difficult to administer.
Distribution Companies:
Availing of the services of established distribution companies is a practice accepted by
Mutual Funds internationally. This practice evolved with a view to circumvent the huge
administrative mechanism required to support a large agent force. Instead of dealing with a
large number of agents a fund can interact with a distribution company, which has several
employees or sub-brokers under it. A distribution company usually manages distribution for
several funds simultaneously and receives commission for its services. Many private funds
have preferred to adopt this practice because of its sophisticated nature and because they
benefit from the specialized knowledge and established client contacts of these marketing
firms. In India there are about 10 major distribution companies in addition to a few hundred
smaller ones. E.g. ICICI capital and securities, JM Morgan Stanley Direct.
Banks and NBFCs:
In developed countries, banks are an important marketing vehicle for Mutual Funds, given
that banks themselves have a large depositors/client base of their own. Several banks both
private and foreign are involved in fund distribution by providing services similar to those of
distribution companies, on a commission basis. Some NBFCs are also providing such
services. All funds do not use this channel. Most of the banks are changing with time and
gearing up to provide distribution services to other AMCs. They are using their competitive
advantage of penetration or distribution of their branches to maximize the geographical
38
reach. E.g. Unit Trust of India bank, HDFC Bank. This trend has also been picked in India
where almost all major banks be it foreign or Indian have started to distribute mutual funds
in retail as well as institutional selling. The major reason for such a shift has been the
lowering on the income on the other deposits and other products that the banks use to sell.
The banks have shifted a major focus on the third party products as they are good revenue
schemes to the income of the bank. Some examples of the banks that are present in the
mutual fund distribution is HSBC, ABN AMRO Bank, HDFC Bank, ICICI Bank. Even
now the small private banks such as Centurion Bank, IndusInd Bank have also entered the
mutual fund distribution arena.
Direct Marketing: -
Direct marketing means that the funds sell their own products without the use of any
intermediaries. Usually this takes the form of the sales officer and employees of the AMC
who approach the investors and accept their contributions directly. Direct marketing by the
funds themselves accounts for a very small percentage of Mutual Fund sales. In the case of
Unit Trust of India, only 5-6% of total sales come through direct channels. Many private
sector funds require that investments into any other schemes be routed only through
registered brokers and they don’t accept direct subscription from investors. Mutual Funds
often use their employees to mobilize funds from high net worth individuals and institutional
investors. In case of short/medium term investment in liquid and or income funds targeted at
companies, funds often resort to direct marketing.
• Internet
Though a very new concept in mutual fund distribution but still it is catching it up. There are
many websites such as the ICICI Direct .com and Myiris.com provide online application
39
of the mutual fund. Though not widely used but still a concept, which is going to catch up in
the near future. These are usually people who have corporate distributors which provide
services to their clients for convenience.
2.6) Distribution Channels In US And Europe:
We have briefly studied the distribution channels available in India. The concept of Mutual
Fund started in US and other European countries. The concept has grown over the years and
changed. Mutual Funds in India were introduced only in 1963 when UTI was started. The
Indian distribution channel has also changed over the years and is also expected to change.
With the advent of globalization the world has become a global village. The benefits of a
particular structure around the world can be reaped by the study of the structure in that
particular country and adopting and integrating the structure to the needs and conditions of
the country. Thus US and Europe being advanced states the structure of working of the
Mutual Fund is different from India. Their structure of distribution is also different,
competitive and investor focused. Therefore the author felt a brief study about the
distribution structure and the trends in those countries and India would be of great help to the
Indian Fund managers. The Fund manager can adopt the competitive structure of distribution
in the Indian context and thus can create a competitive advantage and thus cater to the
investors needs and also exceed their expectations.
40
Universal Banks
Portfolio Managers
Insurance companies
Individual
Fund Factory
investor
Corporates
Intermediaries
Pension plans
Figure 2.5 Distribution channels in US and Europe
• Universal banks: Multi- activity banking organisations. Branch networks
• Portfolio managers: Dedicated to asset management Private Banks/ independent asset
managers
• Insurance companies: Life, property/ casualty, health Not brokers
• Corporates: Large non- financial businesses Treasury assets
41
• Intermediaries: Financial advisers Networks and one- man bands
• Pension Plans: Pension plans inside and outside corporations.
Table 2.2 Trends of Mutual Fund in US, Europe and India:
Key development Trends in US Europe same trend Indian trends
areas as US
Marketing
/Distribution
Explosion of new Likely Low
Distribution channels
Retirement Plans Major new No No
distribution channel
Fee-based advisory Major new No Likely
distribution channel
Proprietary funds Long- term shift to Likely Doubtful
non- proprietary
funds
Buying driver Shift towards Yes Yes
performance
Pricing New pricing Likely Yes
structures
Service Development of Doubtful Yes
42
product support
services
Branding New importance of Yes Yes
branding
Education Increased No Yes
investment in
market education
Products
Product range New product types Yes Likely
Equity assets Growth in equity Yes Likely
Foreign assets Growth in non- US Yes Likely
investments
Index funds Growth in index Doubtful Doubtful
funds
Industry
Concentration Big players keep Yes Yes
hold of large
market share
Fragmentation Growth in number No Doubtful
of small players
Other Issues
Asset Shift Shift of assets from Yes Yes
deposits to funds
Technology Emergence of Yes Likely
Internet- driven
sales
Visibility Growing press Yes Yes
coverage
43
Bull markets Stock market Yes No
growth since 1994
Thus marketing plays a very important role in the Mutual Fund industry. The marketing in
the Mutual Fund industry is growing along with the industry. More and more
advertisements are being used to promote the funds. Fund managers are looking at
New channels of distribution in order to penetrate the market. All the Funds are
planning their strategies to be the first to reach the investors. Most of the Fund
managers are trying to gain competitive advantage based on their Marketing,
distribution and advertisement strategy. The strategies of some of the firms are
discussed in the next chapter.
Chapter Three Distribution Model of AMCs
The focus of the study is to know and understand the Marketing and distribution carried out
by various Indian funds. For this purpose the author has taken a sample size of four AMCs
and studied their marketing and distribution activities. The purpose of taking these
companies was to get a holistic view about the activities, trends prevalent in the industry by
different players at different stages. The sample size incorporated company from each type
of Mutual Fund is assumed as industry practice. The objective of choosing the given said
44
companies was the cover the entire spectrum of Mutual Fund according to the fund holding
pattern
Table 3.1 Companies Studied
Fund ownership/ holding patterns Name of the fund studied

Government owned Unit Trust of India Mutual Fund
Financial Institutional sponsored and joint Prudential ICICI Mutual Fund
venture (predominantly foreign)

Foreign Mutual Fund DSP MERRILL LYNCH Mutual Fund
New Entrant in Mutual Fund industry HDFC Mutual Fund
Specific details about the companies under study is as follows:
45
3.1) Unit Trust of India
The Unit Trust of India Act, 1963, established Unit Trust of India. It began its operations
from 1st February 1964. It has been a dominant player in the Mutual Fund industry. Since
from the date of inception it has remained the market leader with the largest amount of funds
and investor base. The trust has 92 schemes. As on 28.2.2005 the AMC had a Net Assets
under management of Rs 20,835 crores, the biggest mutual fund in India.
The basic strategy of the company is to bank on the trust of investors and introduce new
schemes. The company is coming out with specialized schemes targeted to specialized class.
E.g. Unit Trust of India has come out with a specialized investment fund for women. Thus
the core strategy is to come out with new product features for specific classes. Thus the
company is looking on to target the niche market.
Distribution Channel of UTI Mutual Fund
Among all the players in the industry UTI has the largest and the widest geographical reach
and the dealer network. It has around 80,000 agents. UTI has evolved the concept of chief
representative for each district, who is given a target and has several agents reporting to him.
UTI has franchisee offices that function as small, decentralized distribution centers. UTI in
addition to having its own agents force and sales force also uses third party distribution
services of JM Morgan Stanley.
46
Corporate Office
Zonal Office
District Offices
Chief
Branch Offices
Representative
Agents
Non-Individual Collection
investors Centers
Figure 3.2 Distribution Channel Of UTI
Non-individual distributors are a type of distribution companies. They perform the dual
function of product distribution and sometimes as collection centers. E.g. Integrated
Services limited.
47
3.2 ) PRUDENTIAL ICICI MUTUAL FUND
Prudential ICICI was set up on 25th August , 1993. The Fund is a partnership between
Prudential PLC and ICICI Limited. The Fund is a partnership between the two with a
holding pattern of 55 and 45 percent respectively. The AMC has 55 schemes. As on
28.02.2005 the AMC has assets under management of 16,314 crores.
The core strategy of the company revolves around building up the brand and brand
awareness. It is the company’s philosophy that the investors would invest in the company’s
funds once they recognize the brand. Brand awareness about the main brand i.e. PRUICICI
would lead to increase in inflow of subscription in other products of the company. The basic
core strategy of the company is “Brand Building” & ‘Go Slow, Go Powerful’ This would
increase the brand image of the company and a trust -based relationship would b established,
which would lead to increase in business. They want to offer genuine counseling facilities to
the investors. They would not only promote their products but if need be for the investor
they would also recommend certain products that are in generic competition with Mutual
Funds. Have brand identity, relationship marketing, increase performance and service.
48
Distribution Channel of PRU ICICI Mutual Fund
PRUICICI
Financial Agency Stockbrokers

Banks
Advisors brokers
Figure 3.3 Distribution channel of Prudential

ICICI
Financial Advisors = JM Morgan Stanley direct , ICICI capital
Sales service:
The company as its core strategy provides counseling facility to the investors. The company
has a call center to address the problems of the investors and give quick responses. The call
center helps the firm to increase reach ability and increase consumer friendliness.
49
3.3) DSP MERRILL LYNCH MUTUAL FUND
DSP Merrill Lynch was set up on 16th December 1996. It is a part of the global financial
giant DSP Merrill Lynch Ltd & Merrill Lynch Investment Managers L.P. The AMC has 14
schemes. As on 28.02.2005 the AMC had assets under management of 6,167 crores.
DSP being relatively a new entrant in the market have realized that the key to success was
the presence of well-networked distribution agency. The key to investor success was to have
a good distribution network and so the company’s strategies are focused on dealer/
distributor relationship development. It has identified that in order to develop business it
needs to focus more on distributors as they come in to direct contact with the customer. So
the marketing people of the company hold frequent/weekly meetings with the distributors.
They take distributors for lunch, organize parties etc. they have a huge budget allocated for
distributor-relationship development. Increase penetration. “Be available be present”. The
company is backing up on the strategy of a firm dealer loyalty that would push their
products. The AMC is concentrating on the following aspects and concepts to enhance
customer value and to increase the market share: -
Relationship Marketing:
The firm is trying to add personal touch with its customers, distributors. They believe
that such a relationship would be lasting more in the competitive environment. This
would lead to increase in the loyalties for the firm,
Performance:
The firm is trying to benchmark its performance. As per the policy it would like to
‘optimize’ its returns. It is also educating the investors about how to review
performance.
50
Increase penetration:
The firm wants to increase its geographical penetration through increased number of
agents etc.
Distribution Channel of DSP Merrill Lynch
DSP has mainly 4 categories of distributors:
Category A- this includes banks such as Citibank, Standard Chartered, BNP Paribus,
HSBC, ABN AMRO Bank, HDFC Bank, ICICI Bank etc.
Category B- this category includes regional distributors, which are appointed by the
company. These distributors are responsible for a particular area- a city or a state. They are
supposed to reach a specified target in a particular period. They are also sometimes
responsible for institutional sales in that particular area.
Category C- this category includes the retail agents and the LIC agents. These retail agents
have a good network within the city and they offer personalized services thus have a niche
of their own.
Category D- Institutional sales force these sales force are exclusively to target the corporate
houses.
The company has more than 450 in-house dealers. Thus the sales force of the company can
be divided and shown as following: -
51
Localized
Agents
Corporate
Sales
Force
Banks Retail
Broker
Figure 3.5 Activities of Sales Force of DSP MERRILL LYNCH
The company also out sources its distribution from ICICI capital, JM Morgan Stanley
Direct. These are companies that have a number of dealers and agents forming a distribution
channel of its own. Thus they just pay commission to these distribution companies and they
in turn deal with the agents under them. This is one of the effective methods to cut fixed
costs. The company then follows up with theses distribution companies in order to push
sales.
52
Sales service:
The company sees to it that the investors get prompt and quality service. The company is
planning to set up a call center. This would increase the reach ability of the firm and also
increase the satisfaction of the investors to some extent.
3.5) HDFC MUTUAL FUND
The company is relatively a new player in the market. It was set up on 30th June, 2000. The
Fund is backed by Housing Development Corporation of India Ltd. HDFC was incorporated
in 1977 as the first specialised housing finance institution in India. HDFC provides financial
assistance to individuals, corporates and developers for the purchase or construction of
residential housing. It also provides property related services (e.g. property identification,
sales services and valuation), training and consultancy. Of these activities, housing finance
remains the dominant activity. HDFC currently has a client base of over 5,00,000 borrowers,
13,00,000 depositors, 1,00,000 shareholders and 52,000 deposit agents. HDFC Asset
Management Company Ltd(AMC) was incorporated under the Companies Act, 1956, on
December 10, 1999, and was approved to act as an Asset Management Company for the
Mutual Fund by SEBI on June 30, 2000.
As on 31.12.2000 the AMC had a Net Assets base of 116361 lakhs and unit capital of
112047.96 lakhs. The assets under management as on 28.02.2005 is 14,574 crores.
The present shareholding pattern of the AMC is as follows:
Particulars Percentage of the paid up capital

HDFC 50.10
Standard Life 49.90
Investments Limited
53
Distribution Channel of HDFC Mutual Fund
HDFC
Zonal office
Distributors Banks Retailers Non-individual

agents
Figure 3.7 Distribution Channel of HDFC Mutual Fund
From the structure of the distribution we can identify as to which distributor will cater to the
entire system.
Retail Corporate
Agents Distributors
Figure 3.8 Responsibility Of Promotion
54
Distributors include private banks such as HDFC banks, UTI bank, Citibank, stanchart. And
other non-individual such as integrated service, Intel financial services.
The company has laid more stress on the marketing in the institutional segment.
The company strongly believes in the PUSH strategy, as it’s the most effective strategy in
the introduction of the schemes. Thus as the years pass buy and how well the company
perform will decide upon the basic marketing strategy of PULL or PUSH by the firm.
55
Chapter 4 Vital Issues in Distribution
4.1 ) Institutional v\s Retailing:
UTI:
The company is still the market leader. It has a huge distribution network in place. The
company has a dedicated sales force to look into the Institutional segment. The company has
also designed some products specific for institutional segment. The company has retail agent
strength of more than 80,000 spread all across India. With the onset of competition and
participation of various players the company has geared up its agents to face the
competition. The company also owns some sole UTI distributors. The company being the
market leader has a good clientele base for both Institutional as well as retail front. The
company is targeting both the segment. In case of conflict in objectives then the firm would
go to the retail/common investors as the basic aim to start with UTI was to safeguard the
investor’s interest.
Prudential ICICI:
The company is relatively a new company as compared to UTI. The company is the second
largest company after UTI in terms of size, operations etc. The basic strategy of the
company is to target the Institutional investors present in the metros. The company has not
targeted all the cities in India. The firm has a well-structured plan for entering the other
cities in India; the company has targeted only A class cities. The company has realized the
importance of retail business and the kind of volumes that can be generated firm the retail
segment if the product is targeted at the right market. Though the company has more of its
56
operations in the Institutional segment it is focusing more attention on brand building, which
is a part of their retail strategy.
DSP Merrill Lynch:
The firm is striving to find a balance between the Institutional and retail segment. The
company is outsourcing major part of its retail distribution channel through ICICI Capital,
JM Morgan Stanley Direct. The company has direct marketing sales force and distributors
e.g. Citibank who promote their product to Institutional investors as well as retail investors.
Though the company finds the retail segment to be lucrative in the future it has targeted
mainly the Institutional segment, as the common man is still unaware about the company
into Mutual Fund business. Therefore the future strategy is to develop the retail segment.
HDFC Mutual Fund:
The company being a relatively a new entrant in the Mutual Fund industry is looking out for
clients in both the segments. It is using its parent companies brand name and its distribution
channel to gain market share in both Institutional and the retail segment.
Conclusion:
All the firms are trying to balance between both the Institutional as well as the retail
segment. All the firms have realized the importance of both the segments. They are
concentrating at each segment and deploying their resources to get the maximum advantage
out of it. No firm can survive in the market by concentrating only on one segment.
57
4.2) Economies of distribution:
UTI Mutual Fund:
The company is the market leader. It has the maximum penetration in the market. It has
more than 80,000 agents. Not all the agents are sole agents. The remaining agents also
market other funds. UTI pushes its funds through the dealers by paying them higher
commission and incentives. UTI also provides the agents with training programs to increase
the knowledge and to give proper advise to the investors. The dealers are also responsible
for increasing business. They are allowed to make Institutional sales. In the rural areas the
dealers have their own sales force.
Prudential ICICI:
Prudential ICICI was among the pioneers in the concept of allowing the dealers to deal with
other fund and other financial products. The basic strategy of the firm is to provide financial
counseling to its investors. The agents would provide assistance and counseling to the
investors and would promote the sale of other financial products and instruments if the need
be. The firm provides competitive commission rates to its agents.
DSP Merrill Lynch:
The company does not have many agents selling sole DSP funds. The company out sources
most of its retail segment distribution from distribution companies /institutions such as
ICICI Capital, JM Morgan Stanley Direct. It focuses on developing distributor relationships.
The company has frequent distributor meets, parties, and informal gatherings, cricket
58
matches. Though it allows its distributors to sell other funds it tries and follows up with the
distributor about the sales, its problems.
HDFC Mutual Fund:
The firm is using its in house resources to target most of its sales. The company is using the
network of HDFC agents and HDFC bank branches to promote their products. The firm is
also trying to build up a distributor base to cater to the growing competition. Good
incentives and commission rates form the basis to push the product.
Conclusion:
Almost none of the companies except UTI have sole distributors. It’s virtually impossible
for the company to have a sole distributor network because the cost associated with it. It is
difficult for the company to support a sole distributor or an agent as the agent would demand
a high commission to fulfill his needs but the company cannot afford such high costs as it
has a limited margin in the very competitive market. Slowly and steadily all funds will move
to outsource its distribution network. Next few years would see an increase in specialty
distribution companies. The company will push their products by means of high commission
and incentives. All agents are diversifying themselves into a fund supermarket to cater to the
needs of the investors. The future will see a consolidation in the number of agents and
distributors except for the penetration in the rural areas. There would be a few large
distributors who would have a distributor network of their own.
59
4.3) Size of the cake:
The net AuM(Assets Under Management) of the Indian Mutual Fund industry stood at Rs.
1,53,631 Crores at the end of February 2005. This represented a growth of 46.49% over the
last year. Since the entry of other Mutual Funds in 1998, net assets of the industry have
grown from Rs. 6,871 Crores to Rs.1,53,631 Crores, a compounded growth rate of 25.35%
p.a. Private schemes have increased from 23 schemes in 1996 to 144 schemes in 2000.
Showing an increase of around 525%. On the overall basis the number of schemes have
increased from 168 in 1996 to 326 in 2000. Thus showing an increase of almost 95%. Thus
we see that the rate at which the industry is growing at the same rate the number of players
in the industry are growing. There is fierce competition in the industry. All the companies
are well aware of this competition and are planning their own strategy to counter the
competition and emerge as the market leader. The core broad strategy has been mentioned in
the company analysis. Thus the firms are catering to the competition with these strategies,
with the focus of the strategy being different due to different philosophies and position in the
market.
4.4) Depth of product differentiation:
This is one of the most interesting aspects about the players in the Mutual Fund industry. In
such a competitive market the common man is unable to find the difference in the offerings
of one AMC with that of other. All the companies are more or less following the same
strategies to differentiate their products just the extent of focus or importance on the
particular strategy would differ. The following are the parameters based on which the fund
houses are trying to differentiate from each other:
60
• Brand image of the company/ parent company
• Performance
The focus of advertisements also changes from company to company.
UTI:
UTI believes that it has good brand equity among the masses. The basic focus of their
advertisements is on the performance and the number of schemes that they are coming out at
that time.
Prudential ICIC:
ICICI is not piggy backing on the name of its parent company. It is advertising and trying to
build on its own brand equity. It advertises and promotes its USP of safety and security. It
wants to communicate that investor’s funds are safe and secure. Their TVCs are based on
the lines that ‘how a Father would take care of a child, the same way Pru ICICI takes care of
your investments.’ The core strategy of the firm is to increase business through increasing
brand awareness.
DSP Merrill Lynch:
Most of the activities of the company are directed towards creating brand awareness. The
company is trying to differentiate its products by means of performance; its advertisements
are targeted towards performance and safety. t’s hoarding ads read ‘Who says safe means
less’ and then giving the performance of one of its fund. Thus the company is using
performance as a tandard as well as the brand name to create differentiation from other
61
products. In the elite class most of the investors are aware about DSP Merrill Lynch as a
famous fund and investment managers in US. This plays as an advantage for DSP. Thus to
some extent it is also reaping the benefits from its parent brand.
HDFC:
HDFC is regarded as one of the pioneers in the housing finance industry. HDFC AMC is
again relying on the brand name of its parent company to differentiate the products.
Conclusion:
We can conclude by saying that though almost all the analyzed companies except Prudential
ICICI and DSP Merrill Lynch are backing on the name of their parent companies to
differentiate their products. At least in India the name of the parent company plays a very
important role in the initial subscription of the scheme. But marketing managers should
realize that not all the time do the investors look at the brand name of the parent company.
At the end of the day the performance of the fund plays a very important part in the future
business of the firm. Investors would invest their hard earn money only where they would be
good returns and if the brand image of the parent company backing it would be good then it
would add icing on the cake. But the brand image of the parent company would not ensure a
good business to the fund and the fund would no longer be able to differentiate its products
just on brand image of the parent company. The company would be able to differentiate
itself it can build an image of its own (for e.g. Prudential ICICI) and not rely on their parent
company. The brand name of a fund would be built if it can offer consistent and god returns
to its investors.
62
4.5) Some other general issues:
4.5.1) Investor expectations:
Normally a small investor expects the following from a Mutual Fund in which he invests:
1. Safety
2. Security
3. Reasonable and consistent return
4. Reduced risk
5. Professional management
6. Quick service
7. Liquidity and flexibility
8. Better return than bank deposit
9. Wide variety of product options
10. Education and counseling
11. Comfort level with the organisation.
All the above said expectations are the perception of the marketers about investor’s
expectations. It is good to know that the marketers are well aware about the expectations of
the investors and views at both the ends match. All the expectations of the investors are
important for the investor. The main expectations, which the investors look out for, are
safety of their investments, security, and reasonable and consistent return. He would, before
investing, look the fund from all the angles, consult, and seek advice and then invest.
63
4.5.2) Cannibalization:
One interesting thing is that, though a single fund house has more than 5 funds none of the
funds cannibalize each other. This is primarily because all the funds under the same funds
house have different investment objective and have been designed for a different target
investor with differing risk appetite and investment objective. But each fund of the fund
house would compete with the fund of the same sector of some other fund house. For e.g.
DSP Technology.com fund would not compete with DSP Merrill Lynch Equity Fund, but
would be competing with Prudential ICICI Technology fund. On the whole there would be a
lot of competition between DSP Merrill Lynch and Prudential ICICI as brand names in order
to attract investments from investors.
4.5.3 ) Counseling facility:
Most of the companies rely on their distributors to carry out this function. The companies
organize distributor awareness and education-training programs to keep the distributor well
informed and help them to give the right advise to the investors. Most of the companies offer
these services as a support function but Prudential ICICI has adopted counseling as a
strategy to gain investor trust.
64
CHAPTER FIVE Legal Provisions Relating to Intermediaries
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. Intermediaries consisting of individual
agents, brokers, distribution houses and banks engaged in selling of mutual fund products as
of now do not have any guidelines or regulatory framework relating to the business of
selling Mutual Funds. It is important and necessary that these intermediaries follow
professional and healthy practices. AMFI has therefore taken the initiative of framing a
broad set of guidelines along with a code of conduct. AMFI working group on Best
Practices for sales and marketing of Mutual Funds under the Chairmanship of Shri B. G.
Daga, Former Execu-tive Director of Unit Trust of India with Shri Vivek Reddy of Pioneer
ITI, Shri Alok Vajpeyi of DSP Merrill Lynch, Shri Nikhil Khattau of Sun F & C and Shri
Chandrashekhar Sathe, Formerly of Kotak Mahindra Mutual Fund has suggested
formulation of guidelines and code of conduct for intermediaries and this work has been
ably done by a sub-group consisting of Shri B. G. Daga and Shri Vivek Reddy.
65
CODE OF CONDUCT FOR INTERMEDIARIES
1. Take necessary steps to ensure that the clients’ interest is protected.
2. 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.
3. 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.
4.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.
5 Disclose all material information related to the schemes/plans while canvassing for
business.
6 Abstain from indicating or assuring returns in any type of scheme, unless the offer
document is explicit in this regard.
7 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.
8 Avoid colluding with clients in faulty business practices such as bouncing cheques, wrong
claiming of dividend/redemption cheques, etc.
66
9 Avoid commission driven malpractices such as: (a) recommending inappropriate products
solely because the intermediary is getting higher commissions there from.(b) encouraging
over transacting and churning of mutual fund investments to earn higher commissions, even
if they mean higher transaction costs and tax for investors.
10 Avoid making negative statements about any AMC or scheme and ensure that
comparisons if any, are made with similar and comparable products.
11 Ensure that all investor related statutory communications (such as changes in
fundamental attributes, exit/entry load, exit options, and other material aspects) are sent to
investors reliably and on time.
12 Maintain confidentiality of all investor deals and transactions.
13 When marketing various schemes, remember that a client’s interest and suitability to heir
financial needs is paramount, and that extra commission or incentive earned should never
form the basis for recommending a scheme to the client.
14 Intermediaries will not rebate commission back to investors and avoid attracting clients
through temptation of rebate/gifts etc.
15 A focus on financial planning and advisory services ensures correct selling, and also
reduces the trend towards investors asking for pass back of commission.
16 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:
67
17.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 _ 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
Registration _ If there is a proved second violation by the intermediary, the registration will
be cancelled and an intimation sent to all AMCs.
18. The intermediary will have a right of appeal to AMFI.
68
CHAPTER SIX CONCLUSION
Future trends in the Indian Mutual Fund industry
Product:
There would be increase in the types of Mutual Fund being offered. New types of fund
would be introduces at regular intervals depending upon the market conditions and investors
needs. In the short run there would be increase in debt funds. The industry is expecting
index fund to be introduced soon. The money market funds are also expected to gear up. The
normal investor would demand income funds rather than growth funds.
Place:
The distribution channel is expected to grow. There would be major emphasis on retail
channels. Companies would be looking at the B and C grade towns for business. Post
offices, cooperative societies, Internet are supposed to be the new distribution channels
coming in as the new channel structures. The distribution channel in the urban areas would
see a lot of consolidation. There would be decrease in the number of individual agents
selling sole funds. All these agents would come together and would transform into fund
supermarkets/ one stop shop of financial services.
Promotion:
The companies have realized the importance of promotion in the industry. More and more
companies are increasing their promotion budgets. The coming years AMCs would increase
their spending in Television and print media. Rural advertising is also gaining importance.
69
The Mutual Fund industry would be on the top clients list of the advertising firms. The firms
are using advertising medium to create brand awareness and trying to differentiate their
products based on the brand and performance of the fund.
Size of the cake
The Mutual Fund industry is expected to grow. Mutual Funds are expected to emerge as the
best investment option in the future. It would surpass the bank deposits. Though the Mutual
Fund industry is expected to grow the number of players in the industry are expected to
grow at a much faster rate thus ensuring fierce competition in the industry. The cake is
expected to grow but the numbers of cake eaters are expected to grow at a much faster rate.
Customer orientation:
Investors would have a wide variety to choose form. He would enjoy a high barging power.
All the companies would increase their customer orientation. All the functions of the
companies would revolve round the investors. There would be increased in transparency in
the functioning of Mutual Fund. New and detailed guidelines would be issued by SEBI to
regulate the market. The market is expected to open up with more inflow of foreign capital
in this sector.
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Distribution of Mutual Funds in India

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Distribution of Mutual Funds in India

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Distribution of Mutual Funds in India

Chapter 1 Introduction to Mutual Funds

sale of mutual fund schemes.

1.1) Emergence Of Mutual Funds:

fund management then deposited with banks.

investment opportunities to Indian investors. We have started witnessing the phenomenon of

from other intermediaries such as the banks.

1.2) The Concept Of Mutual Fund

the total amount of the fund.

after deducting reasonable management fees.

investors put together.

same as a Unit Trust of India Mastershare-holder or an investor in an Alliance or DSP

NAV of the number of units held.

1.3) Advantages Of Mutual Funds

mutual funds to all investors:

amount of investment that would otherwise require big capital.

• Professional management: even if an investor has a big amount of capital available to

• Reduction/Diversification of risk: when an investor invests directly, all the risk of

lesser costs because of larger volumes, a benefit passed on to its investors.

the fund is close-end. Liquidity of investment is clearly a big benefit.

1.4) Disadvantages Of Investing Through Mutual Funds:

delegates this decision to the fund managers. The very-high-net-worth individuals or

constructs a portfolio to his choice.

• Managing a Portfolio of Funds: Availability of a large number of funds can actually

shares or bonds to select.

nonprofessional, but charges fees

passenger seat of somebody else's car

difference in a mutual fund's total performance.

salesmen who do not make those costs clear to their clients.

1.5) Types Of Funds

be grouped into certain classifications for better understanding.

From the investors perspective we could follow three basic classifications:

• Close end or Open end.

• Load funds or No-load funds.

• Tax exempt or Non-tax exempt funds.

Figure 1.1 Types of Mutual Funds

any of these charges are classified as no-load funds.

receiving dividends from virtually all mutual funds.

Broad Structural Classification

Open End Vs. Close End:

of units exceed fresh subscription.

Load and No Load Funds:

a fund’s sales expenses may be recovered from the investors are:

from the redemption proceeds payable to the investor.

These charges made by the fund managers to the investors to cover

including brokers’/agents’/distributors’ commissions, advertising and marketing expenses.

unit to get to know his net sales proceeds.

Tax-exempt Vs. Non-Tax-exempt Funds

Specific Type of Mutual Fund:

Broad Fund type by nature of investments:

many market securities. Therefore under this category we have Equity,

Broad fund types through investment objectives:

Broad Fund types by Risk profile:

invest in short-term fixed income securities, as compared to loner-term portfolios of Bond

Type of Mutual Fund Objective Scope of Investments

and safety for short term deposit , commercial papers

& inter-bank call money

Funds government and private

companies, banks and

entities across all industries

and the sectors

entities across all industries

and the sectors