Chapter: 2 Changing Face of Mutual fund industry in India 2.1Growth of the Indian mutual fund industry 2.2Changing Regulatory Landscape 2.3Identified issues,challenges and suggested research actions by Different Consultancy and Research Firms on Indian mutual fund industry 2.4SWOT Analysis of Indian Mutual Fund Industry
CHAPTER TWO CHANGING FACE OF MUTUAL FUND INDUSTRY IN INDIA Since last two decades Indian mutual fund industry has observed significant growth in terms of Asset management companies, mutual fund schemes and distributors. 2.1 Growth of the Indian mutual fund industry According to KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, the Assets Under Management (AUM) have grown at a rapid pace over the past few years, at a CAGR of 35 percent for the five-year period from 31 March 2005 to 31 March 2009. Over the 10-year period from 1999 to 2009 encompassing varied economic cycles, the industry grew at 22 percent CAGR. This growth was despite two falls in the AUM - the first being after the year 2001 due to the dotcom bubble burst, and the second in 2008 consequent to the global economic crisis (the first fall in AUM in March 2003 arising from the UTI split) 2009.Growth in AUM in the Indian Mutual Fund Industry (Average AUM in INR Billion) Opportunistic view AUM Base and Growth Relative to the Global Industry India has been amongst the fastest growing markets for mutual funds since 2004; in the five-year period from 2004 to 2008 (as of December) the Indian mutual fund industry grew at 29 percent CAGR as against the global average of 43 percent. Page 21
Table 2.1 Key concerns, issues and challenges to Mutual fund Industry year 2009-2014 Source Year Growth statistics of mutual fund Key concerns issues challenges industry KPMG Report Indian Mutual Fund Industry The Future in a Dynamic 2009 India has been amongst the fastest growing markets for mutual funds since 2004, witnessing a CAGR of 29 percent Low customer awareness levels financial literacy Limited flexibility in fees and pricing structure Environment in the five-year period from 2004 to Limited focus on public sector network Outlook for 2015 2008 as against the global average of 4 percent Distributors limited interest in post closure service of mutual funds Large number of mutual fund schemes Complicated KYC norms CII Mutual fund Summit 2010 AUM have managed to record a Low retail participation Indian Mutual Fund compounded growth of 28% over 2006- Lack of investor Education Industry - Towards 2015 2010, however, the AUM of Equity Cost pressures Sustaining Inclusive Growth Funds and Balanced Funds where retail Distribution network - Evolving Business Models investors invest have only Grown by Changing regulations 20% in the same period. The net sales of Equity/Balanced funds in 2009-10 have been one of the lowest in recent years. Page 22
Source CII Mutual fund Summit 2011 Distribution Spectrum and the Changing Business Environment Indian Mutual Fund Industry Year Growth statistics of mutual fund industry 2011 The number of folios in the equity segment has shown a decline from 409 lakh as of March 2010 to 392 lakh as of March 2011. Growth levels in the industry have stumbled in the past year, with assets under management declining by four per cent as of March 2011 as compared to the fantastic growth of 47% in March 2010 Key concerns issues challenges Lack of distributor regulation Low Investor awareness High trading cost Technology Large portfolio in liquid funds Mis- selling of mutual funds Governance and risk management As of March 2011, AUM stand at Rs 5922.50 billion. Net inflows for the year ended March 2010 were high at Rs 830.81 billion.however, the year ended March 2011 faced tremendous redemption pressures and recorded a net outflow of Rs 494.06 billion Page 23
Source CII Mutual fund Summit 2012 Is there a silver Lining? The Indian mutual fund industry Year Growth statistics of mutual fund industry 2012 The mutual fund industry, beset by netredemptions by investors and adverse global and local market conditions shrank by 1.6% in terms of during the AUM year FY2011-2012. Volatile market conditions in the last two years have led to net withdrawals by investors to the tune of 49,406 crore INR in FY 2010-11 and 22,023 crore INR in FY 2011-12, leading to a further drop in AUM, in addition to the drop caused by adversemarket movements. Key concerns issues challenges Upfront commission and Trail commission Direct channels and exclusive or preferential treatment for distributors Changing Regulatory landscape Indeed these tough times can be seen as an opportunity for the industry to reinvent itself. Page 24
Source Year Growth statistics of mutual fund industry CII Mutual fund Summit Although there was a volatile market 2013 2013 condition average AUM grew 23% for Indian mutual fund industry the year ended March 2013 in Mutual Unearthing the growth fund industry andthe rise in AUM has potential been coupled with erosion of the in untapped markets investor base, evident from the loss of 3.6 million folios The equity segment saw a decline of 4.4 million folios, although the debt segment showed an addition of 0.8 Million folios. KPMG report 2014 2014 Industry recorded an AUM of INR 8,800 Indian mutual billion. The highest AUM was recorded fund industry in August 2013 as INR 9,580 billion. Distribution continuum: Key to success (Source: Compiled by the researcher from the above mentioned resources) Key concerns issues challenges Uncertain market environment Commission structure How to increase the rural footprint Leveraging of technology Investor Awareness Blurred lines between advisor and distributor Investor Mentality Cultural bias towards physical assets Partnering with bank Lack of product differentiation Page 25
Over this period, the mutual fund industry in mature markets like the US and France grew at 4 percent, while some of the emerging markets viz. China and Brazil exceeded the growth witnessed in the Indian market. However, despite clocking growth rates that are amongst the highest in the world, the Indian mutual fund industry continues to be a very small market; comprising 0.32 percent share of the global AUM of USD 18.97 trillion as of December 2008. However after several years of relentless growth after 2008-2009 industry is triggered with global crisis, fluctuating market conditions and over dependence on corporate customers and retail distribution of mutual funds. So the time has come for the industry to revive its health with the collaborative efforts initiated by all the stakeholders for the growth and sustainability of the industry. It s now a crying need of an hour to gain the investor confidence back with the new regulatory regime by the regulator (SEBI), AMFI and Asset management companies and distributors. There are various Mutual fund summit held by CII every year and PWC has come up with the report which shows the issues, challenges and opportunities for the Indian mutual industry. The various other consultancies reports also show the alarming situation of mutual fund industry in India. So, it can be said that there is changing face of mutual fund industry in India and hard core efforts in the right direction are required to revamp the industry. In the following paragraph the highlights of mutual fund industry is explained during past 4 years. With the references of the all the above literature the key challenges in front of Mutual fund industry are summarized as follows: Page 26
Low Levels of Investor Awareness Although the mutual fund product is a very old product, still in India it lacks awareness amongst the customers. As majority of the AUM is generated through the Tier I cities, Tier II and Tier III cities are still lack their approach in investment in to stock market and mutual funds. A large majority of retail investors lack an understanding of risk-return, asset allocation and portfolio diversification concepts. Limited Focus on Increasing Retail Penetration The Indian mutual fund industry had limited focus on building retail AUM and has only recently stepped up efforts to augment branch presence in Tier 2 and Tier 3 towns. Players have historically garnered AUM by targeting the institutional segment that comprises 63 percent AUM share as at March 2008. Limited Innovation in Product Offerings The Indian mutual fund industry has largely been product-led and not sufficiently customer focused. The popularity of NFOs triggered a proliferation of schemes with a large number of non-differentiated products. The industry has had a limited focus on innovation and new product development, thereby catering to the limited needs of the customer. Products that cater specifically to customer life stage needs such as education, marriage, and housing are yet to find their way in the Indian market. Mis-selling of mutual funds The industry needs to guard against the mis-selling of mutual funds, and take suitable preventive Measures. Sometimes, mis-selling may happen inadvertently, if the distributor does not have the relevant expertise and knowledge, to guide the investor. On other accounts, mis-selling may happen as a result of fraudulent activities on the part of the distributor or IFA, especially now that the commissions have been impacted in the no-load regime. If the incentive to sell is missing, then it may lead fund managers to indulge in fraud and mis-selling practices. Page 27
AUM to GDP Ratio The ratio of AUM to India s GDP gradually increased from 6 percent in 2005 to 11 percent in 2009. Despite this however, this continues to be significantly lower than the ratio in developed countries, where the AUM accounts for 20-70 percent of the GDP. Share of Mutual Funds in Household Financial Savings Investment in mutual funds in India comprised 7.7 percent of the gross household financial savings in FY 2008, a significant increase from 1.2 percent in FY 2004. The households in India continue to hold 55 percent of their savings in fixed deposits with banks, 18 percent in insurance and 10 percent in currency as of FY 20086. In 2008, the UK had more than thrice the investments into mutual funds as a factor of total household savings (26 percent), than India had in the same time period. As of December 2008, UK households held 61 percent of the total savings in bank deposits, 11.6 percent in equities and 1 percent in bonds. Profitability The increase in revenue and profitability in the Indian mutual fund industry has not been commensurate with the AUM growth in the last 5 years. The AUM grew at 35 percent CAGR in the period from March 2005 to 2009, while the profitability of AMCs - which is defined as PBT as a percentage of the AUM - declined from 24 bps in FY 2004 to 14 bps in FY 2008. During FY 2004 and FY 2008, the investment management fee as a percent of average AUM was in the range of 55 to 58 bps (small increase to 64 bps in FY 2006) due to the industry focus on the underlying asset mix comprising relatively low margin products being targeted at the institutional segment. The operating expenses, as a percentage of AUM, rose from 41 bps in FY 2004 to 113 bps in FY 2008 largely due to the increased spend on marketing, Page 28
distribution and administrative expenses impacting AMC margins10. Rising cost pressures and decline in profitability have impacted the entry plans of global players eyeing an Indian presence. The growth in AUM accompanied by a decline in profitability necessitates an analysis of the underlying characteristics that have a bearing on the growth and profitability of the Indian mutual fund industry. Customers The Indian mutual fund industry has significantly high ownership from the institutional investors. Retail investors comprising 96.86 percent in number terms held approximately 37 percent of the total industry AUM as at the end of March 2008, significantly lower than the retail participation in the US at 82 percent of AUM as at December 2008. Out of a total population of 1.15 billion, the total number of mutual fund investor accounts in India as of 31 March 2008 was 42 million (the actual number of investors is estimated to be lower as investors hold multiple folios)13. In the US, an estimated 92 million individual investors owned mutual funds out of a total population of 305 million in 2008. 2.2 Changing Regulatory Landscape Mutual fund industry regulatory reforms 1. Infrastructure mutual funds rules relaxed: (August September 2013) According to the SEBI, for infrastructure it would allow foreign feeder funds that get at least 20% of their managed assets from long term investors such as sovereign wealth funds and pension funds to qualify as strategic investors. This distinction is necessary because the SEBI requires these infrastructure debt funds which operates as mutual funds, to get a minimum commitment of 250 crore from strategic investors before launching. Page 29
2. SEBI allows MF to hold gold certificates: (July August 2013) SEBI allowed mutual funds to hold gold certificates issued by banks in the physical form. This move was taken to protect the interests of investors in securities and to promote and regulate the securities market. 3. Distributors can buy and sell mutual funds on stock exchanges (July- August 2013) SEBI allowed mutual fund distributors to purchase and redeem mutual funds units through stock exchanges on behalf of their clients. Currently this facility was available only for stock brokers and clearing houses. With this move, distributors have an additional channel for distributing mutual fund schemes. 4. Efforts to increase minimum capitalization requirement for AMC: (June-July 2013) Keeping in mind the current scenario of number of AMC in the market and investors confusion in buying of mutual funds, the view is already given by SEBI chairman U.K Sinha for increase in base capital requirement of AMC which is currently Rs. 10 Crore. 5. AMFI- CRISIL Launch five mutual fund performance indices (May June 2013) Rating specialist CRISIL and mutual fund industry body AMFI have joined hands to launch five simple indices to increase mutual fund performance awareness. The indices are across five categories which include equity funds, ELSS, debt funds, Money market funds and hybrid funds. The indices are expected to increase awareness about the mutual fund performance and increase transparency which in turn will boost the investor confidence. The indices will be updated every quarter and will be available on AMFI and CRISIL websites. Page 30
6. Colour codes come in to effect (July-August 2013) Since July 1, 2013 the SEBI proposed colour codes to label mutual fund schemes based on their risk came in to effect. All AMC have adopted the colour codes with their advertisement application forms, KIM and SID which now bear colour code which denote the level of risk associates with schemes. The three colour schemes are labeled brown for high risk, blue for low risk and yellow for moderate risk. 7. AMFI launched Common Account statement (e CAS) in electronics form SEBI has taken initiative to ruled out physical statements and to provide e CAS to all the investors email id registered as per KYC. This newly launched e CAS will offer convenience, security with anytime and anywhere access. 8. Mutual fund industry to weed out non serious players (October November 2012) SEBI feels there is a case for consolidation in asset management industry due to presence of some non serious players. Page 31
2.3 Identified issues,challenges and suggested research actions by Different Consultancy and Research Firms on Indian mutual fund industry 1. Suggestive of Mutual fund summit 2010, The Indian mutual fund industry is passing through a transformation. On one side it has seen a number of regulatory developments while on the other the overall economy is just recovering from the global crisis of 2008. The regulatory changes have been made keeping in mind the best interests of the investors. However, like all changes these changes will take time to be adapted by industry, intermediaries and the investing public at large. The industry is looking forward to early resolution of certain interregulatory issues requiring Government / Court intervention. Market participants are waiting to see how the industry adapts to these changes, while trying to maintain its pace of growth. Mutual funds are restructuring their business models to provide for increased efficiencies and investor satisfaction. The industry also faces a number of issues which are characterized by lack of investor awareness, low penetration levels, high dependence on corporate sector and spiralling cost of operations. The Growth rate of the industry therefore needs to be seen from this perspective. 2. Suggestive of Mutual fund summit 2011, The past year has been a defining period for the mutual fund industry, as lack of incentivisation has made it increasingly cumbersome for the distributor to reach out to the retail investor. The number of folios in the equity segment has shown a decline from 409 lakh as of March 2010 to 392 lakh as of March 2011. As the industry strives to reach out to the smaller towns and cities, the regulatory landscape is also changing. Page 32
3. Suggestive of CII Mutual fund summit, 2012,Is there a silver lining? The Indian mutual fund industry 2012 is The present scenario demands vigorous innovation and reinvention. Wholesale or drastic changes may not be warranted; instead, the purpose may be better served by adopting a cluster of key initiatives in the areas of cost efficiency, product designand positioning, alternative distribution models, revenue diversification and capacity creation. 4. Suggestive of CII Mutual fund summit 2013, The mutual fund industry is yet to spread its reach beyond Tier I cities. The top five cities contribute to 74% of AUM, with the remaining 26% distributed among other cities. Statistics show that in March 2013, penetration in the top five cities increased to 74% as compared to 71 in March 2012, whereas for cities beyond the top five, penetration has decreased. 5. Suggestive of Delloite report 2013,Mutual Fund Outlook Shifting gears for future growth As mutual fund firms look forward, we believe that three core strategies will shape their approach in 2013: Adapting to an evolving regulatory landscape Tactically pursuing growth opportunities amidst challenging market conditions A shift back to focusing on operational excellence 6. Suggestive of KPMG Report, June 2009, Indian Mutual Fund Industry The Future in a Dynamic Environment Outlook for 2015 India has been amongst the fastest growing markets for mutual funds since 2004, witnessing a CAGR of 29 percent in the five-year period from 2004 to 2008 as against the global average of 4 percent. The increase in revenue and profitability, however, has not been commensurate with the AUM growth in Page 33
the last five years. Low share of global assets under management, low penetration levels, limited share of mutual funds in the household financial savings and the climbing growth rates in the last few years that are amongst the highest in the world, all point to the future potential of the Indian mutual fund industry. 7. Caceis Investor Services Report June 2009, This is a critical time for policymakers and the industry to reinforce the confidence in long term savings products, especially for retirement planning. The steps taken in the future will have to be in tune with investor needs, and we hope the themes and measures discussed within this report will foster a discussion to address the skepticism of investors towards product producers and intermediaries on these issues. From all the above suggestive, it can be concluded that mutual fund industry is facing lots of challenges and there is a need to relook at the regulatory frame work, distribution pattern and most importantly investors expectations. Page 34
2.4 SWOT Analysis of Indian Mutual Fund Industry Table 2.2 SWOT Analysis of Indian Mutual fund industry Strength Weakness Alternative to equity, different schemes like equity, debt, balanced funds available Provides liquidity to the investors Large number of potential customer as a base The size of the market is very large. Opportunities Plethora of products available in the market creating confusion for Investors Reasonably less participation of retail investors Distribution network confines to metro cities Lack of investor grievance redressal mechanism Threats Huge untapped market in semiurban and rural areas. High level of savings habit among the people Liberalized business environment. Using on-line mode of trading systems. Increasing competition among the players. High level of volatility in the stock market. Possibility of more stringent regulations by SEBI, RBI, AMFI, etc., in future. Insurance policies, ULIPS, Bank FD products can act as a substitute product. Source: Compiled by the researcher Page 35