Strategies Of Development Of Channel Distribution Of Mutual Fund

A REPORT SUBMITTED TOWARDS THE PARTIAL FULFILLMENT OF DEGREE OF P.G.D.M. SESSION 2012-13 TRAINING EXECUTED AT

STATE BANK OF INDIA FUND MANAGEMENT PVT.LTD. , JAIPUR

SUBMITTED BY:

PRIYA JAIN

INTERNATIONAL SCHOOL OF INFORMATICS AND MANAGEMENT

Objective:
The project tries to accomplish the following tasks: Comparative analysis of the mutual fund industry. Strategy development for the distribution channel.

Scope of Study:
Study included: In depth study about the Asset Management Business. Collection of Secondary Data from internal sources. Comparative analysis of the Mutual Fund Industry. Analysis & comparison of S.B.I Fund Management Pvt Ltd vis--vis competitors Studying the distribution channel & developing a strategy for the same.

Proposed Methodology:
The research will mainly involve secondary research. The research mainly was exploratory followed by descriptive research. I will take the help of various sites like valueresearchonline, amfi & mutualfundsindia and software like invest well available at office for data collection followed by analysis & strategy development.

Significance of Study:
The study would provide S.B.I Fund Management Pvt. Ltd with a clear picture of its market standing & the strategy for the distribution channel if revised & implemented will help the company grow in size and geographical reach.

TABLE OF CONTENTS
INTRODUCTION TO MUTUAL FUNDS 1.1 Definition 1.2 History of Mutual Fund 1.3 Indian Mutual Fund Industry 1.4 Mutual Fund Operational Flow Chart 1.5 Organization of Mutual Fund 1.6 Types of Funds 15 1.7 Benefits of investing in Mutual Fund 1.8 Risk associated with Mutual Fund 21 ABOUT S.B.I.(FMPL) Societe Generale Asset Management Co. 2.1 State Bank of India- largest banks in India 2.2 The joint venture 28 2.3 The structure of the joint venture 2.4 S.B.I(FMPL) specialized investment teams 29 2.5 Products by S.B.I (FMPL) ANALYSIS 3.1 Distribution Channel structure 3.2 Industry Overview 3.3 S.B.I(FMPL) Analysis 3.5 SWOT Analysis 3.6 Porters five forces model STRATEGY 4.1 Aim 4.2 IFA Channel 4.3 National Distributor 4.4 Regional Distributor 4.5 Corporate Channel 4.6 Internal Distributor CRITICAL ISSUES IN MF DISTRIBUTION 5.1 Issues in Distribution 55 55 57 58 58 59 32 34 43 51 53

6 8 9 12 12

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27 27

28

30

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5.2 Issues in product Basket 5.3 Regulatory Changes 5.4 Technology 5.5 Education & Training APPENDIX

61 62 62 63

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Chapter 1 INTRODUCTION TO MUTUAL FUNDS

1.1 Definition 1.2 History of Mutual Fund 1.3 Indian Mutual Fund Industry 1.4 Mutual Fund Operational Flow Chart 1.5 Organization of Mutual Fund 1.6 Types of Funds 1.7 Benefits of investing in Mutual Fund 1.8 Risk associated with Mutual Fund

1.1 Definition of Mutual Fund

A mutual fund is an entity that pools the money of many investors -- its unit-holders -- to invest in different securities and financial instruments. Investments may be in shares, debt securities/ instruments, money market securities/ instruments or a combination of these. These investments are professionally managed on behalf of the unit-holders, and each investor holds a pro-rata share of the portfolio i.e. entitled to any profits when the securities are sold, but subject to any losses in value as well.

According to AMFI India, a Mutual Fund is a trust (under Indian Trust Act 1882) that pools the savings of a number of investors who share a common financial goal. The money thus collected is then invested in instruments such as shares, debentures and other securities/ instruments. The income earned through these investments and the capital appreciations realized are shared by its unit holders in proportion to the number of units owned by them. Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities/ instruments at a relatively low cost. According to SEBI, Mutual fund is a mechanism for pooling the resources by issuing units to the investors and investing funds in securities in accordance with objectives as disclosed in offer document. Investments in securities are spread across a wide cross-section of industries and sectors and thus the risk is reduced. Diversification reduces the risk because all stocks may not move in the same direction in the same proportion at the same time. Mutual fund issues units to the investors in accordance with quantum of money invested by them. Investors of mutual funds are known as unit holders.

The profits or losses are shared by the investors in proportion to their investments. The mutual funds normally come out with a number of schemes with different investment objectives which are launched from time to time. A mutual fund is also required to be registered with Securities and Exchange Board of India (SEBI) which regulates securities markets before it can collect funds from the public. Mutual funds provide an economical way by which an investor of modest means can obtain the same professional advice and diversification of investments as a wealthy individual or institution. A wealthy person can retain an investment adviser to select and manage his or her investments and, by investing in a number of different securities, can achieve diversification of risk. Mutual funds are designed to permit thousands of investors to pool their resources as shareholders in a fund that, in turn, invests in a large number of securities selected by a professional investment adviser. The shareholders of a mutual fund are its owners and are entitled to all of the fund's income and gain from its investments, net of fees and other operating expenses. There are mutual funds designed for many different investment objectives, ranging from maximizing total return to providing the highest level of income consistent with the preservation of investors' principal. To achieve their objectives, funds invest in a wide variety of securities: some funds invest primarily in common stocks; some invest primarily in bonds issued by corporations or the federal government; some invest mainly in obligations of state and local governments; and some, known as money market funds, invest in short-term money market instruments like certificates of deposit, commercial paper and United States Treasury bills. Mutual funds are organized under state laws as corporations or business trusts. However, mutual funds differ from other companies in a number of important respects. First, almost all mutual funds are externally managed; they do not have employees of their own, and all their operations are carried out by third parties such as investment managers, broker-dealers, and banks. Second, virtually all mutual funds continuously offer new shares to the public. Third, mutual funds are required by law to redeem (buy back) their outstanding shares at any time upon a shareholder's request, at a price based on the current value of the fund's assets. Fourth, federal laws impose detailed requirements on the structure and operations of mutual funds

and impose special responsibilities on their independent directors or trustees. The following portions of this document discuss each of these matters.

1.2 Origin of Mutual Funds

Mutual funds are not an American invention. The first was started in the Netherlands in 1822, and the second in Scotland in the 1880's. Originally called investment trusts, the first American one was the New York Stock Trust, established in 1889. Most that followed were begun in Boston in the early 1920's, including the State Street Fund, Massachusetts Investor's Trust (now called MFS), Fidelity, Scudder, Pioneer, and the Putnum Fund. The Wellington Fund, the first balanced fund that included both stocks and bonds, was founded in 1928, and today is part of the giant Vanguard Funds Group. In the 1960's there was a phenomenal rise in aggressive growth funds (with very high risk). Sometimes called "go-go" or "hot-shot" funds, they received the majority of the billions of dollars flowing into mutual funds at that time. In 1968 and 1969, over 100 of these new aggressive growth funds were established. A severe bear market began in the autumn of 1969. People became disillusioned with stocks and mutual funds. "The market's toast. it'll never get back to where it was!" was echoed by panicked investors. Unemployment grew; inflation went crazy, and investors pulled billions back out of the funds. They should have hung in there! Many funds have risen 9,000% since then.

The 1970's saw a new kind of fund innovation: funds with no sales commission called "no load" funds. The largest and most successful no load family of funds is the Vanguard Funds, created by John Bogle in 1977. At the end of the 1920's there were only 10 mutual funds. At the end of the 1960's there were 244. Today there are more than 6,500 unique funds and even thousands more that differ only by their share class (how they are sold, and how their expenses are charged).

1.3 Indian Mutual Fund Industry

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 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), 8

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. 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. 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 October 31, 2003, there were 31 funds, which manage assets of Rs.126726 crores under 386 schemes. The graph indicates the growth of assets over the years.

Growth of assets under management

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One of the reasons for continuous growth of the AUM in the industry is the rising investor faith in the mutual funds & the equity market. This can be seen by the pie charts given earlier which shows the increase in contribution of Mutual Funds to GDP.

1.4 Mutual Fund Operation Flow Chart

The flow chart below describes broadly the working of a mutual fund:

Passed back to

INVESTORS

Pool their money with

RETURNS

FUND MANAGER

Generates SECURITIES/ INSTRUMENTS

Invest in 11

As seen in the chart, Investors buy the units of the Mutual Fund. This fund is then used by the Fund Manager to invest in various securities of the primary and secondary market. These securities give back substantial returns to the Mutual Fund and then this appreciated money is passed back to the investors.

1.5 Organization of a Mutual Fund

A mutual fund comprises four separate entities, namely sponsor, mutual fund trust, AMC and custodian. The sponsor establishes the mutual fund and gets it registered with SEBI. The mutual fund needs to be constituted in the form of a trust and the instrument of the trust should be in the form of a deed registered under the provisions of the Indian Registration Act, 1908. The sponsor is required to contribute at least 40% of the minimum net worth of the asset management company. The board of trustees manages the MF and the sponsor executes the trust deeds in favour of the trustees. It is the job of the MF trustees to see that schemes floated and managed by the AMC appointed by the trustees are in accordance with the trust deed and SEBI guidelines. Unit Holders

Sponsors Trustees The Mutual Fund Custodian SEBI Transfer Agent AMC

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There are many entities involved and the diagram below illustrates the organizational set up of a mutual fund:

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Sponsor Company
(E.g. J.M.Financial and Investment consultancy services Pvt.Ltd.) Establishes the MF as a trust and registers it with SEBI

Board of Trustee Company

Mutual Fund
(E.g. SBI Mutual Fund)

Holds unit holders funds in MF enter into an agreement with SEBI and ensures compliance Float MF Funds Manages the funds as per SEBI guidelines and AMC agreement Provides custodial services,Internally responsible for safe custody mutual fund assets Provides Registrar and transfer services of transactions by unit holders. Provides the network for distribution of the schemes to the investors

AMC
(E.g. Canara Robeco Asset Management Pvt. Ltd.)

Custodian

Registrar

Distributors

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1.6 Type of Funds

There are wide varieties of Mutual Fund schemes that cater to investor needs, whatever the age, financial position, risk tolerance and return expectations. The mutual fund schemes can be classified according to both their investment objective (like income, growth, tax saving) as well as the number of units (if these are unlimited then the fund is an openended one while if there are limited units then the fund is close-ended).

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Classification according to Capitalization

Open-ended schemes

These funds are sold at the NAV based prices, generally calculated on every business day. These schemes have unlimited capitalization, openended schemes do not have a fixed maturity - i.e. there is no cap on the amount you can buy from the fund and the unit capital can keep growing. These funds are not generally listed on any exchange.
Open-ended funds are bringing in a revival of the mutual fund industry owing to increased liquidity, transparency and performance in the new open-ended funds promoted by the private sector and foreign players. Open-ended funds score over close-ended ones on several counts. Some of these are listed below: a) Any time exit option: The issuing company directly takes the responsibility of providing an entry and an exit. This provides ready liquidity to the investors and avoids reliance on transfer deeds, signature verifications and bad deliveries. b) Tax advantage: Though Budget 2000 proposals envisage a tax rate of 20% on dividend distribution made by the Debt funds, the funds continue to remain attractive investment vehicles. In equity plans there is no distribution tax. c) Any time entry option: An open-ended fund allows one to enter the fund at any time and even to invest at regular intervals (a systematic investment plan). Close ended schemes Schemes that have a stipulated maturity period, limited capitalization and the units are listed on the stock exchange are called close-ended schemes. These schemes have historically seen a lot of subscription. This popularity is estimated to be on account of firstly, public sector MFs having floated a lot of

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close-ended income schemes with guaranteed returns and secondly easy liquidity on account of listing on the stock exchanges.

Classification objectives
Objectives

according

to

investment

Mutual funds have specific investment objectives such as growth of capital, safety of principal, current income or tax-exempt income. In general mutual funds fall into three general categories:

Equity Funds invest in shares or equity of companies. Fixed-Income funds invest in government or corporate securities that offer fixed rates of return. Balanced Funds invest in a combination of both stocks and bonds.

I) Growth Funds
These funds seek to provide growth of capital with secondary emphasis on dividend. They invest in shares with a potential for growth and capital appreciation. Because they invest in well-established companies where the company itself and the industry in which it operates are thought to have good long-term growth potential, growth funds provide low current income. Growth funds generally incur higher risks than income funds in an effort to secure more pronounced growth. These funds may invest in a broad range of industries or concentrate on one or more industry sectors. Growth funds are suitable for investors who can afford to assume the risk of potential loss in value of their investment in the hope of achieving substantial and rapid gains.

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They are not suitable for investors who must conserve their principal or who must maximize current income.

ii) Growth and Income Funds

Growth and income funds seek long-term growth of capital as well as current income. The investment strategies used to reach these goals vary among funds. Some invest in a dual portfolio consisting of growth stocks and income stocks, or a combination of growth stocks, stocks paying high dividends, preferred stocks, convertible securities or fixed-income securities such as corporate bonds and money market instruments. Others may invest in growth stocks and earn current income by selling covered call options on their portfolio stocks. Growth and income funds have low to moderate stability of principal and moderate potential for current income and growth. They are suitable for investors who can assume some risk to achieve growth of capital but who also want to maintain a moderate level of current income.

iii) Fixed-Income Funds

The goal of fixed income funds is to provide current income consistent with the preservation of capital. These funds invest in corporate bonds or government-backed mortgage securities that have a fixed rate of return. Within the fixed-income category, funds vary greatly in their stability of principal and in their dividend yields. High-yield funds, which seek to maximize yield by investing in lower-rated bonds of longer maturities, entail less stability of principal than fixed-income funds that invest in higher-rated but lower-yielding securities. Some fixed-income funds seek to minimize risk by investing exclusively in securities whose timely payment of interest and principal is backed by the full faith and credit of the Indian Government. Fixed-income funds are suitable for investors who want to maximize current income and who can assume a degree of capital risk in order to do so. iv) Balanced

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The Balanced fund aims to provide both growth and income. These funds invest in both shares and fixed income securities in the proportion indicated in their offer documents. These are ideal for investors who are looking for a combination of income and moderate growth. v) Money Market Funds/Liquid Funds For the cautious investor, these funds provide a very high stability of principal while seeking a moderate to high current income. They invest in highly liquid, virtually risk-free, short-term debt securities of agencies of the Indian Government, banks and corporations and Treasury Bills. Because of their short-term investments, money market mutual funds are able to keep a virtually constant unit price; only the yield fluctuates. Therefore, they are an attractive alternative to bank accounts. With yields that are generally competitive with - and usually higher than -- yields on bank savings account, they offer several advantages. Money can be withdrawn any time without penalty. Although not insured, money market funds invest only in highly liquid, short-term, top-rated money market instruments. Money market funds are suitable for investors who want high stability of principal and current income with immediate liquidity. vi) Specialty / Sector Funds These funds invest in securities of a specific industry or sector of the economy such as health care, technology, leisure, utilities or precious metals. The funds enable investors to diversify holdings among many companies within an industry, a more conservative approach than investing directly in one particular company. Sector funds offer the opportunity for sharp capital gains in cases where the fund's industry is "in favor" but also entail the risk of capital losses when the industry is out of favor. While sector funds restrict holdings to a particular industry, other specialty funds such as index funds give investors a broadly diversified portfolio and attempt to mirror the performance of various market averages.

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Index funds generally buy shares in all the companies composing the BSE Sensex or NSE Nifty or other broad stock market indices. They are not suitable for investors who must conserve their principal or maximize current income. A summary is presented in the table below of the various funds and their investment objectives.

Scheme Type Objective Money Market Income Growth Balanced Tax Saving Open Close Yes Yes Yes Yes Yes No Yes Yes Yes Yes

Time Horizon Short-Term Medium -Long Term Long Term Long term Long term

Risk Profile Low Low to Medium High Medium to high High

Typical Investment Pattern Equity (%) 0 0 80-100 0-60 80-100 Debt (%) 0-20 80100 0-20 0-40 80100 Money Market Inst./Others (%) 80-100 0-20 0-20 0-20 0-20

1.7 Benefits of Investing In Mutual Funds

Professional Management Mutual Funds provide the services of experienced and skilled professionals, backed by a dedicated investment research team that analyses the performance and prospects of companies and selects suitable investments to achieve the objectives of the scheme. Diversification Mutual Funds invest in a number of companies across a broad crosssection of industries and sectors. This diversification reduces the risk because seldom do all stocks decline at the same time and in the same

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proportion. You achieve this diversification through a Mutual Fund with far less money than you can do on your own. Convenient Administration Investing in a Mutual Fund reduces paperwork and helps you avoid many problems such as bad deliveries, delayed payments and follow up with brokers and companies. Mutual Funds save your time and make investing easy and convenient. Return Potential Over a medium to long-term, Mutual Funds have the potential to provide a higher return as they invest in a diversified basket of selected securities. Low Costs Mutual Funds are a relatively less expensive way to invest compared to directly investing in the capital markets because the benefits of scale in brokerage, custodial and other fees translate into lower costs for investors. Liquidity In open-end schemes, the investor gets the money back promptly at net asset value related prices from the Mutual Fund. In closed-end schemes, the units can be sold on a stock exchange at the prevailing market price or the investor can avail of the facility of direct repurchase at NAV related prices by the Mutual Fund. Transparency One gets regular information on the value of your investment in addition to disclosure on the specific investments made by a particular scheme, the proportion invested in each class of assets and the fund manager's investment strategy and outlook.

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Flexibility Through features such as regular investment plans, regular withdrawal plans and dividend reinvestment plans, you can systematically invest or withdraw funds according to your needs and convenience. Affordability Investors individually may lack sufficient funds to invest in high-grade stocks. A mutual fund because of its large corpus allows even a small investor to take the benefit of its investment strategy. Choice of Schemes: Mutual Funds offer a family of schemes to suit your varying needs over a lifetime. Well Regulated All Mutual Funds are registered with SEBI and they function within the provisions of strict regulations designed to protect the interests of investors. The operations of Mutual Funds are regularly monitored by SEBI.

1.8 Risk Associated With Mutual Funds

There are certainly some benefits to mutual fund investing, but you should also be aware of the drawbacks associated with mutual funds.

Credit Risk The possibility that company or other issuers whose bonds are owned by the fund may fail to pay their debts (including the debt owed to holders of their bonds). Credit risk is less of a factor for bond funds that invest in insured bonds or U.S. Treasury bonds. By contrast, those that invest in

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the bonds of companies with poor credit ratings generally will be subject to higher risk. Interest Rate Risk The risk that the market value of the bonds will go down when interest rates go up. Because of this, you can lose money in any bond fund, including those that invest only in insured bonds or Treasury bonds. Funds that invest in longer-term bonds tend to have higher interest rate risk. Prepayment Risk The chance that a bond will be paid off early. For example, if interest rates fall, a bond issuer may decide to pay off (or "retire") its debt and issue new bonds that pay a lower rate. When this happens, the fund may not be able to reinvest the proceeds in an investment with as high a return or yield. No Insurance Mutual funds, although regulated by the government, are not insured against losses. The Federal Deposit Insurance Corporation (FDIC) only insures against certain losses at banks, credit unions, and savings and loans, not mutual funds. That means that despite the risk-reducing diversification benefits provided by mutual funds, losses can occur, and it is possible (although extremely unlikely) that you could even lose your entire investment. Dilution Although diversification reduces the amount of risk involved in investing in mutual funds, it can also be a disadvantage due to dilution. For example, if a single security held by a mutual fund doubles in value, the mutual fund itself would not double in value because that security is

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only one small part of the fund's holdings. By holding a large number of different investments, mutual funds tend to do neither exceptionally well nor exceptionally poorly. Fees and Expenses Most mutual funds charge management and operating fees that pay for the fund's management expenses (usually around 1.0% to 1.5% per year). In addition, some mutual funds charge high sales commissions, 12b-1 fees, and redemption fees. And some funds buy and trade shares so often that the transaction costs add up significantly. Some of these expenses are charged on an ongoing basis, unlike stock investments, for which a commission is paid only when you buy and sell. Poor Performance Returns on a mutual fund are by no means guaranteed. In fact, on average, around 75% of all mutual funds fail to beat the major market indexes, like the S&P 500, and a growing number of critics now question whether or not professional money managers have better stockpicking capabilities than the average investor. Loss of Control The managers of mutual funds make all of the decisions about which securities to buy and sell and when to do so. This can make it difficult for you when trying to manage your portfolio. For example, the tax consequences of a decision by the manager to buy or sell an asset at a certain time might not be optimal for you. You also should remember that you trust someone else with your money when you invest in a mutual fund. Trading Limitations

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Although mutual funds are highly liquid in general, most mutual funds (called open-ended funds) cannot be bought or sold in the middle of the trading day. You can only buy and sell them at the end of the day, after they've calculated the current value of their holdings. Size Some mutual funds are too big to find enough good investments. This is especially true of funds that focus on small companies, given that there are strict rules about how much of a single company a fund may own. If a mutual fund has $5 billion to invest and is only able to invest an average of $50 million in each, then it needs to find at least 100 such companies to invest in; as a result, the fund might be forced to lower its standards when selecting companies to invest in.

Inefficiency of Cash Reserves Mutual funds usually maintain large cash reserves as protection against a large number of simultaneous withdrawals. Although this provides investors with liquidity, it means that some of the fund's money is invested in cash instead of assets, which tends to lower the investors potential return. Different Types The advantages and disadvantages listed above apply to mutual funds in general. However, there are over 10,000 mutual funds in operation, and these funds vary greatly according to investment objective, size, strategy, and style. Mutual funds are available for virtually every investment strategy (e.g. value, growth), every sector (e.g. biotech, internet), and every country or region of the world. So, even the process of selecting a fund can be tedious.

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Costs despite Negative Returns Investors must pay sales charges, annual fees, and other expenses regardless of how the fund performs. And, depending on the timing of their investment, investors may also have to pay taxes on any capital gains distribution they receive even if the fund went on to perform poorly after they bought shares.

Lack of Control Investors typically cannot ascertain the exact make-up of a fund's portfolio at any given time, nor can they directly influence which securities the fund manager buys and sells or the timing of those trades.

Price Uncertainty With an individual stock, you can obtain real-time (or close to real-time) pricing information with relative ease by checking financial websites or by calling your broker. You can also monitor how a stock's price changes from hour to hour or even second to second. By contrast, with a mutual fund, the price at which you purchase or redeem shares will typically depend on the fund's NAV, which the fund might not calculate until many hours after you've placed your order. In general, mutual funds must calculate their NAV at least once every business day, typically after the major U.S. exchanges close.

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Chapter 2 ABOUT S.B.I Fund Management Pvt. Ltd

2.1 SGAM Investment Engineers with a global presence 2.2 State Bank of India - largest banks in India 2.3 The joint venture 2.4 The structure of the joint venture

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2.5 S.B.I(FMPL) specialized investment teams 2.6 Products by S.B.I Fund Management Pvt. Ltd

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2.1 SGAM Investment Engineers with a global presence

SGAM is the asset management subsidiary of SG Group, with registered capital of 292.8 million. With a range of 900 investment funds and a pool of assets reaching 239 billion, SGAM is the fourth-largest asset management company in the EUR zone. Since 2000, it has been rated AM2+ by Fitch Ratings. Well-established corporate governance SGAM has established scientific corporate governance which is introduced from European and well adapted to Chinese practice as well.With maximum portion of independent directors--4 respected experts specialized in finance, accounting and law from renowned universities or international firms-- in the board of 9, SGAM prevent related-party transactions with its shareholders and achieve perfect balance within the board, monitor the management in terms of compliance with contractual obligations and legal regulations, improve the internal control mechanism and protect interests of unit-holders. Return trust with diligence and professionalism Being grateful to investors trust and support, and holding interests of unit-holders are given superior to that of shareholders as its tenet, Fortune SGAM regards the protection of interests of unit-holders as its utmost priority, and bears in mind its social responsibility and commitment. Holding creating values with professionalism, returning trust with diligence as its core corporate values, SGAM believes that the best way to pay back unit-holders is to keep the asset secured and add value for the investors.. SGAM advocates respect culture in its operation: respect customers demand, offer intimate and hospitable service; respect market principles, seize opportunities and manage asset steadily; respect other fund companies, fairly compete and share Chinas economy growth; respect employees, bond elites staffs and create team work atmosphere Elite team and ambitious goal pursuit Team building, Personal achievement, Growing together, SGAM attracts an elite team consisting of talented local and global professionals .The team is professional, young and ambitious, 63% employees received master or higher degree, average age is 31. Our investment and research team has profound investment experience in both domestic and international capital markets, as well as deep understanding of Chinas capital markets. Through independent and 30

foresighted research, the analysts in-depth studies provide strong support for investment. All fund managers received master or higher degree and had over 8 years working experience in the securities industry. Their professional, diligent and discreet work is the guarantee for their optimized fund performance. With the stable core management team, strong and professional investment and research team, innovative spirit, and intimate cooperation between Chinese and foreign shareholders, the company is endowed with advantages of both internal cohesion and external competitiveness

2.2 State Bank Of India - largest banks in India

State Bank Of India is Largest Bank Of India. All Branch Commenced Operation In 1901 as Alliance Bank Of Simla Limited Lequidated & Taken Over By Imperial Bank Of India In 1923 The Branch Was Reconsituted Into State Bank Of India On 15th July 1955. The bank has a strong nationwide distribution network and a AAA rating by CRISIL, the Indian subsidiary of Standard and Poors. State Bank has an outstanding relationship with public pension institutions and millions of customers accessible through its 1,27,000 plus nationwide branch network. It was one of the first Govt. sector banks to launch networked ATMs and obtain ISO certification. Recently, it was adjudged Best Govt Sector Bank' in a survey conducted by Financial Express - Ernst & Young' for 2005-06. State Bank has a clear strategy to build a leading Indian bank, while creating business alliances with international best-in-class financial institutions, as with SGAM in asset management.

2.3 The joint venture

In March 2007, SGAM and State Bank decided to forge an alliance. The alliance is in the form of a joint venture, with S.B.I Fund Management

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pvt. Ltd . being the joint venture entity. SBI FMPL managed the assets of S.B.I Mutual Fund founded in 1987, which is a well-established institution in the Indian mutual fund market. FMPL managed equity schemes, debt schemes and hybrid schemes. These schemes managed FMPL by have consistently achieved awards; CanFloating Rate won the Gold Award at the ICRA Mutual Fund Award 2007 and CanBalance II won the Best Fund Award at the Lipper Awards India 2007. With experience and skill-sets of SGAM, combined with the distribution network of State Bank, and its strong local presence, S.B.I (FMPL) is set to emerge as a vibrant player that leverages creativity and passion for investing.

2.4 The structure of the joint venture

The company presents itself in a new modern style that expresses the ambition to deliver high quality innovative products and investment solutions. STATE Bank retains 51 per cent of the shares in S.B.I(FMPL) whereas SGAM holds the remaining 49 per cent. The joint venture reflects a true equal balance between partners, as both parties hold equal representation in terms of governance. SGAM is heavily involved in the operational activities and management of the company, ensuring high standards of product quality, risk management and integrity aspiring to best international practices.

2.5 S.B.I Mutual Fund has specialized investment teams

These teams have the expertise required to develop investment solutions that meet the needs of investors. The objective of S.B.I(FMPL) is to build Indias leading asset management companies that will be best-ofthe-class. It will offer innovative products to the investor community in India. S.B.I(FMPL) feels responsible for ensuring that the products meet international standards. These will be infused into S.B.I(FMPL) through

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SGAM global resources in terms of product development, compliance, risk management and fund management. Under the leadership of a new and experienced management team, S.B.I(FMPL) will Introduce SGAM proven active investment style and its quantitative and qualitative investment tools into S.B.I MF Leverage on SGAM knowledge to enrich the S.B.I MF experience in compliance and risk management processes Offer excellent and innovative products, by partnering with selected distributors and by proactively servicing State Bank, which boasts a network of over 2,550 branches.

2.6 Products by S.B.I M F

The existing products continue to be available for investing for the investor community. The product range is an integrated part of SGAMs global investment platform, thereby benefiting from the global qualitative and quantitative investment tools and processes. S.B.I(FMPL) will continue to enhance its product portfolio by offering unique investment solutions to meet varying investor needs. The product range will benefit, to the extent allowed by regulatory authorities, from access to professionally managed international securities, be it in the form of international equities, fixed income, hedge funds or private equity. The following products are offered by S.B.I MF Large cap & Blend Schemes Magnum Multicap fund Magnum Equity fund Magnum Index fund Magnum Multipler plus1993 SBI Bluechip fund Magnum Taxgain fund Sectorial Scheemes Magnum Sector fund Umbrella: Contra fund Magnum Sector fund Umbrella: Emerging Businesses fund Magnum Sector fund Umbrella: IT Fund

33

Magnum Sector fund Umbrella: FMCG Fund Magnum Sector fund Umbrella: Pharma fund Magnum Comma fund Small & Mid Cap Schemes Magnum Global fund Magnum Midcap fund Market Neutral Srtrategs SBI Arbitrage Opportunities fund Hybrid Schemes-Equity Oriented Magnum Balanced fund Magnum NRI Investment fund Flexi Assets Plan Hybrid Schemes-Debt Oriented Magnum Childrens Benefit Plan Magnum Monthly Income Plan Debt Schemes Magnum Income Plus fund Magnum Income fund Magnum Gilt fund MMIP- Floater Magnum Floating rate Plan Magnum NRI Investment Fund Short Term Schemes SBI Premier Liquid fund MICF-Liquid Floater Plan Magnum Instacash fund SBI Short Horizen fund

34

Chapter 3 ANALYSIS
3.1 Distribution Channel structure 3.2 Industry Overview
3.2.1 By Asset Class 3.2.2 By Investor segment 3.2.3 By Zone 3.2.4 By Distribution Channel

3.3 S.B.I (FMPL) Analysis

3.3.1 AJMER Region Analysis 3.3.1.1 By Distribution Channel 3.3.1.2 By Investor Segment 3.3.1.3 By Scheme 3.3.2 All India Analysis 3.3.2.1 By Distribution Channel

35

3.3.2.2 By Investor Segment 3.3.2.3 By Scheme 3.3.2.4 By Zone

3.4 SWOT Analysis 3.5 Porters five forces model

3.1 Distribution Channel Structure

The channel sales structure given in the figure above shows the four categories of distribution channel namely institutional sales, internal distribution, organized distributors & independent financial advisors. Institutional Sales. The institutional sales channel includes the business houses colloquially referred as corporates. The Corporates today like to park in their money in the Liquid schemes offered by the mutual Funds to maintain high liquidity, higher principal safety & for short term. 36

Internal Distribution. The internal distribution for S.B.I(FMPL) includes the State Bank & its branches. The Internal Distribution channel is applicable only in case of bank sponsored mutual funds. Organized Distributor. The other category of distribution channel is the organized distributors because of their organized distribution channels that cover a lot of geographical area. The organized distributors are divided into Banks other than that for internal distribution, and majorly into National distributor & Regional distributor. Independent Financial Advisors. The last category of distribution channel is referred to as the IFA channel which forms the retail part of the distribution channel. The IFAs offer a wide variety of financial products like insurance, mutual fund schemes and many other products. The IFAs are a key to have a reach for the vast geographical expanse of India. The IFAs also form associations for a better bargaining power with the AMC. Some of the associations are MF Chain, Value Chain & Prudent group. Direct Channel. Any sales apart from all these channels, which directly come to the AMC & the AMC does not incur any charges, forms a part of this channel.

37

3.2 Industry Overview

The year 1993 was a remarkable turning point in the Indian Mutual Fund industry. The stock investment scenario till then was restricted to UTI (Unit Trust of India) and public sector. This year marked the entry of private sector mutual funds, giving the Indian investors a wider choice of selecting mutual funds. From then on, the graph of mutual fund players has been on the rise with many foreign mutual funds also setting up funds in India. The industry has also witnessed several mergers and acquisitions proving it advantageous to the Indian investors. The industry has around 29 players of all sizes. The graph below shows the major players & assets managed by them.

38

Source: MFI

Source: MFI

39

There are 5 players in the industry which have AUM of more than 40k Crs which cover around 51 % of the market share. There are 12 players having AUM in the range of 10k - 40k Crs which cover close to 39 % of the market share. In the range of 1k 10k Crs there are 11 players having 10% of the market pie. These charts reflect the status as of April 08. The AUM of the Industry was close to 560k Crs.

40

3.2.1 By Asset Class

41

Source: CAMS, Karvy

The total size of AUM in the industry is close to 568,169.78 crores as on May end 2008. Around 35 % of the AUM is invested in debt while 32 % in equity schemes followed by 21 % in liquid schemes. This shows that the major part of the AUM is in Debt instruments. The AUM is further divided into Fixed maturity plans (FMP), Monthly income plans (MIP), Floating rate schemes & Liquid schemes which contributes the major portion of the AUM close to 58 %. The equity instruments can be classified as Diversified, Tax Planning, Index and sectoral schemes. The diversified category forms a large proportion of the AUM in equity around 74 %.

42

3.2.2 By Investor Segment

Source: Karvy

The above charts give an analysis of the AUM fund category wise and zone wise. The charts reflect the industry statistics as on 31st May, 2008. The fund category wise distribution clearly shows that the maximum part of the AUM is contributed followed by the retail clients. The HNI clients contribute around 17 % to the total AUM of the industry. While zone wise, the west zone leads the other zones by a great amount. Among the other zones, the north zone contributes 17% while the south zone contributes 11%.

43

3.2.3 By Zone

Source: CAMS

44

It is evident from the graph that the top 10 cities contribute around 90% of the assets while the next 25 cities contribute 8% and the next 45 cities contribute only 2 % of the total assets under management in the industry. Thus it can be concluded that the geographical penetration or the geographical reach of the mutual fund products is limited and they have a great potential. Lets look at the market share by distribution channel.

3.2.4 By Distribution Channel:

The total assets under management in the industry crossed 6 lakh crores during the year 2007-08 and were closed to 4.5 lakh crores during last year. The market share by distribution channel is explained in the above chart. The major part is contributed by Banks, followed by national & regional distributors. But as we see the market share of the assets managed under equity the IFA channel leads by a majority because of the vast expanse & the geographical reach. The contradiction in the charts above & below can be attributed to the high component of Debt investments that flow in from bank & National Distributors.

45

Source: CAMS, Fidelity

The chart above clearly indicates the importance of the IFA channel in the distribution of Mutual Fund products as far as the assets under equity are concerned. The graph shows a dip in the assets contributed by Banks towards the equity schemes. One of the important note to be made is the increase in the AUM under equity assets increased from 17bn US$ to 30bn US$. For higher market penetration with lesser resources, the role of organised distributors becomes very important. The organised distributors include Global Distributors, Indian Banks, National distributors & Regional Distributors.

Source: CAMS, Karvy

46

Among the organised distributors, national distributors are the major contributors at 52%. The global distributors are also trying to catch up fast and currently contribute 20%. While the Indian Banks & regional distributors each contribute 14%.

Source: CAMS, Karvy

The organised distributors contribute around 60% in Equity funds, 62% in cash funds & 56% in Debt Funds. The remaining in each category of fund is contributed by IFAs, corporates, corporate distributors, local unorganized distributors.

47

Source: CAMS, Karvy

48

3.3 Company analysis S.B.I Fund Management Pvt. Ltd 3.3.1 Ajmer Region - Analysis.
3.3.1.1 By Distribution channel The Ajmer Region alone contributes close to 1960 Crs to the corpus of S.B.I(FMPL) The Break up according to distribution channel is as shown below.

6%

10% 10%

DIRECT INVESTMENT BANK REGIONAL & NATIONAL DISTRIBUTOR IFA

74%

Source: CAMS, Karvy

3.3.1.2 By Investor Segment In the Ajmer region, an analysis according to the fund category reveals that Corporates amount for 89 % while trusts contribute around 8 %. The HNI segment and the retail segment each contribute 2% and 1% each.

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3%

4% 21%

TRUST CORPORATE HNI RETAIL

72%

Source: CAMS, Karvy

3.3.1.3 By Scheme

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0.45% 7.15% 11.40% OTHER DEBT FUNDS LIQUID FMP EQUITY 81%

The Ajmer region maily accounts for Cash, Bond, FMP and equity growth. The Cash schemes for half of the corpus contributed to the Ajmer region. The Bond Schemes contribute 40% while FMP schemes contribute 7% of the AUM. The Equity growth schemes contribute 3%.

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3.3.2 All India -Analysis

3.3.2.1 By Distribution Channel

Source: CAMS, Karvy

The total size of assets managed by Canara Robeco is close to 4k crs. For simplicity, the data of top 100 investors, which account for 90% of the corpus, is chosen for analysis. 41% of the total corpus is contributed by the direct channel. The national distributor accounts for 28% while regional distributors account for 17% of the AUM. The banks contribute close 13%. 3.3.2.2 By Investor Segment

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Source: CAMS, Karvy

According to investor segment, corporates contribute the major portion around to 88%. The retail category contributes 3% while the HNI segment contributes 4%. The trust category contributes 5% to the total AUM. 3.3.2.3 By Scheme

Source: CAMS, Karvy

According to the scheme wise portfolio, 49% of the AUM is invested in Bonds while 36% is invested in cash. The FMP scheme carries 10% of the AUM and 5% of the is under the equity schemes.

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3.3.2.4 By Zone

Source: CAMS, Karvy

Western region contributes around 57% to the AUM, followed by south which contributes 27%. The contribution of the north zone & the east zone is 9% & 7% respectively.

Source: CAMS, Karvy

Mumbai leads the list of cities in its contribution to the AUM. Mumbai alone contributes 55% of the corpus. Chennai & New Delhi each contribute 14% & 9%. Kolkata & Bangalore each contribute 7% while the rest of the cities contribute 8% to the corpus.

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The graph shown above is a graphical representation of the asset mobilisation. The y axis represents percentage of the assets mobilised. The mobilisation by the banks, the regional & the national distributors was the highest in the year 2006, while the mobilisation from the direct & the IFA channel was the highest in the year 2007. The mobilisation from all the channels has dropped over the years except from the IFA channel. Some of the major distributors in the Bank channel are as follows Canara Bank Kotak Mahindra Bank HDFC Bank of Saurashtra BNP Paribas The major ones in the National Distributor Channel are Stratcap

55

 Bajaj Capital PLC Apollo Sindhori Prebon Yamane Anand Rathi Securities Religare Bluechip DSP Merrill Lynch Among the regional Distributors, Russell Credit Shivranjani securities Visaria securities Poddar Financial services S.J. Broking & Suvridhi capital markets. The important point that should be bought to notice is that although the AUM has increased over the years, the asset mobilisation has not increased i.e. the increase in the AUM of the AMC is less than the increase in the AUM of the industry.

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3.4 SWOT Analysis

Strengths One of oldest Mutual Fund after UTI. Good return in Gilt & Income Scheme Working towards fulfilling motto SGAM is considered as the one of the biggest brands among the global asset management companies & the Joint Venture would enhance the Brand image. Invest in businesses with sustainable competitive advantages Growing intermediaries network Long history in Managing money Large network of State Bank branches.

Weakness Visibility is the main issue of concern Perceived as a government run Company , therefore perceived as poor quality service Because of lost focus in the past, distributors will take some time to cope up. Pressure to work within the scope of Regulatory bodies Opportunities Create a high brand recall A change in Mindset Build upon perceived value of SGAM, a global Huge market to tap Steps should be taken to inverse the Proportion of RBI SEBI

asset management leader.

People investing in Banks to Mutual Funds.

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Higher degree of necessity to educate Investors Consolidation / Takeover Need of the Hour High operating margins Improving market share Earnings momentum superior to peer group High ROCE and RONW Approach government affiliated & run corporate Involvement of Top Management Promotional activities to be enhanced Adoption of Technology in the Daily Working & Greater support to Distributors Increasing Investor Education & Awareness

and institutions

for handling Customer Grievances Threats Risks can be divided into two parts o Market Risks o Credit Risks Governed largely by SEBI which at times is harsh with respect to tax policy Indirectly the political scenario of the country also influences and affects the returns by a mutual fund. Poor Quality of Servicing adds on to the threat faced by S.B.I(FMPL) Asset Management Company.

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3.5 Porters five forces model

Threat of Potential Entrant Threat of Buyers Threat of Suppliers Inter firm Rivalry Threat of Substitutes Various Mutual Funds across Nations. E.g. AIG, Fidelity, Prudential, Chase, Vintage Mutual Corporations Having Large Financial Power

Threat of Potential Entrant

Fund, Strong Heritage etc.

Threat of Buyers Depends largely on the economic condition of the Investor apart from their perceived value and notions about Mutual Funds Also depends on the investment objectives , returns & safety of the investment to the Investor Threat of Suppliers When Equity Markets face recession No further securities and Government Bonds are issued by the government Economic condition of the economy Inter firm Rivalry 59

 UTI till lately was considered the main rival Others like Birla Sunlife , HDFC and standard chartered too pose a threat to this Mutual Fund Also competition from other MNCs provide for competition and threat to SBI (FMPL) Threat of Substitutes Fixed deposit , bonds, Shares are a few of the list Various Kinds of Securities , Chit Fund and other schemes add on to the list

Chapter 4 STRATEGY
4.1Aim 4.2IFA Channel 4.3 National Distributor 4.4 Regional Distributor 4.5 Corporate Channel 4.6 Internal Distributor

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4.1 Aim
To grow in size i.e. in terms of AUM as well as in terms of geographical expansion. Some of the key observations that need to be kept in mind, while framing the strategy are: 1. The market share is currently less than a percent of the entire industry 2. Currently only 30% of the AUM is in equity instruments, the remaining 70% in Debt. 3. To align systems in place after the JV between State Bank & Societe Generale Asset achieved. To achieve the goals, the team at S.B.I(FMPL) has been divided into four groups handling the different distribution channels namely the National Distributors, the regional distributors, the IFA channel & the institutional sales. Each team consists of a mix of an experienced personnel & an enthusiast. The no of employees in each group depends on the total no of distributors to be covered. Every channel has clients with different aims & goals and hence the strategy to sell the products should also be different. management company. 4. To define regular goals and tracking to ensure that the goals are

4.2 IFA Channel

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The IFA channel accounts for around 44% of the equity assets in the industry. The IFA channel is the only channel that covers vast geographical expanse requires the most effort in terms of time & money. This channel requires visits in personnel by the relationship managers. Regular meetings & updates about the product, market round ups need to be mailed to the IFAs. Arranging meets with the Fund manager or IFA meets are a part of the activities carried out by the relationship managers of the company. The first step by the channel managers is to prepare a database of the Independent Financial advisors. The next step is Client profiling. The relationship managers need to profile each IFA and report in the format given below.

S.B.I (FMPL) AMC (Client Profile) Date: Name: Company: Nature of Business: Address: Designation: Phone: Mobile: Client Base:

Email Id: Investment Avenue: Asset Under management (AUM):

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Clients Meeting Details & Background:

Problem Areas:

Plan Of Action: Target (Per month or per annum): For the better following of the distributors, the IFAs have been classified into three different categories on the basis of their AUM. The interaction is the key to get business from the IFA channel. This can be achieved by undertaking the following activities. 1. The IFAs need to be kept updated with the products offered by S.B.I(FMPL) through Product notes or research reports. 2. Arranging IFA meets or meets with the fund managers to improve interaction. 3. Freebies for the IFAs such as umbrellas, Notepads, etc. 4. Arranging contests & awarding the IFAs for their performance.

4.3 National Distributors

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The national distributors are distributors with a very wide base of branches for distribution. The organized distributors include national distributors & regional distributors. The national distributors include corporate distributors, Indian banks & global banks. The organized distribution channel is very important as it contributes close to 60% and major portion of the organized distributors is constituted by national distributors. The distribution through national distributors starts means of tie-ups. The process of tie-up includes Fund manager evaluations, reports, designing & signing of the service level agreements by both the parties. After the designing of the agreement, the agreements are passed by the legal department and the Registrar & transfer agents. When the agreement is passed by all the departments, it is signed by both the parties. At S.B.I (FMPL), we i.e. the Asst. Managers & I had designed a system to track the tie-up process which was known as the Request for proposal. The request for proposal cannot be described as it is confidential. The request for proposal is a system which tracks the stage at which the agreement is, the person concerned for the approval by a particular department. It also keeps in account the date of initiation of the process, the expected deadline dates for the different departments & the deadline for the completion of the agreement. The system also keeps a track of the problem coming in the way of the process & the plan of action. The system can be accessed only by the concerned people & track the status of tie-ups. The management also takes up activities like meets with the Fund managers, cricket matches. Regular updates with the product notes, industry updates and research reports.

4.4 Regional Distributors

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The regional distributors are distributors of financial products which are present only in selected geographies but they may have expertise in distribution over other distributors. In some cases, a group of IFAs come together & form a consortium to have better bargaining power with the AMCs. Some examples of such consortiums are the MF Chain, Value chain, Prudent group. For the regional distributors, the process starts by meeting the distributor maintaining the meeting details. After this, regularly keeping them updated with the product notes, research reports & market updates. Arranging Fund manager meets with the regional distributors & discussion on future strategy & portfolio selection. Some contests such as super scorer are also introduced to introduce competition among the distributors.

4.5 Corporate Channel

This channel is perhaps one of the biggest contributors to the Debt schemes. This channel can also be referred to as the institutional sales channel. The assets flow in through the treasury departments of the corporates. The meeting with the fund manager forms an important part of following the corporate clients. Golf meets for the top management are quite effective for this channel. Product notes & performance reports need to be sent regularly. Good after sales service is the only key to good client base.

4.6 Internal Distributor

65

The internal distributor for S.B.I Fund Management Pvt. Ltd. AMC is State Bank. The branches need to be regularly visited & informed on the products. Product notes, research reports, Performance reports need to mailed across regularly. Apart from the fund manager meets, S.B.I (FMPL) also organizes training programmes. The training programmes on the AMFI advisors module which is essential for all the distributors. Such knowledge sharing sessions add respect to the Brand of the company.

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Chapter 5 Critical Issues in MF Distribution

5.1 Issues in Distribution 5.2 Issues in product Basket 5.3 Regulatory Changes 5.4 Technology 5.5 Education & Training

67

There are some critical issues that need to be addressed to realize the full potential of the mutual fund industry. The issues arise in the following areas Issues in Distribution Issues in product Basket Regulatory Changes Technology Education & Training

5.1 Issues in Distribution

Mutual Funds are Difficult to comprehend o Historical Perception of the industry is a mixed bag o There is no picture in an investors mind on what is he expecting from the product Difficult to buy o Not enough distribution, especially in smaller cities. o Mass Distribution is difficult as product margin is very slim Possible Solutions Industry must get together to publicize the good long term returns given by mutual funds Bundling with other financial products o Not enough distribution, especially in smaller cities. o Insurance wrapped Allow lock-ins and guaranteed structures

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o Will enable MFs to upfront multi-year fee for distributors

5.2 Issues in Product Basket

Very limited baskets of products are feasible under current Regulations Plain vanilla investments in the equity & debt represent current product range There is a serious lack of differentiation in new products coming to the market Globally, there is a trend of investors moving towards alternate asset classes Real estate (REITS); PE, long/short, hedge funds, other derivative structures, wrap products, capital guaranteed structures, offshore products, commodities, currencies Provident & Retirement funds are the biggest source of MF industry corpus globally Changes in the existing regulations required to allow/encourage retirement funds into the industry

5.3 Regulatory Changes

Regulations to facilitate retirement, pension money into existing mutual funds choice to salary earner on how his retirement money should be invested Distributor Regulation Regulations to enhance product Basket Allowing alternate asset classes Real Estate (REITs), PE, hedge funds, other derivative structures, wrap products, capital guaranteed structures, offshore products, commodities, currencies Allowing more flexibility in the existing products lock-ins, capital guarantees, derivative usage & changes to facilitate

69

bundling of products with insurance/bank accounts/credit cards Consolidation of investment regulations into one to avoid fragmentation of countrys investment.

5.4 Low Penetration: Technology

MF Industry has the potential to be larger than the banking industry Banking industry has presence in more than 600 towns across the country with over 70,000 branches and 200 Mn customers. Industry needs to think towards issues like Closer integration with the banking industry for movement of funds Central clearing house for subscription / redemption across fund houses Paperless transactions and online transactions

5.5 Low Penetration: Education and Training

Education, training & retention of industry personnel Limited availability of trained and experienced personnel No training infrastructure for industry professionals Fund managers moving to FIIs and Hedge Funds Rising cost of experienced resource-retention is a challenge

Lack of investor Education and Awareness Investors need to be educated about the benefits of mutual funds Investors need to be told about the track record of the industry

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The awareness has to be spread beyond the first 10-15 cities into smaller towns

Even in big cities many have heard of mutual funds but are still not aware of product benefits or have confidence in the product

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APPENDIX
1. Glossary

72

Appendix: Glossary
A Administrative operational expense Charge for maintaining your mutual fund account. Advisor (Fund Manager) Person or company responsible for making mutual fund investments. Organization employed by a mutual fund to give professional advice on the fund's investments and asset management practices. Also known as investment advisor. Appreciation An increase in a fund's value. Ask Price Also known as the offering price, the ask price is the amount at which a mutual fund's shares can be purchased. To calculate the ask price, add a fund's current net asset value per share to its sales charge, if any. Asset Allocation Fund A fund that invests in a variety of asset classes, including domestic and foreign stocks and bonds, money market instruments, precious metals, and real estate. Some asset allocation funds maintain a relatively fixed allocation between asset classes, while others actively alter the mix as market conditions change. Asset-Backed Security

73

A debt instrument collateralized by credit card receivables, auto loans, or other assets and securitized by a bank or other financial institution. Automatic Reinvestment A shareholder service that authorizes dividend and capital gain distributions to automatically purchase more fund shares. Taxes still must be paid on the amount reinvested even though no funds are received directly by the investor. Automatic Withdrawal A shareholder service that entitles an investor to fixed payments, every month or quarter. The payment comes from the dividends, income and/or realized capital gains on securities held by the fund. This service is often chosen by retirees who want to receive a regular income supplement. Average Annual Total Return A standard measurement of fund performance that includes dividends, gains, and changes in share price. Average Life The weighted average maturity date of a portfolio of bonds. B Back End Load One of three possible sales charge schedules imposed by funds that charge fees. A back end load, or "deferred sales charge," is a fee charged when fund's shares are sold. The amount of the fee usually varies depending on how long the investment is held-generally the longer the time period, the smaller the fee. Funds sold under several sales charge options usually refer to the shares sold with a back end load as class B shares.

74

Balanced Fund A fund with an investment objective of both long-term growth and income, through investment in both stocks and bonds. Typically, the stock/bond ratio ranges around 60%/40%. This broader diversification across asset classes tends to further reduce risk. Balanced Target Maturity Funds A fund that invests to provide a guaranteed return of investment at maturity (targeted periods). In order to achieve its investment objective, a balanced target maturity fund invests a portion of its assets in zero coupon U.S. Treasury securities while the remainder is invested in stocks that the manager believes will provide long-term growth of capital and income. Basis Point (Bp) The smallest measure used in quoting yields on fixed income securities. One basis point equals one percent of one percent, or 0.01%. Benchmark Index Indicators used to provide a point of reference for evaluating a fund's performance. The most common benchmark for equityoriented funds is the S&P 500 Index. For fixed-income funds it is the Lehman Brothers Aggregate Bond Index. Beta A measure of a fund's risk, or volatility, compared to the market which is represented as 1.0. A fund with a beta of 1.20 is 20% more volatile than the market, while a fund with a beta of 0.80 would be 20% less volatile than the market.

75

Bid Price Also known as the "sell" price, the bid price is the price at which a fund's shares are bought back by the fund. The bid price of a fund share is usually its net asset value. Bond Fund A fund that invests primarily in bonds, whether they are issued by corporations, municipalities, or the U.S. government and related agencies. Bond funds generally emphasize income over growth, and can generate either taxable or tax-free income. C Call Risk The possibility that bonds will be re-paid (or "called") prior to maturity. This possibility increases during periods of falling interest rates. Capital Appreciation The profit made on an investment, measured by the increase in a fund share's value from the time of purchase to the time of sale. Capital Appreciation Funds A fund that invests primarily in common stocks the manager believes will provide maximum capital appreciation. Capital appreciation funds often resort to aggressive investment techniques, such as rapid portfolio turnover, leveraging, and investing in unregistered securities in order to achieve their objectives. Capital Gain Distributions

76

A distribution to shareholders of profits realized from the sale of securities in a fund's portfolio. Capital gain distributions are usually paid yearly, and are currently taxable at a rate up to 28%. Capital Growth Also called capital appreciation, capital growth is an investment objective of many stock funds. Capital growth is achieved when the market values of a fund's holdings increase, causing the fund's net asset value per share to increase. Closed-End Fund A fund that offers a limited number of shares. The shares of closed-end funds, which are typically listed on one of the major stock exchanges, are bought and sold through brokers. The price of the shares is determined by the pressures of supply and demand rather than by the value of underlying assets. Commercial Paper Debt instruments that are issued by established corporations to meet short term financing needs. Such instruments are unsecured and have maturities ranging from 2 to 270 days. Commercial paper is rated by Standard & Poor's and Moody's Investor Service. Commission A fee imposed when funds are bought or sold to compensate the broker for his or her role in the transaction. Common Stock Fund A fund that invests primarily in common stocks. The investment objectives of common stock funds may vary greatly. Compounding 77

Interest earned on interest previously earned and reinvested. For example, if a security paid a fixed interest rate of 10% annually and an investor invested $500, by the end of the first year the investor would have earned $50 in interest. If that interest was reinvested, the investor would enter the second year with $550 invested. At the end of the second year, the investor would have earned $55 in interest -- earning an extra $5 in interest thanks to the reinvestment of the first year's interest. Convertible Security Corporate securities (usually preferred shares or stock or bonds) that are exchangeable for a set number of another form of security (usually common stock) at a pre-stated price.

Convertible Securities Funds A fund that invests primarily in convertible bonds and/or convertible preferred stocks. Corporate Bond Funds A fund that invests primarily in corporate bonds. In general, corporate bond funds seek income over capital growth. Credit Rating A measure of a bond issuer's creditworthiness as rated by an independent agency, such as Standard & Poor's or Moody's Investor Services. Ratings are set as a reflection of the perceived financial stability of the issuer, from AAA to D. Bonds rated Baa or higher by Moody's, or BBB or higher by S&P, are considered "investment grade." Conservative investors tend to select funds composed of all AAA rated bonds, or "investment grade" bonds. More aggressive investors, looking for high yields, are more interested in funds that invest in lower rated bonds. 78

Moody's Aaa Aa A Baa Ba B Caa Ca C

Standard & Poor's AAA AA A BBB BB B CCC CC C DDD DD D

Credit Risk The possibility that a bond issuer will default, failing to repay principal or interest as promised. "Credit risk" is also known as "default risk." Currency Risk The potential for price fluctuations in the dollar value of international stocks due to changing currency exchange rates. Current Yield Annual interest or dividend payments expressed as a percentage of a bond's current price. Custodian The organization (usually a bank) that keeps custody of securities and other assets of a fund. D 79

Depreciation A decline in an investment's value. Derivative A financial security whose value is based on, or "derived" from, a traditional security, asset, or market index. Distribution The payment of dividends and capital gains to shareholders Distributor The organization arranging for the sale of fund shares either directly to the public or through intermediaries, such as financial advisers. Diversification The practice of spreading investments among different securities to reduce risk. Diversification works best when the returns of the securities are varied, so that losses incurred by securities falling in price are offset by gains of those rising in price. By nature, mutual funds are a diversified investment. Dividend Short-term profits, stock dividends or interest income which funds distribute to shareholders. E Equity Income Funds A fund that seeks to provide relatively high current income and growth of income by investing a large portion of its assets in stocks. 80

Ex-Dividend Date The date on which a fund's net asset value will fall by an amount equal to a dividend or capital gains distribution. The ex-dividend date is usually the business day immediately following the record date. Expense Ratio A fund's operating expenses, expressed as a percentage of its average net assets. Funds with lower expense ratios are able to distribute a higher percentage of gross income returns to shareholders. Expense A fund's cost of doing business. All of a fund's expenses are disclosed in the prospectus as a percentage of assets.

F Fixed Income Security A security that pays a fixed rate of return. This term is usually used in reference to government, corporate or municipal bonds, which pay a fixed rate of interest until the bonds mature, and to preferred stock, which pay a fixed dividend. Fixed income securities offer the guarantee of a fixed return, but do not offer an investor much, if any, potential for growth. Front-End Load One of three possible sales charge schedules imposed by funds that charge fees. A front end load, or "upfront charge" is a fee charged on the initial purchase of fund shares, and can range

81

from 3% to 8% of the purchase amount. Funds sold under several sales charge options usually refer to the shares sold with a front end load as "Class A shares." Fully Invested The investment of nearly all available assets in securities other than short-term securities (such as savings and money market accounts). When a fund is said to be "fully invested," it usually implies that the fund's manager is confident that the securities markets will be improving. Fund of Funds A fund that invests only in the shares of other open-end funds. Fund of funds were popular during the 1960s but have subsequently fallen out of favor with most investors. G Growth An investment objective of many stock funds. Current income, if considered at all, is a secondary concern for these funds. Capital growth is achieved when the market value of a fund's holdings increases, causing the fund's net asset value per share to increase. Growth Fund A fund that invests primarily in the stocks of companies whose long-term earnings are expected to grow significantly faster than the earnings of the market in general (as represented by the S&P 500 Index). In general, growth funds seek to provide capital gains, rather than dividend income. Growth and Income Fund

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A fund that seeks to provide both growth of capital and a stream of income. This is done by investing primarily in the common stock of companies that have had not only increasing share value, but also a solid record of paying dividends. Growth Index Fund A fund that invests primarily in growth stocks included in one of the major unmanaged stock indices. Growth index funds generally seek to match or exceed the investment performance of the targeted index. H Hedge Fund A mutual fund that uses futures to offset investment risk. For example, a fund manager concerned about declining stock prices might hedge his or her holdings by buying a put option of some stocks. Put options, call options and selling short are widely used hedging tools for stock fund managers. Hedging is also used extensively in international funds that attempt to minimize currency risks. The fund's prospectus discloses whether or not a fund engages in hedging. High Current Yield Fund A fund that seeks to provide a relatively high current yield. High current yield funds tend to invest primarily in lower grade fixed income securities without any quality or maturity restrictions. High-Yield Bond Fund A fund that invests primarily in high yield bonds, also referred to as junk bonds. High yield bond funds generally seek high returns and tend to be one of the riskier bond fund investments.

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I Income 1) Payments of dividends, interest, and/or short term capital gains earned by securities held by a fund. Income dividends are paid after deducting operating expenses. 2) An investment objective of many fixed income funds. Capital appreciation is not a consideration for these funds. Income Fund A fund that invests primarily in fixed income securities and/or high-yielding stocks. In general, income funds seek to provide current income rather than growth of capital. Index Indicators used to provide a point of reference for evaluating a fund's performance. The most common indices for stock funds are the Dow Jones Industrial Average and the S&P 500 Index. For fixed-income funds it is the Lehman Brothers Aggregate Bond Index.

Index Fund A fund that invests in a collection of securities intended to match that of a broad-based index (NOTE: It is not possible for investors to actually invest in the actual index, such as the S&P 500). In general, index funds seek the same or a slightly better return that the index they mirror. Index funds tend to charge low administrative expenses. Investment Company

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An investment company invests the pooled funds of investors in securities appropriate for its stated investment objectives. For a fee, the investment company provides more diversification, liquidity, and professional management service than is normally available to individual investors. Mutual funds, known as open-end investment companies, have portfolios that can grow or be reduced, based upon market conditions and investor investment/redemption patterns. Hence the name: they have limitless numbers of shares outstanding. Closed-end funds, also called unit investment trusts, have a fixed portfolio, and a pre-set number of shares outstanding. L Ladder A fixed income investment strategy that seeks to reduce interest rate risk by investing in fixed income securities with a wide variety of maturities. Though this strategy assures continuous cash flow, there may be some sacrifice of total return, since shorter-term bonds tend to have lower yields than longer-term bonds. Large-Caps Stocks of companies with market capitalizations of more than $1 billion. Large-caps tend to be well established companies, so that their stocks entail less risk than smaller-caps, but which also offer less potential for dramatic growth. Liquidity The ease with which an investment can be converted into cash. Shares in a fund are generally considered highly liquid investments because they can be sold on any business day for

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their then current value (which may be more or less than an investor's original cost). Load A sales charge assessed by certain mutual funds (load funds) to cover selling costs. A front-end load is charged at the time of purchase. A back-end load is charged at the time of sale. M Market Capitalization Also referred to as "market cap." Market capitalization is a measure of a corporation's value, calculated by multiplying the number of outstanding shares of common stock by the current market price per share. Market capitalization is usually grouped into four main categories: large-cap, mid-cap, small-cap, and micro-cap. Market Timing Attempting to time the purchase and sale of securities to coincide with ideal market conditions. Mutual fund investors may switch from stock funds to bond funds to money market funds as the strength of the economy and interest rate directions change. Maturity Date The date on which the principal amount of a bond is to be paid in full. Money Market Fund Money market funds seek to maintain a stable net asset value by investing in the short-term, high-grade securities sold in the money market. These are generally the safest, most stable securities available, including Treasury bills, certificates of 86

deposit, and commercial paper. Money market funds limit the average maturity of their portfolio to 90 days or less. They seek to generate monthly income, and to maintain a stable $1.00 per share net asset value. Some money market funds offer checkwriting privileges. No fees are generally charged to purchase or redeem shares in a money market fund. Several different portfolio types are available: Taxable, taxable government securities, and national or state tax-free. Mutual Fund An open-end investment company that combines the money of thousands of people and invests it in a variety of securities in an effort to achieve a specific objective over time. Mutual funds offer the benefits of portfolio diversification (which provides greater safety and reduced volatility), professional management, and stand ready to buy back its shares at the current net asset value. Every fund's prospectus details information on the fund's objectives, fees, the management company, and more. N Net Asset Value (Nav) The current market worth of a mutual fund's share. A fund's net asset value is calculated daily by taking the funds total assets, securities, cash and any accrued earnings, deducting liabilities, and dividing the remainder by the number of shares outstanding. Net Assets The net worth of a fund. No Load Fund A fund that sells its shares directly to investors without a sales charge. 87

O Objective A fund's investment objective states the financial goals it is aiming for, such as "growth," or "income." Offering Price Also known as the "ask" price, the offering price is the amount at which a mutual fund's shares can be purchased. To calculate the offering price, add a fund's current net asset value per share to its sales charge, if any. Open-End Fund (Also known as "mutual fund.") An investment company that pools money from shareholders and invests in a variety of securities, including stocks, bonds, and money market instruments. They offer growth, income, or both, and the opportunity to invest in everything from a country or industry to the movements of the markets themselves. A mutual fund continually sells new shares to investors and redeems those that are tendered by shareholders. Operating Expenses The normal costs a mutual fund incurs in conducting business, such as the expenses associated with maintaining offices, staff, and equipment. There are also expenses related to maintaining the fund's portfolio of securities. These expenses are paid from the fund's assets before any earnings are distributed. P Pooling 88

Pooling is the basic concept behind mutual funds. A fund pools the money of thousands of individual and institutional investors who share common financial goals. The fund uses this pool to buy a diversified portfolio of investments

Portfolio A collection of securities owned by an individual or an institution (like a mutual fund). A fund's portfolio may include a combination of stocks, bonds, and money market securities. Portfolio Manager The individual who is responsible for managing a mutual fund's assets. Portfolio Turnover A measure of the trading activity in the fund's portfolio of investments. In other words, how often securities are bought and sold. R Redeem To cash in shares by selling them back to the mutual fund. Mutual fund shares are redeemable on any business day. Redemption Fee A fee charged by some funds when shares are sold (redeemed). Redemption Price The price at which a mutual fund's shares are redeemed (bought back) by the fund. The value of the shares depends on the market value of the fund's portfolio of securities at the time. This value

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is the same as "net asset value per share." In the newspaper, this amount is shown as the "bid" price. Reinstatement Privilege A shareholder who redeems fund shares, and then changes his or her mind, may have a onetime privilege of reinstating the investment by investing the proceeds of the redemption at net asset value (with no sales charge). There is generally a 30-day time limit for this service. Repurchase Agreement (Repo) A contract under which an investor sells a United States security to a bank or Corporation, and agrees to repurchase the security later at a specified time and price. Purchaser earns interest competitive with money market rates. S Series Funds Funds that are organized with separate portfolios of securities, each with its own investment objective. Settlement Date The date agreed upon by the parties to a transaction for the payment of funds and the delivery of securities. Shareholder An investor. The shareholder is the owner of shares of a mutual fund. Short-Term Fund A fund that invests primarily in securities with maturities of less than one year. Short-term funds include taxable money market 90

funds and tax-exempt money market funds (also known as shortterm municipal bond funds). Signature Guarantee A stamp or seal given by a bank or member of a domestic stock exchange that authenticates a signature. A signature guarantee is typically required by a mutual fund sponsor to conduct certain transactions, such as the change in ownership of an account.

Small-Caps Shorthand for small capitalization stocks, small-caps usually have a market capitalization of $500 million or less. In general, small caps tend to be less established companies that offer more growth potential than larger capitalized companies, but which also entail greater risk. Small Company Growth Fund A fund that seeks aggressive growth of capital by investing primarily in stocks of relatively small companies with the potential for rapid growth. Strip A brokerage house practice of separating a bond into two separate securities: a principal portion (PO) and an interest portion (IO). A variation known by the acronym "STRIPS" (Separate Trading of Registered Interest and Principal of Securities) is a stripped zero-coupon bond that is a direct obligation of the U.S. Treasury. Other strips include Treasuries stripped by brokers, such as TIGERS, and Salomon Brothers' tax-exempt M-CATS.

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Switching The movement of assets from one fund to another. Also know as "exchanging." An investor will switch mutual funds when their investment objectives change or because of market conditions. This is usually done within a family of funds, but can be done between different fund families. There usually is no charge for a certain number of transactions per year, after which a transaction fee may apply. T Tax-Exempt Bond Fund A fund that invests in municipal bonds. While investors do not pay federal income taxes on the income from these funds, they may be subject to state or local taxes.

T-Bill (Treasury Bill) A fixed-income security issued by the U.S. Government. Technology Fund A fund that invests primarily in the stocks of companies engaged in the technology industry. U Underwriter The organization that acts as the distributor of a mutual fund's shares to broker/dealers and investors. Unrealized Gain or Loss Increases or decreases in the prices of securities held by the fund.

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W Withdrawal Plan A program in which shareholders receive payments from their mutual fund investments at regular intervals. Y Yield Current income (interest or dividends) paid by a fund, expressed as a percentage of the investment's price.

Yield Curve A graph depicting yield as it relates to maturity. If short-term rates are lower than long-term rates, it is called a positive yield curve. If short-term rates are higher, it is called a negative, or inverted, yield curve. If there is little difference, it is called a flat yield curve. Yield to Maturity (YTM) The effective annual rate of return earned by a bond if held to maturity. This rate takes into account the amount paid for the bond, the length of time to maturity, and assumes coupon payments can be reinvested at the yield to maturity. Z Zero Coupon Bond Bond issued at a discount which accrues interest that is paid in full at maturity.

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