Panorama

SEPTEMBER 2010 ISSUE THREE

•Overview of Asset
Management Sector
•Mutual Fund profiles
•News updates

Asset Management Sector - An Overview

What is Asset Management? category that pool foreign retail or
institutional funds and invest in Indian Th e As se t M an ag em
en t
The Asset Management industr y debt and equity. Private Equity funds, sector grew by over 50
comprises the activities of investors who domestic and foreign, constitute a 0%
pool their resources and allow a booming segment as well.
from 2003 to 2008.
professional fund manager to invest them.
Development
Asset Management in India
Although the mutual funds and Insurance
The Asset Management Industry in India sectors have been opened up to private
Impact and aftermath of the
consists of a vibrant and rapidly growing
players only 16 and 8 years ago
Recession
mutual funds sector, an insurance sector
respectively, the Asset Management
that is dominated by unit-linked sector grew by over 500% from 2003 to
In 2008, the Asset Management industry
2008 and venture funds have
in India declined by about 12 %.
been allowed even more
However, this negative growth was
Growth in Assets under Management recently. The Indian equity
significantly lower than the global decline
market with its remarkable
of 17% and the decline of 21% that the
bull run throughout most of
in INR crore industry faced in the United States.
this decade right up to the
Following the global recovery in 2010,
500000 crisis has boosted major
Assets under Management (AuM) in
growth in the asset
India have increased by 14%.
375000 management industry. Even
now, India stands poised at the
250000
threshold of major regulatory
Re g u l a t i o n o f F D I i n A s s e t
125000 changes that can open up new
Management
2003 04 segments like Real Estates and
05 0
06 07 Pension Funds to retail
08 09
Upto 49% investment is permissible
10 investors and private and through normal operating channels. For
foreign fund managers. investment over 49%, there are increasing
insurance plans, and venture capital minimum capitalization requirements for
funds, both domestic and foreign. Foreign foreign institutions as the percentage of
Institutional Investors (FIIs) form a investment rises, increasing upto a

1

minimum of $ 50 million for investment
over 75%.
Verticals:
1. Mutual Funds:
A mutual fund is a professionally
managed fund that pools money from
many investors and invests typically in
Leveraged Buyout
• Private equity firm buys major
ity
control of an existing or ma
ture loss-
making or stagnant firm
• Restructures the organization
and
processes to ensure a turna
round and
increase profitability.
investment securities such as stocks,
bonds, short-ter m money market
instruments, other mutual funds, other
securities, and/or commodities such as
precious metals.
Sub-Categories:
a. Equity Mutual Funds
b. Commodity Mutual Funds
c. Bond Mutual Funds
2. Private Equity
Private equity is an asset class typically
consisting of equity securities in
operating companies that are not publicly
traded on a stock exchange. Investments
in private equity most often involve either
an investment of capital into an
operating company or the acquisition of
an operating company. Capital for private
e q u i t y i s r a i s e d p r i m a r i l y f ro m
institutional investors.
a. Leveraged Buyout (LBO):
In a typical leveraged buyout transaction,
the private equity firm buys majority
control of an existing or mature loss-
making or stagnant firm and restructures
the organization and processes to ensure
a turnaround and increase profitability.
b. Venture Capital:
Venture Capital funds invest in several
emerging companies or start-ups but
rarely take a majority stake in any single
company.
3. Hedge Funds:
A hedge fund is an investment fund open
to a limited range of investors that
undertakes a wider range of
investment and trading activities than
traditional long-term investment funds.
It pays a performance fee to its
investment manager.
4.Insurance Funds:
Insurance funds in India are
dominated by Unit Linked Insurance
Plans (ULIP). This is a financial
product that offers life insurance as
well as an investment like a mutual
fund. Part of the premium paid by
investors goes towards the sum assured
and the balance is invested in equity,
fixed-return or a mixture of both.
In India, Insurance funds are regulated
by the Insurance Development and
Regulatory Authority (IRDA).
5. Exchange-traded Funds (ETFs):
An exchange-traded fund is an
investment fund traded on stock
exchanges, much like stocks. Its valuation
is linked to an index, ad it can only be
traded by certain authorized participants.
6. Pension Funds:
Pension funds derive their funds from the
deferral of income by employees and
invest it on their behalf to provide a
source of income after retirement. The
largest investor in the world is Japan’s
Government Pension Fund. It manages
assets worth about US$ 250 billion.
According to a Morgan Stanley estimate,
pension funds worldwide manage around
US$ 20 trillion in assets, which is more
than the GDP of the United States.
In India, pension funds are regulated by
the Pension Fund Regulatory and
Development Authority (PFRDA).
Equity Mutual Funds
Equity mutual funds are the most
common type of mutual fund worldwide.
They can be broadly classified on the
basis of their investment strategy into
Growth and Value Funds. Growth funds
2
The largest invest
or in the
world is Japan’s G
overnment
Pension Fund. It
manages
assets worth abou
t US$ 250
billion.
invest in stocks expected to yield large
capital gains while value funds invest in
undervalued stocks.
In India, the assets managed by mutual
funds grew at a compounded rate of 61%
annually from 2005 to 2008, while their
market capitalization has grown from 3.4
percent to 7.2 percent in the last six years.
This impressive growth was stalled by the
economic downturn in 2009, but is now
showing signs of recovery.
Products
1. Systematic Investment Plan (SIP):
A Systematic Investment Plan (SIP) is a
vehicle offered by mutual funds to help
small retail investors save regularly. It is
similar to a recurring deposit with a bank,
where an investor puts in a small amount
every month. The ticket size for a SIP
can even be less than Rs.1000. In India,
SIPs are the fastest growing mutual fund
product, with their share of the equity
MF market increasing from 2% in 2005
to 15% in 2009. This growth is
highlighted by the fact that it was
undeterred even by the recession during
2008, when the equity mutual fund
market as a whole decreased in size. The
advantage offered by SIPs is that, over a
period of time, the number of units
purchased using the fixed periodic
investment is inversely proportional to the
price of each unit for each successive
period. Hence, fewer units are purchase
when the price is higher while more units
are purchased when the price is lower.
Hence, investors’ risk is reduced by the
averaging effect this strategy has on the
Net Asset Value (NAV). However, the
NAV will decrease if the absolute unit
price decreases in the long term.
2. Equity Linked Saving Scheme (ELSS):
An equity linked saving scheme is equity
mutual funds with Tax benefits. The
advantage of an ELSS over other tax
saving instruments such as National
Savings Certificate and Public Provident
Fund is that the lock-in period is only 3
years while for NSC it is 6 years and for
PPF it is 15 years. However, the risk
factor is higher in an ELSS. In India,
ELSS is gaining popularity with its
market share increasing from 23% in
2003 to 38% in 2009. The top five ELSS
in India typically give returns of 25–30%
Distributors
1. Independent Financial Advisors:
Numbering over 100,000, IFAs sell a
number of financial products besides
mutual funds. Many of them are
dormant or inactive.
2. Banks:
Both Private and Public sector banks sell
mutual fund products to their customers
through their branches and wealth
relationship managers
3. National and Regional Distributors:
They have an organized setup, with
branches and sales forces to promote and
sell mutual fund products. Examples of
distributors are Bajaj Capital Ltd. And
NJ India Invest.
4. Direct Channels:
This refers to the direct sale of mutual
fund products to customers by Asset
Management Companies (AMCs)
through their offices and online channels.
Customers
The three main categories of investors
are small retail investors, corporates and
high net-worth individuals (HNIs). Small
retail investors, who invest under Rs. 5 the legal title to the assets of the fund, but
lakh, account for 99% of the investment have a fiduciary duty to the shareholders
volumes, making them a very important of the fund.
target segment for mutual funds. Also,
their average tenure of investment is 30 3. The net worth of the AMCs should be
months, the highest for any customer at least Rs.5 crore.
segment in the industry. However it must
also be noted that they contribute to only 4. MFs should distribute minimum of
90% of their profits among the investors.
60% of the revenues of the industry.
HNIs and corporates, on the other hand,
There are other guidelines also that
are less likely to have a long holding
duration but they are also less likely to govern investment strategy, disclosure
norms and advertising code for mutual
redeem shares during turbulent times in
the markets. Thus, the trade-off for funds.
mutual funds is between concentrated
Removal of entry load and its
money from HNIs that is unlikely to stay
impact on MFs
when markets are booming, but will ride
out bad times, and diluted funds from Entry load is the charge levied by mutual
retail investors which have longer holding funds when a customer buys into the
durations in a stable market but diminish fund. Mutual funds also charge a
when signs of instability appear. management fee for the holding duration
and an exit load before redemption. Until
Regulatory Authority for Mutual
recently, entry load was present in the
Funds
Indian MF market and it motivated
distributors to push volumes of MFs
Securities Exchange Board of India
which offered them higher incentives.
(SEBI) is the regulatory authority of MFs.
SEBI has the following broad guidelines The removal of entry load in August
2009 was intended to ensure that MFs
pertaining to mutual funds:
are judged solely on the basis of their
1. All MF schemes should be registered perfor mance, creating g reater
with SEBI. accountability and transparency in the
MF market.
2. MFs should be formed as a Trust
under Indian Trust Act and should be
o p e r a t e d by A s s e t M a n a g e m e n t
Companies (AMCs). A Trust comprises of
a specified number of Trustees, who hold

Mutual Fund Profiles

SBI Mutual Funds
SBI Mutual Fund is a 20-year old mutual
fund with an investor base of over 5.8
million. It was set up as a joint venture
between State Bank of India and Société
Générale Asset Management, France. The
fund manages over Rs. 38,782 crores of
assets across 38 active schemes.
SBI MF’s Equity Funds include diversified
Equity Funds, Sectoral Funds and Index
Funds. SBI MF also offers equity schemes
segregated by market capitalization of stocks
(midcap and largecap) as well as by sectors
(pharma, IT and FMCG).
Anil Dhirubhai Ambani Group (ADAG)
and its schemes are managed by Reliance
Capital Asset Management Limited., a
subsidiary of Reliance Capital Limited.
RMF’s equity funds include growth funds,
diversified equity funds, ELSS and SIPs. It
also advertises a Quant fund which uses
mathematical modeling to make its
investments. While most of its schemes are
open ended, its ELSS is a 10-year close
ended scheme. It also has natural resources
and infrastructure equity funds among its
range of products.
ICICI Prudential
ICICI Prudential is sponsored by Prudential
plc, one of UK's largest players in the
insurance & fund management sectors and
India’s second largest bank, ICICI Bank.
Founded in 1998, ICICI Prudential now has
Average Assets under Management (AAuM)
of INR 68,742.64 crore.
ICICI Prudential offers equity, debt and
gold exchange traded funds. Among ICICI
Prudential’s equity funds are Infrastructure,
Service industries, IT and FMCG funds. It
also offers tax-saving schemes.

Besides equity schemes, it also offers a
number of debt schemes and a gold ETF.
Reliance Mutual Fund
Reliance Mutual Fund has Average Assets
Under Management (AAuM) of
Rs. 1,04,511 crores and an investor count of
over 73.30 Lakh folios. It is a part of the
RMF offers a range of debt funds that invest
in debt and money market instruments of
varying risk.
Among its other products are a Banking
ETF linked to the CNX bank index, a gold
ETF linked to the price of gold and fixed
maturity plans.
 Vedanta to buy majority
stake in Cairn India
Vedanta Resources plc, the first Indian
manufacturing company to be listed on
the London Stock Exchange and the
world’s fifth largest miner, has agreed to
buy majority stake in Cairn India, the
local arm of Britain's Cairn Energy.
Cairn Energy is selling up to 51% of it
62.37% stake in Cairn India to Vedanta,
in a deal that could see the Anil Agarwal
owned Vedanta spending up to $9.6
billion.
Cairn Energy has said that it will seek
government’s consent and endorsement
for selling its stake in Cairn India. The
Oil Ministry has appeared uncomfortable
at a non-oil firm gaining control of a
company whose main property is the
Barmer district oilfields in Rajasthan.
However, the ministry is unlikely to stall
the deal given that Cairn India’s contract
with the government for the properties in
question does not provide for a change in
control at the corporate level. Moreover,
100% FDI is allowed in Oil and Gas
exploration, restricting government
action.
The proposed deal has also not gone
down too well with the state-run Oil and
Please send in your suggestions and
Natural Gas Corporation (ONGC), comments to
which owns a 30% in the Rajasthan oil
teamconsult@iimahd.ernet.in
block of Cairn India. In a letter to Cairn
Energ y Plc Chief Executive Bill
Gammell, ONGC Company Secretary Team Consult
NK Sinha said that the Edinburgh-based Amber Maheshwari
firm required "consent of ONGC besides Agam Khurana
other gover nmental approvals to Bharati Agarwal
consummate the proposed" sale.
Chaithanya Rao
Following the announcement of the Girish Gupta
proposed deal, Vedanta’s Credit Ratings Gurveen Bedi
were downgraded by Fitch and it was Hemant Chhabra
placed on Creditwatch negative by S&P.
These stem from the risk in the deal,
Kommu Nageen
given Vedanta’s lack of experience in the Mohit Garg
oil sector. Murali Nair
Neeraj Huddar
India currents imports 70% of its oil
usage. With the entry of Vedanta, and its
Nilesh Kumar Gupta
Richa Gupta
aim of drilling for more oil in India, this
deficit may see a fall. The primary issue Simit Batra
lies with Vedanta’s inexperience in this Utsav Kheria
sector, and it would be interesting to see
Vamsi Krishna
how Vedanta proceeds in case the deal is
allowed. Vivek Iyer

Mahindra & Mahindra to acquire South

Korea’s SsangYong
Mahindra & Mahindra (M&M) has signed a Memorandum of Understanding (MoU) to acquire South Korean auto maker SsangYong Motor
Company (SYMC). The deal is valued at close to $ 500 Million, making it the second largest outbound acquisition in the automotive space. The
deal is expected to close in November. The strategic intent behind this acquisition is worth a closer look.

SsangYong would give M&M access to more than 1400 dealers in almost 100 countries. Of special interest, is access to markets in Russia,
Europe and Latin America. Access to the US market is also valuable as M&M has not been successful in its past efforts to create a viable
distribution in the US.

The two companies would also share their R&D and production platforms resulting in huge cost savings. This will also help the companies
launch new products with a reduced lead time. Mahindra & Mahindra launched the SUV ‘Xylo’ seven years after the launch of its flagship
‘Scorpio’ in 2002. SsangYong has not launched a new product in the last four years.

M&M also intends to bring in SsangYong’s existing products to the Indian market. Mahindra currently does not have any presence in the above
Rs. 10 Lakhs market segment in India and SsangYong’s SUVs like the Rexton, Kyron and Actyon are expected to fill up this void. The product
portfolios of the two companies complement each other extremely well.

Overall, the move seems to be a perfect fit in M&M’s target of becoming a big player within the niche of utility vehicles and having a global
presence in this market.