Mutual Funds market

G ro u p 3 Pra te e k ( 4 ), M u kta ( 2 8 ), V a ru n ( 3 4 ), N a l n ( 4 4 ), S a n ka l ( 4 5 ), i p H a rka ra n ( 5 5 )

Contents :
Mutual Funds Basics.

Mutual Funds Evolution.

Global Mutual Fund Market A Quantitative Study.

Global Mutual Fund Market A Qualitative Study.

Mutual Funds The Indian Scenario.

Mutual Funds : Basics

The Mechanism

Mutual Funds : Basics

Sponsor & AMC

Mutual Funds : Basics

Trustee

Mutual Funds : Basics

Other Entities

Mutual Funds : Basics

Net Asset Value

The price of each unit is known as NAV

NAV on any day, reflects the value of the funds investments divided by the number of units issued by the fund. Customers purchase and sale price are based on this amount

Mutual Funds : Basics

Classification of Mutual Funds.

Global Mutual Funds Market : A Quantitative Study

Number of Mutual Funds World Wide

Number of Mutual Funds , Region Wise , 2010 ( Q4 )

Source: www.ici.org

Global Mutual Funds Market : A Quantitative Study

Number of Mutual Funds World Wide A Comparative Study

Source: www.ici.org

Global Mutual Funds Market : A Quantitative Study

Growth In Number of Mutual Funds, 2010 (Q4) Developed Economies

Source: www.ici.org

Global Mutual Funds Market : A Quantitative Study

Growth In Number of Mutual Funds, 2010 (Q4) Developing Economies

Source: www.ici.org

Global Mutual Funds Market : A Quantitative Study

Total Assets Under Management

Total Net Asset Under Management in Billion US$ (World)

Source: www.ici.org

Global Mutual Funds Market : A Quantitative Study

Total Assets Under Management A Comparative Study

Source: www.ici.org

Global Mutual Funds Market : A Quantitative Study

Growth in Total Assets Under Management Country Wise.

Source: www.ici.org

Global Mutual Funds Market : A Quantitative Study

Classification By Types Of Funds.

+9.3%

Distribution of World Wide Mutual Funds ( By Type Of Asset )

- 0 . 68 %

- 1 . 12 % +4.5%

Source: www.ici.org

Growth In Total Net Asset Value ( By Type Of Fund ) in Billion US$

Global Mutual Funds Market : A Quantitative Study

Total Net Asset Value (By Type Of Fund) Developed Economies.

Source: www.ici.org

Global Mutual Funds Market : A Quantitative Study

Total Net Asset Value (By Type Of Fund) Developing Economies.

Source: www.ici.org

Global Mutual Funds Market : A Qualitative Study

Entry & Exit Load
INDIA UK US China Australia No concept of Entry Load charged by the MFs to the investors. No entry load be Front end charge of charged for all MF about 5% of the net schemes launched on or assets after August 1, 2009 Entry loads are charged Fund houses charge to investors of openentry loads for MF ended MF schemes. Not investors. on close-ended.

Distributer receive Distributers are paid commission from the commission (typically investors based in 3%) out of 5% by the investors assessment of MFs. Entitles to receive various factors a trail commission of including service around 0.5%of the net rendered. asset annually.

For close-ended schemes, the investor pays commission directly to the distributer of MF scheme

The commission to Distributers are paid distributers are borne by commission by the the investors as the MFs. mutual fund pays distributors from the loads charged to the investors in the scheme.

Exit load may or may not be charged to the investors depending on the period they stay invested.

Exit fees are also being Exit loads are charged Fund houses charge exit No concept of Exit charged by few fund to investors of openloads for MF investors. Load charged by the houses to investors on ended MF schemes. Not MFs to the investors. redemption of MF units. on close-ended.

Global Mutual Funds Market : A Qualitative Study

Management Fee To AMC
India UK There exist statutory limits defined by SEBI for payment of management and advisory fees to the AMC US No statutory limits are prescribed, but it is ensured that the AMC does not earn an unfair profit from the advisory contract. China Australia There exists no cap on the management fees to the AMC other than those stipulated in each funds scheme prospectus. Statutory caps are fixed No pre-defined statutory for advisory fees caps on the fees payable payable to the AMCs to AMCs. depending on the type of fund

The advisory fees payable are caped at 1.25% for Net Asset< 100 crores and 1% for NA> 100 crores

Fees varies on the type of funds and are usually about 1.5% of the net assets or an actively managed equity fund.

AMC fees typically For equity based funds, The fees payable vary, range between 0.5% to the AMC fees are inter alia, depending on 1.75% of the net assets capped at 1.5%, while the type of the fund. depending on the type of for index, debt based & the fund. money market funds, capped at 0.5-0.7%, 0,61.2%, 0.33% resp. of the NA

Global Mutual Funds Market : A Qualitative Study

Regulation Of Distributers
India UK The distributors of the MF units are not separately regulated by SEBI or any other regulatory authority. US Distributors in the US are regulated by the Securities Industry and Financial Markets Association. China Australia Distributors in UK are regulated by the Financial Services Authority MF distributors are The Australian regulated and authorized Securities and by China Security Investments Regulation Commission Commission regulates the distributors in Australia

SEBI is in discussion to introduce a more stringent certification program for all distributors of the MF schemes.

There is a regulation Distributors are required being proposed that will to pass the securities require distributors of broker-dealer exams in MF units to undertake order to cell units of certain examinations. MFs.

No specific certification is required to be obtained by the distributors to entitle them to provide professional advice to investors in MF Schemes.

Global Mutual Funds Market : A Qualitative Study

Tax Implications
India UK US China Australia

MFs are treated as a In the hand of MF, pass-through entity and capital gains are tax hence are not liable to exempt. tax.

Funds are pass-through In order to promote MF MFs are treated as a entities and only the industry, the tax pass-through entity and investors pays tax upon authority in China gives hence are not liable to receipt of income or nearly full tax tax. capital gain exemptions to MF and distributions by the investors. fund.

Mutual Funds The Indian Scenario

The Growth Story

UTI was established on 1963 by an Act of Parliament 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. First Mutual Fund Regulations came into being, under which all mutual funds, except UTI were to be registered and governed. The 1993 SEBI (Mutual Fund) Regulations were substituted by a more comprehensive and revised Mutual Public sector Fund Regulations mutual funds set in 1996. up by public At the end of sector banks and January 2003, there LIC & GIC. were 33 mutual At the end of 1993, funds with total the mutual fund assets of Rs. industry had 1,21,805 crores. assets under management of Rs.47,004 crores.

Mutual Funds The Indian Scenario

Key Highlights

Assets Under Management (AUM) have managed to record a compounded growth of 28% over 2006-2010 AUM of Equity Funds and Balanced Funds where retail investors invest have only grown by 20% in the same period The net sales of Equity/Balanced funds in 2009-10 have been one of the lowest in recent years Accounts for less than 4% of household savings in India Assets under management as a percentage of GDP is less than 5 per cent in India as compared to 70 per cent in the US, 61 per cent in France and 37 per cent in Brazil Since the 1990s when the mutual fund space opened up to the private sector, the industry has traversed a long path, adapting itself continuously, to the changes that have come along Growth in Assets Under Management (AUM) experienced has been unprecedented, growing at a CAGR of 28% over the last four years, slowing down only over the last two years, as a fallout of the global economic slowdown and financial crisis

Mutual Funds The Indian Scenario

Key Highlights

Some of the other trends which have emerged strongly over the past year are heavy outflows triggered by market volatility and partnering of asset management companies with banks, to increase the strength of distribution networks. Developments on aspects of entry load, management fees paid to asset management companies, regulation of distributors and taxation of mutual funds from the investor point of view, are some of the areas which deserve to be given attention

Mutual Funds The Indian Scenario

The rationale behind institutional sales claiming such a large chunk of the AUM pie is the benefit of tax arbitrage and lack of short term investment options. When compared with economies like US and China, investments channelized through corporates, comprise only around 15% and 30% of the assets under management (AUM), respectively. HNI segment especially in Tier 2 &Tier 3 cities has expanded creating a pool of investible surplus

Mutual Funds The Indian Scenario

Mutual Fund Investments v/s FII Investments In India

Mutual Funds The Indian Scenario

Key Challenges

Under-penetrated population Inaccessibility in smaller towns and cities due to lack of an efficient distribution network Heavy reliance on institutional sales Low financial literacy levels and Cost pressures emanating as a result of inefficiencies in systems and processes

Mutual Funds The Indian Scenario

Business Model To Sustain Profitability

Discount Brokers - They will serve customers at a nominal fee, earning commissions from the AMC in addition to receiving trail commissions Directly from AMC - This model is apt if the customer is able to identify the type of fund that he wants to invest in Advisory Model - This model functions on fees paid to financial advisors for advice rendered by them. Link with an advisory model is more likely to pave the way for long term benefits, aiding in gaining more market share.

Mutual Funds The Indian Scenario

Reaching Out To Tier II & Tier III Cities.
In India around 65% of savings are with banks or post office deposits and cash at home, while 23% are invested in real estate and gold and only 12% is channelized towards financial instruments.

Thus, manifesting tremendous opportunity for growth in mutual funds.

Diversity of Indian culture implies that different models need to be explored and executed in order to make a breakthrough in these smaller towns. A few banks intended to adopt the hub-and-spoke model, gradually adding locations to each hub, where the could perhaps cater to 2-3 location each.

Emergence of stock exchange platforms is seen as a suitable means to increase penetration levels of financial assets and thus mutual funds.

Targeting the HNI segment, some organizations plan to introduce Wealth Cafes across the nation, catering solely to the requirements of HNIs.

To lure customers into capital markets, AMCs are pursuing investors to look upon gold Exchange Traded Funds (ETF) as an exciting offer.

Mutual Funds The Indian Scenario

Spreading Awareness Among The Investors.
Introducing innovative products. Investor education programs should be customer oriented with emphasis on the risk appetite of investors rather than simply a demonstration of the range of products. Products should be designed to bolster income levels of the rural segment and also increase there spending capacity. Mapping the requirements of investors today to a hierarchy of needs (akin to Maslows model), the new age investor demands higher rate of return, more transparency and most importantly the freedom to choose from a wide range of product alternatives.

Mutual Funds The Indian Scenario

Recent Developments In The Indian MF Sector
FIIs Allowed to invest in Mutual Funds KYC, routes other than Mauritius and distribution needs to be addressed W.e.f. August 1, 2009, SEBI banned the entry load (SIP excluded) that was deducted from the invested amount, and instead allowed customers the right to negotiate and decide commissions directly with distributors based on investors assessment of various factors and related services to be rendered Higher distributor commission on Unit Linked Insurance Products (issued by Insurance companies) is giving tough competition to the business of mutual funds SEBI is considering a new incentive structure for agents that might involve a service fee for distributors and a commission paid by the funds. In return, the distributors would have to submit to stricter supervision.

Mutual Funds The Indian Scenario

Recent Developments In The Indian MF Sector No Additional Management Fees on schemes launched on no load basis SEBI has scrapped the additional management fee of 1% charged by AMCs on schemes launched on a no load basis leading to a further squeeze in margins earned by the AMC Direct Tax Code Implications : Unlike the extant tax provisions, DTC does not provide for any benefit for investment in equity linked savings scheme, and also proposes to increase the compliance in the hands of MFs by widening the scope of deduction of tax to include payments made to residents. It is unclear whether the income earned will be exempt or taxed in the hands of the investors on accrual basis, as stated in the Discussion Paper on the DTC. Disclosure of Investor Complaints in the Annual Report In order to improve the transparency in the grievance redressal mechanism, SEBI has recently issued a Circular that requires MFs to include details of investor complaints in their Annual Report as part of the Report of the Trustees, beginning with the annual report for the year 2009-10. MFs provide abridged booklets of the Annual Reports to all the unit holders

Mutual Funds The Indian Scenario

Recent Developments In The Indian MF Sector Fund of Fund ( FoF ) schemes SEBI has issued directions stating that since these arrangements create conflict of interest, AMCs shall be prohibited from entering into any revenue sharing arrangement with the underlying funds in any manner and they have been prohibited from receiving any revenue by whatever means/ head from the underlying fund Further, SEBI is also in discussions to raise the AMC fees from the present cap of 0.75% of the net assets in the case of FoF schemes

Mutual Funds The Indian Scenario

The Way Forward
Diverse range of products In US, MFs provide products that cater to the entire life cycle of the investor Regulation of MF distributors Recommendation to re-visit the eligibility norms of AMCs Amongst other recommendations, the key ones are relating to increase in the minimum net worth of AMCs from the existing Rs. 10 crores to Rs. 50 crores change in the definition of net worth sponsor to be a regulated entity and change in definition of control Trading through stock exchange platform While trading through the stock exchange, the investor would get to know about the validity of his order and the value at which the units would get credited/ redeemed to his account by the end of the day. Whereas, while investing through MF distributor or directly with the MF, the investor gets information of the subscription and redemption details only in the form of direct communication from the MF/ AMC Thus, by trading through the stock exchange, the investor would be able to optimize his investment decisions due to the reduced time lag in the movement of funds Real estate Mutual Funds

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