CRISIL YOUNG THOUGHT LEADER 2008

A DISSERTATION ON
Has the Indian Mutual Fund Industry come of age?
By:
Jubin Pandey
MBA-Finance, II Year
NMIMS
jubin.pandey@gmail.com
Total 10 pages excluding coverpage, table of contents, appendix and reference pages

Authors Profile
Name: Jubin Pandey
Education:
Qualification
MBA

Institute/Organization
NMIMS

Board/ University
NMIMS

Year
2009

%/CGPA
3.46/4.0

B.E
(Electronics)

Vivekanand Education
Societys Institute of
Technology (VESIT)

Mumbai University

2006

66.6

H.S.C.

R.D. National Junior

College

Maharashtra Board

2002

89.3

Maharashtra Board

2000

85.4

S.S.C
St. Stanislaus High School
Cleared CFA-L1 exam in June,2008.

Completed FIMMDA-NSE Certification for Debt Markets in India

Work Experience:
Worked with Avaya Global Connect Ltd. (AGCL) as a Project Engineer from July 06-May 06

Summer Project:
Worked on strategy development, analysis and implementation of a model for Account Activation and
Early Engagement of Customers at Kotak Mahindra Bank Ltd.

Corporate Projects:
Angel Broking Ltd.: Currently preparing an equity research report for investment ideas among minicement plant companies performing initial investment review; macro, business, financial, and industry
research; complete valuation analysis and detailed financial modelling.
Avaya Global Connect Ltd: Detailed competitor analysis and profiling.
Achievements:

Co-authored a paper on PPP model for Infrastructure Growth which won the second prize at
National Insurance Academy at Pune
Co-authored a paper on Impact of Hedge funds on Capital markets in India which won the second
prize at International Management Institute at Delhi.
Was presented the Best Interjector Award and Finalist Award at Vivekanand Memorial Debating
Competition held at IILM, New Delhi.
Awarded first prize in the Parliamentary Debate at T. A. Pai Management Institutes Annual Festival.
Volunteered to teach and serve as a mentor for under-privileged children at the NGO Akanksha.

Executive Summary
This paper, examines the current trends in the Mutual Fund industry relating to its Assets under
Management, Distribution channels and Ownership pattern, to figure out a way for the future of
MF industry in India. The suggestions for a way forward are rooted in the understanding of the
current market conditions and the macro-economic impact on mutual fund industry. With
recession setting in firmly in the developed world and equity markets in India in the turmoil, the
mutual fund industry in India needs to re-assess its current offerings of products as well as the
distribution model that currently exists.
The paper discusses a new concept of developing financial products called life-style wraps
which this paper suggests as a panacea to counter the threat of ULIPs and also to increase retail
penetration of MFs through greater awareness. Also looking at the current trends in the market
the paper evaluates mutual funds as an investment option in Indian context. Issues in corporate
governance practices of MF (mutual fund) industry in India and if further regulatory guidance is
required for Mutual Funds in India, have also been discussed.

Table of Contents
Introduction..........................................................................................................................................................5
Overview of the Indian Mutual Funds Industry ................................................................................................5
Assets Under Management:............................................................................................................................5
Trends in Asset Holding Pattern: ...................................................................................................................5
Sector-wise AUM Distribution Pattern:....................................................................................................5
Open Ended Funds v/s Close-ended Funds: .............................................................................................6
Mutual Fund Ownership in India: ..................................................................................................................6
Distribution of Mutual Funds: ........................................................................................................................6
Mutual Funds as Investment Options in India...................................................................................................7
ULIPs (Unit Linked Insurance Plans) v/s MFs: ............................................................................................8
Lifestyle Wraps (Refer Appendix II for detailed explanation of lifestyle wraps): ......................................9
Mutual Funds- The Way Forward ....................................................................................................................10
Improving Distribution of Mutual Funds: ...................................................................................................10
Direct Channel:.........................................................................................................................................10
PSU Banks:................................................................................................................................................10
Independent Financial Advisors:.............................................................................................................10
Investor Education and Awareness: .............................................................................................................11
Measuring MF performance: ........................................................................................................................11
Looking Long Term:.....................................................................................................................................12
Issues in Regulatory Oversight and Transparency and Disclosure Norms for Mutual Funds: ................12
Appendix I .........................................................................................................................................................14
Appendix II-Lifestyle wraps*...........................................................................................................................18
References and Bibliography............................................................................................................................20

Introduction
Mutual funds are suitable investment for a person who seeks higher return by investing at regular
intervals and at the same time is looking for lower risk. Mutual funds offer the benefits of
professional fund management, economies of size and scale and do a great service to the nation
as they provide liquidity by making sure personal savings reach those sectors which require the
capital and provide high returns. After growing slowly in the initial period of four decades, MF
industry in India has seen significant growth in the past decade. There has been greater investor
awareness of the benefits of investing in mutual funds, entry of private sector and various tax
incentives by the Government. The AUM (Assets under Management) of mutual funds has
grown to Rs. 5.44 trillion in August 2008 from just Rs. 0.47 trillion in1993. This phenomenal
growth has been accompanied by constant vigilance by SEBI which introduced regulations in
1993, revised them in 1996 and has been amending them from time to time. However, concerns
remain about corporate governance practices among MFs in India the under-served market which
is lacking in product as well as distribution depth which are explored here.

Overview of the Indian Mutual Funds Industry

Assets Under Management: Last decade has seen a steep increase in the AUM (assets under
management) of the Mutual Funds in India (Refer Exhibit 1). Today India has 35 asset
management companies offering more than 950 mutual fund schemes and managing assets worth
Rs. 5.44 trillion as of August 2008 which is five and a half times that of August 2002. Even the
decline in equity markets, has not deterred more companies from entering this business. As many
as seven firms plan to offer new mutual funds, braving choppy stock markets, after receiving inprinciple approval from the SEBI. These firms are of course looking at the long term potential
for the mutual fund industry in India and their decisions reinforce the robustness of this industry.
Trends in Asset Holding Pattern:
Sector-wise AUM Distribution Pattern: Private sector mutual funds have grown steadily in the
past decade such that by end of June 2008 a total of 28 such funds were in operation. 12 of these
are Indian funds and the rest are either joint ventures or foreign funds. Out of the total AUM of
Rs. 564,752crore by end of June 2008, UTI accounts for Rs. 50,831crore (9%) and the private
sector accounts for Rs. 461,223crore (81.6%) (Refer Exhibit 1). Compare this to March 2000, the

total AUM was Rs. 113,005crore of which UTI held the lions share (67.74%). Thus, over the last
8 years the asset holding pattern in the Indian MF industry has witnessed a significant churn and
the private sector has emerged as the biggest player. Even in the private sector it is the Indian
companies or predominantly Indian JVs, which account for Rs. 362,116crore of AUM which is
78% of the entire AUM pie for the private sector. In fact the private sector has been the major
generator of new funds.
Open Ended Funds v/s Close-ended Funds: Over the years open-ended funds have emerged as
the preferred choice of the investor. Today nearly Rs. 375,000crore of the total of 544,000crore
are invested in open ended funds (Refer Exhibit 2). Now the industry is seeing growth in the debt
interval funds which are fast replacing Fixed Maturity Plans (FMP) and have captured a
significant AUM share in 2008(Refer Exhibit 2).This is due to their more cost efficient structure
which allow load-free redemptions and subscriptions at fixed interval. Also since same fund
allows fresh investments and redemptions fund houses save the filing fee.
Mutual Fund Ownership in India: The ownership pattern of MF assets reveals that corporate
holding is 51% of asset amount compared to 42% of individuals. But more alarmingly MF
industry is concentrated in the hands of fewer investors. A Finance Ministry's study in 2003
revealed that as many as 27 mutual fund schemes then had just one investor holding anywhere
between 23 and 90 per cent of the corpus. Geographically; the ownership of mutual funds in
rural areas is relatively low with 13.7 per cent of urban households owning mutual funds against
only 3.8 per cent of rural households. Its also been reported that only 3-4% of Indian households
have invested in mutual funds and 42% of these households are located in the Top 8 cities.
Hence, thrust on driving ownership of MF units in rural areas and even tier II and III cities is key
to future growth of the MF industry. Also in the overall hierarchy of investment instruments
mutual funds occupy the lowest position. MF investment as a percentage of household savings is
only 5%. But that was only in 2007. Historically it has been as low as 1-2%.
Distribution of Mutual Funds: Current distribution mix shows independent financial advisors
contribute 44% of the industry equity assets and have increased their share in the equity assets of
MF industry which are the most widely distributed products (Refer Exhibit 3). Independent
financial advisers (IFAs) do not belong to any particular financial institution, and many of them
work out of private offices to serve a local and familiar clientele. Many IFAs in India started out
6

as either agents for the insurance company or as employees of a securities firm. With IFAs
playing a bigger role in connecting investors with fund houses, asset management companies are
sprucing up what have come to be known in their circles as `IFA verticals'. A section of IFAs are
Chartered Financial Planners (CFP) and the quality of business they are able to bring is better
than other intermediaries. Also IFAs are often much focused in their approach, frequently
managing to strike personal ties with clients. Any intermediary selling mutual fund need to
register with AMFI (Association of Mutual Funds in India - the trade body of MF industry).
Banks are the other principal distribution channels for MFs in India. However, most of the
business is brought in by global banks with 20% of total AUM contribution or private Indian
banks which contribute to 14% of total AUM. PSU banks which have extensive branches in the
country have been left largely untapped at just 1.9% of the total AUM pie. There is a strong case
to develop PSU banks as MF distributors. The global banks have lost market share over the
couple of years from 2005 to 2007 while domestic and PSU banks have gained. Another major
distributor is the NBFCs, which operate at either regional or national level. The regional
operators have been helping MFs to expand their base in tier II or III cities and also rural areas.
Some of the leading national distributors, such as Birla Sunlife Distribution Co. Ltd, Bajaj
Capital Ltd, have name recognition equal to that of India's leading domestic banks. With Indian
stock markets booming in 2007, a lot of brokers were attempting to diversify and build large
distribution businesses which come under this category. However, the NBFCs push needs to be
complimented though mutual banking tie-ups with PSU banks to expand MF distribution.

Mutual Funds as Investment Options in India

There are several investment options available to investors including bank deposits, company
deposits, precious metals, immovable property, equities, MFs and more recently ULIPs. Data
suggests that share of deposits in financial savings is highest at 47% and that in shares
debentures and MFs is small at 5% (Refer Exhibit 4).
Bank Deposits, National Savings Certificates and Post Office deposits are the first preference of
investors from data in exhibit 4. However, the returns offered by these instruments after
adjusting for inflation can turn out to be negative. Current deposit rates are 8.75% to 9.75%.
Adjusting for an inflation rate of more than 11% it is still negative return. Gold has been a
7

traditionally important investment for Indians. Though current uncertainty has propped up gold
prices beyond historical highs, over the last 10 years gold has given modest 9-10% returns.
Immovable property has also given good returns, but one needs a substantial amount for
investment, requires maintenance and significant time and effort for defect free title of the
property. Equity investments on the other hand have consistently outperformed other investment
options (Refer Exhibit 5) and investors with a clear long term investment horizon have almost
always made money by investing in equity. These observations lead us to mutual fund as the
next destination of investment vehicle in India. For investors who are willing to take risks for
higher returns and do not have required expertise for investing in equities, MFs are the best
option. Another important factor that further strengthens the argument for MF growth in India is
Favorable Demographics. For a young country like India, with 54% population under the age of
25 and 80% under 45 and the percentage of working population rising rapidly, MFs are the tailor
made investment options. The young age gives the appetite for greater risks and also the need for
higher returns to save for the future. Also various schemes like equity growth schemes, balanced
and tax savings schemes, Gilt Schemes can satisfy the divergent needs of an investor.
ULIPs (Unit Linked Insurance Plans) v/s MFs: This topic deserves special mention as ULIPs
have emerged as a major threat to MFs in attracting retail investors. ULIPs are insurance and
investment product bundled into one. It has over the years become an extremely popular product
through aggressive selling, accounting for 60% of premium collections. It offers capital
appreciation along with small insurance cover and the premiums paid are allocated to purchasing
units of a mutual fund depending on the risk appetite of the investor besides the regular premium
cover. There are certain factors that have led to the rise of ULIPs and their dominance over MFs
at least among retail investors as follows:
Entry fee in MFs is 2-2.5% capped by regulations and on the other hand in ULIPs, the cost
structure is not transparent. Sometimes commissions can go as high as 30% of the first year
premium and continued cuts per premium paid for 3 years. Such high commission structure has
led to agents pushing this product over normal term insurance schemes and MF which offer little.
Moreover IRDA has failed to crack a whip on mis-selling of ULIPs and the regulatory norms for
these products are weak offering more scope for manipulation. In contrast SEBI has been coming
down hard on MFs and their cost structure rationalizing them from time to time and protecting
8

the investors with adequate disclosure norms. This has created an uneven playing field and
ULIPs have a significant two-fold advantage of lax regulations and better distribution.
Lifestyle Wraps (Refer Appendix II for detailed explanation of lifestyle wraps): It is high time
that IRDA should crack down on gross mis-selling of ULIPs and MF should come up with
greater investor awareness programs. A better informed investor could understand a concept like
lifestyle wrap which is a combination of index funds or some other equity fund, government
securities or AAA bonds and a normal insurance policy without the investment part. Here,
capital appreciation can be taken care by mutual funds, capital protection by AAA bonds and
insurance policy for eventualities. Investment wraps offer a superior alternative to ULIPs and
should be used by MF companies to reach out to retail investors.
Impact of the Macro-economy on Mutual Funds
Gross Domestic Savings (GDS) rate as a percentage of GDP has gone up over the last 4 years
and currently stands at 34.8% of GDP(Refer Exhibit 6).Also household savings have gone up
significantly over the past decade from less than 200000 crore in 1993-94 to nearly 1,000,000
crore in 2007-08 (Refer Exhibit 7).However, most of the acceleration in savings rate has been in
private and public corporate sector which has doubled from a combined 5.5% of GDP to 11%.
(Refer Exhibit 6). In fact the household savings rate as a percentage of GDP has declined
marginally in 2005-06 from 24.2% in 2005-06 to 23.8% in 2006-07. Now corporate houses are
more inclined to plough their savings into MFs than household investors as they are savvier
when it comes to their investments than individuals and tax rate on dividends from MFs is lower
than the corporate tax rate levied on income from securities held directly by corporations
businesses. This has led to stupendous rise in AUMs as more and more corporate savings flow
into debt funds like FMPs and the money market funds of the mutual funds. If we see the
ownership pattern of MF shares in India it seems to validate the above argument. Just above 50%
of MF asset amount is held by corporate and institutional investors as compared to 10% in the
US and only 49% is held by individuals (Refer Exhibit 8). With slowdown imminent corporate
savings are likely to decline and mutual funds have to return to the basics of channeling the
savings of retail investors to much needed sectors. As a result increasing retail penetration would
be the key to survival and growth for MFs in the next few years.

Mutual Funds- The Way Forward

Improving Distribution of Mutual Funds: A lot needs to be done to enhance the reach of MFs to
cover many more households. Here three suggestions are mooted to enhance distribution of MFs
in India:
Direct Channel: Today the contribution of direct channel to investments in MFs is low and it is
more or less a distributor driven model. MFs need to move towards direct investment model as
entry load on direct investments is nil leading to lesser costs for investors.. For this to happen
MFs offer platforms for direct buying of the MF scheme units from its website. One possibility is
creating an online supermarket of funds where people can sell and buy units of MFs like shares
on stock exchanges. AMFI has formed a committee to look into this possibility. This would also
be the fastest way to cut through the army of two million insurance agents that sell ULIP
products and compete with them on level playing field on distribution front. A common trading
platform will not only enable investors to compare the performance of funds, but also shorten the
ladder of costs associated with investments in mutual funds. India will have to develop its own
model for MF hypermarket. It can invite the national exchanges to develop competing trading
platform for the entire universe of schemes and regulate them through SEBI. This is easier said
than done as the industry will have to devise a suite of regulatory norms under which such a
system will operate and will have to devise modules to educate the investors. Most importantly
supermarkets should not encourage short-term investors and market-timers through high charges
for early redemption.
PSU Banks: Increase the share of PSU banks in the distribution channel which is currently 2-3%
(Refer Exhibit 3). PSU banks have much greater reach than private banks and have more
credibility than NBFCs. The existing consumer base of PSU banks is very distinct from private
banks and opens up new opportunities for MFs in tier II and III cities besides the rural areas.
Also the number of transactions carried out by PSU banks inside the branch is much higher than
private banks in urban areas where net banking is in vogue. This results in more face to face
contact with potential customers and greater conversion rates.
Independent Financial Advisors: Encourage IFA distribution model for financial products.
AMFI can take a proactive stop by requesting colleges to introduce financial planning courses.
AMFI should also provide IFAs with opportunities to constantly interact with the MF industry
10

and arrange training modules which can be provided online, to keep the IFAs updated about new
financial products offered. The guidance provided by such training should be wholesome with
constant focus on balancing risk-reward for the IFAs clients and not just mere pushing of MF
products. One major advantage of this distribution paradigm is that IFAs are more dependent on
fees than commissions and increased selling through IFAs would reduce mis-selling and entry
load costs for the MFs.
Investor Education and Awareness: Linked to this need to reach out to retail investors is the drive
to educate them on the benefits of mutual fund investments. In fact there should be a national
level focus on improving overall financial literacy in the country through courses introduced at
college or even school level curriculum and such initiatives should be supported by AMFI.
Currently only 50% of household savings are invested in financial investments and only 3-4% in
MFs. Considering that MFs offer superior returns at modest risk it is important that Indian
households get a chance to tap into the higher returns through MFs which is possible only
through greater awareness of IT and finance. Concurrent with establishing the ground work to
enable more retail investors to invest in Mutual Funds its important to attract the smaller
investor by promoting the right product which is the systematic investment plan (SIP) approach
wherein smaller investors can more easily participate, and in the process spread risks more
effectively when doing so. Current sales incentives are skewed towards investment volumes
which puts SIP on the backburner. However, with more and more IFAs things can change in the
future. Also as mentioned above, lifestyle wraps should be promoted through greater investor
awareness which would lead to more savings channeling into mutual funds. Investment wraps
can offer capital protections, appreciation and insurance at the same time. Though its a concept
its a powerful one and has the potential to make every Indian a savvy investor.
Measuring MF performance: More information on mutual fund performance through
independent third party research is required so that investors can make informed decisions about
which schemes to invest in. Currently, value researchs portal on the web in India does a good
job of rating MF schemes but we need more such web portals which can scientifically measure
MF performance. In US there is a vibrant industry that thrives on independent scientific
performance measurement tools and it needs to be developed in India as well, with a focus on
developing the correct benchmarks for comparing MF performance. The quality of research like
11

that at Morningstar in the US is still lacking in India and most of the research is still carried out
by third-party products division in banks. There is serious concern about the independence of
such research carried out and the quality as well. For more quality performance measurement of
MFs in India, AMFI would need to train increasing number of professionals through tie-ups with
business schools to introduce such courses in the curriculum. AMFI can also introduce
certifications on scientific methods of performance measurement and can develop a research
division which will keep monitoring MF performance from time to time and develop
benchmarks.
Looking Long Term: Indian MFs encourage Performance-chasing. If gilts are doing well, asset
management companies launch gilt funds. If a particular sector is doing well, a sector fund is
launched. If the sentiment leans towards risk aversion because of down markets, index funds are
actively marketed. It does not matter if it is the wrong time for entry into such market segments.
In 1999-2000, all MFs marketed technology funds aggressively which then fizzled out in the
dotcom bust. Late last year debt funds were encouraged buoyed by benign interest rates without
concern for long term prospects. Currently maximum outflows are being seen from such debt
funds. We need more MFs that can look beyond just 1-2 year horizon and look towards long
term investors and provide them with long term opportunities. For this to happen we need more
funds which focus on performance rather than just AUMs. Currently MFs in India seem to be
competing against each other in mobilizing funds. However, in more mature markets like the US
there are funds like Dimensional Fund Advisors which despite being very small offer best
performance. We need such quality focused funds in India too.
Issues in Regulatory Oversight and Transparency and Disclosure Norms for Mutual Funds:
Indian Mutual Funds are regulated by the comprehensive and qualitatively excellent SEBI
regulations. Also many of the prescriptions of the Kumar Mangalam Birla Committee for
establishing corporate governance in India are already reflected in the SEBI regulations. Though
such regulatory measures initiated by SEBI have undoubtedly put in place a well defined
corporate governance mechanism for Indian mutual fund, but the last mile is yet to be negotiated
before investor confidence can be taken for granted. Till recently, the industry played host to
several questionable practices late trading (where big corporate investors got to invest at
favorable prices of the previous day), scheme switching (shifting investments between schemes
12

within the same fund) and excessive incentivization for selling mutual fund schemes, among
others. The charge sheet by CBI in 2006 against former SBI fund managers for buying Padmini
Technologies Stock from Triumph International (owned by scamster Ketan Parekh ) by means of
off-market purchase resulting later in a loss of Rs. 600crores (when the shares value tanked) for
SBI investors and the subsequent inaction by SEBI has further dented investor confidence. In
fact most of the charge sheeted managers are still very much in the industry and in prominent
positions as well. There are also reports of certain trustees which operate out of the office
premises of the AMCs severely undermining the independence of the trustees. Fund managers
and the trustees are the most important component of this industry and SEBI needs to make sure
that their judgment is not clouded by personal interests.
Another area of concern is concentration of MF units in hands of few investors. Even with
SEBIs rule of minimum 20 investors and no one investor holding more than 25% of the schemes
corpus there is a possibility of concentration of the corpus in the hands of few investors by
having marginal investors and having few big investors having holdings shade less than 25%.
This also keeps the AMCs from disclosing the big investors as their contribution is less than the
required 25% for disclosure. Hence, it is necessary to amend this rule and make disclosures
necessary in case of any investor holding above 5% of the corpus and to gradually bring down
the maximum limit of holding from 25% to 5%. Otherwise there is a risk of having a Portfolio
Management Service for a few large investors being converted to MFs to enjoy tax benefits.
In India we have mostly followed the disclosure based regulations as practiced in the US and our
regulations are seen closer to that of the SECs. However, current events in the financial world
put a question mark on the efficacy of disclosure based regulations. We need a separate paradigm
for our regulations rather than basing it just on experiences outside. If mutual funds in India truly
need to become the conduit for small investors into the market, SEBI needs to be on the watch
out constantly and proactively regulate MF industry.
Conclusion

Mutual fund industry in India has still a few years to go before it fully recognizes its potential as
the conduit for investments by small investors and corporates alike. Prominent among the issues
discussed in the paper are the issues of good corporate governance, distribution and investor
awareness which can propel the mutual fund industry into the next level of growth.
13

Appendix I

Exhibit 1: Total AUM: Sector-wise distribution

Exhibit 2: Total AUM: Fund Type distribution

14

Exhibit 3: Distribution Mix-Equity Assets-MF Industry

Area of Investment

Rs. Crs

% of financial savings

Deposits(banks and others)

278985

47.4%

Shares, Debentures and Mutual Funds

29008

4.9%

Investment in Small Savings

72364

12.3%

Insurance

83340

14.2%

Others

124959

21.2%

Source: RBI

Exhibit 4: Investment Patterns

Exhibit 5: Long term returns across various asset classes

15

Household

Savings Private

Corporate Public

Gross

Year

Rate'

Sector

Sector

Savings

2001-02

22

3.5

-2

23.5

2002-03

23.1

4.1

-0.7

26.4

2003-04

24.4

4.4

1.1

29.8

2004-05

23

6.6

2.2

31.8

2005-06

24.2

7.5

2.6

34.3

2006-07

23.8

7.8

3.2

34.8

Domestic

Source: RBI

Exhibit 6: Indias Savings Rate

16

Exhibit 7: Break-up of Household Sector Savings

Investor Group

Asset Amount %

Individuals

42.83

Non-resident Indians

4.95

Foreign institutional investors

1.21

Corporations, domestic institutional investors

51.01

Source: AMFI

Exhibit 8: Amount of MF industry Assets held by each investor class

17

Appendix II-Lifestyle wraps*

An amount is set aside for term insurance for a defined term and amount, so as to leave a larger
residual for the investment function. The term insurance is custom tailored, commensurate with
the individual. Similar risk profiles may be bucketed together to purchase term insurance more
cheaply for the pools and sub-pools.
The remaining funds are available for investment in Index Mutual Funds. These are allowed to
grow over the well defined term, the Investment Horizon. For a greater cutting edge, the
purchases of Index Funds are in bear phases and corrections, and some, held for treasury, are
sold in bull phases for profit booking opportunities.
To sum up, the Asset Allocation is between appropriate Term Insurance and Index Funds. This is
the message for financial planners. This form of passive management generates excellent returns
at low cost. The key to added success is to invest on dips.
Going further Recall the Rule of 72, which reads:

r * y = 72 or, r = 72/y. If the investment

horizon is 10 years (y = 10), at what rate will the initial investment double? The answer is 72/10
= 7.2% p.a. This corresponds to the rate prevailing in 10-year government securities. If Rs.500 is
invested, yielding 7.2% p.a. compounded will result in Rs.1000 at the end of 10 years. Hence,
the capital of Rs.1000 is protected or locked in. The balance Rs.500 can be invested in Index
Mutual Funds for 10 years to generate returns.
For further customization, investment in Index Mutual Funds can be substituted partly or fully
with investment in specific stocks. These stocks could be in sectors that are perceived to have
growth prospects over that particular 10-year horizon (e.g. Tech Stocks in the 1990s) or in
sectors where the investor spends heavily and needs hedging (e.g. senior citizens spend a lot on
medicine, travelers on hotels and cost of medicines in case of senior citizens. Those with a liking
for travel may opt for hotel stocks, and those who smoke frequently opt for cigarette stocks.
Hence the term Life Style Wraps. This approach is rooted in the philosophy of Peter Lynch. It
can also complement investment in Index Mutual Funds by placing a higher weight on stocks
such as pharmaceuticals, hotels or cigarettes, as the case may be. With sector funds, even this

18

can be done in a cost effective manner. This is an application of the Focussed Portfolio as
advocated by Warren Buffet.
*This text in appendix II is derived from the paper on Lifestyle Wraps by Dr. Sunder Ram Korivi
and Venkatesh B.S.

19

References and Bibliography

Mutual Funds in India: Marketing Strategies and Investment Practices by H. Sadhak

Paper on Life-style Wraps: Cost-efficient Alternative to ULIPs by Dr. Sunder Ram Korivi & Venkatesh
BS
Paper on India's Mutual Fund Industry by Tetsuya Kamiyama
India's Savings Rate Surge Feb 24th 2006 by C.P. Chandrasekhar and Jayati Ghosh
MFs

asked

to

tap

rural

savings

The

Hindu

available

at

http://www.hindu.com/2004/03/28/stories/2004032803941500.htm
World View: Indian mutual funds available at http://ia.rediff.com/money/2007/dec/14mf.htm

Mixed response to scrapping of MF entry load The Business Standard available at http://www.businessstandard.com/india/storypage.php?autono=296016
Young

people

should

invest

in

mutual

fund

SIP

livemint.com

available

at

http://www.livemint.com/2007/09/30235340/Young-people-should-invest-in.html
Mutual fund companies in India face post-boom profit crunch - livemint.com available at
http://www.livemint.com/2008/07/31232832/Mutual-fund-companies-in-India.html
Seven more firms get Sebi approval to sell mutual funds livemint.com available at
http://www.livemint.com/2008/09/08003143/Seven-more-firms-get-Sebi-appr.html
www.amfiindia.com
www.rbi.org.in

20