1ne mnnItlLVlutuall'uncl' haC!

the toUowing products: INDUSTRY: DEC 2003 INFINITY: DEC 2003

.Innniti Liquid Fund
.Innniti Floating Rate Fund
.Innniti Short-term Fund
.Innniti Bond Fund
• Innniti Government Securities Fund
• Innniti Equity Fund
• Innniti Top 200 Equities Fund
• Infiniti Opportunities Fund
• Infiniti Technology Fund
.Infiniti India Tiger Fund
Of these, the last five were equity-related funds for which the main buyers were retail in-
vestors with some short-term buying and selling by corporations as well. About 90% of the INDUSTRY: DEC 2004 INFINITY: DEC 2004
AUM in the different Infiniti equity mutual funds was from individual buyers.
Figure 2 shows the distribution of ownership between individuals and institutions/corpo-
rates for private sector mutual funds. Compared to the industry, Infiniti also had a lower level
of AUM under equity funds though the share of the private sector in the mutual fund industry
was increasing (see Figures 3a & 3b).

Others 2%

INDUSTRY: JAN 2005 INFINITY: JAN 2005

Individuals 32%

Corporates/lnstitutions 66%

FIGURE 2:
Ownership of Private Sector Mutual Funds by Investor Type as % of Assets
Under Management. FIGURE3a:
Industry and Infiniti - Comparison of Fund Composition.
Source: SEBI
 ~
40,000 (j) 616 Month
the
tive
the
tive
6,3642004
14,620
14,703
35,008
2,061 Schemes
Totalfor
Cumula-
Totalfor
Ason
31st
10,853
31,934
104,818
115,775
2,072
27,31~
10,597
16,548
5,053
17,802
6,405
11,469
2,804
2,376
Janua
Cumula-
3,651
Apr 03 Unde
Mana-to
to Jan'04
Apr'03
Month
Existing All Schemes
Jan'04 Total
New
Schemes
From Sales - All Schemes15
From Redemption - Asset,
geme
2,804
No. Amount Amount ~
2.376 41
2
Category
30,000

E 20,000
E
{J}
(J)
::::>
.....•

A) Bank
10,000 Sponsored (5)

B)lnstitutions (3)

C) Private Sector.
0-- Dee 2003 Dee 2004 Jan 2005 1. Indian (8)
21.168
• UTI • Bank/lnstituion Sponsored • Pvt. Sector
2. Foreign (1)

FIGURE3b: 3.Joint Ventures:

predominantly
Increasing Role of Private Sector in Mutual Funds. Indian (5) 12,513 12,513 114.296 10,741 100,158 34,46·

4. Joint Ventures:
Infiniti and the industry predominantly
657
616424,227
476,435
54,065
48,172
53,408
44,240
157,994
377,673
177,006
423,625
17,648
41,058
44,856
110,56
51,272
18,498
Foreign (9) 18,498
Infiniti started off as a pure investment bank in India; it was distributing mutual fund products *35,370 *248,979 *34,177 *232,367 *121,805 II 145,371 •
3 I
in India in 1994 when there were no mutual fund distributors. In 1997, Infiniti launched its February 25, 2004 I
Total
Released on
own mutual fund and was #10 in terms of assets managed as of March 31, 22006. In 1997, In- (1 +2+3)
finiti used to have to call brokers (who transacted on the stock exchange) and explain to them
as to what a mutual fund was. In March 2006, Infiniti Mutual Fund was ranked seventh out of Grand Total
(A+B+C)
27 different fund houses that were managing mutual funds in India in terms of assets under
management (AUM) (see Tables la, 1b & Table 2). With increasing market liberalisation,
growth in demand for financial products, including mutual funds, was expected to continue.
Unlike physical products and many services, mutual funds are an advisory product even for the
individual buyer.
NOTES:

1. Data isprovisional and hence, subject to revision.

2. *Figuresfor corresponding period of last year include the figures of erstwhile Unit Trust of India, of India
(undivided) and hence, not strictly comparable.
Source: Infiniti
) -I
,. 872
·-=H'~-· 482
'. 31st
11,930the
872
Totalfor
tive
59,725Month
712
Cumula-
the 2005
60.207
678.962
69,611
51,318
587,971
598,416
17,040
tive
49,054
194,859,1
3,213
17,522
10,513,
45,722
23,889
4,535
16,622
28,883
6,253
273,210
60,576
Schemes
57.644"
10,935
Apr'
72,214
7,535
28,802
6,890
3,450
51,800 ' j; '1Apr'
04 to10,513
120,028
50,042
23,160
4,322
198,527
126,679
22,549
2,355
Totalfor
3,213
266,675
23,765
24,428
January
8,992
23,765
*476,435 Mana-
Under
As onI'I:• to" - *424,227
3Sales
Jan'05
Month
672.115'
Cumula-
30,569
126,437
04
>'*48.172 Jan'05
152,280
All Schemes
7,535
,~145,372
All Schemes Assets Total
<{o

(A+B+C)
Indian
gement
Foreign
Sponsored (3)
(1)@
Predominantly Mutual
(10)schemes
1. *Figuresfor
Data isprovisional
4,322If -Fund
- ::- --'-
andventure
hence,
Data
subject
- of January
to revision. Indian.
2005 (Rs. in crores) Redemption - Tablel2 Market Share by Assets Under Management of
as
2.
3. Bank
#only Sponsored
new Joint
correspondingperiod
where allotment -predominantly
lastis
year.
completed Source: Infiniti.
4.
1.Joint
1.lndia Ventures:
@consequent
(10) to the change in shareholdingpattern ofSBI Funds Management Ltd It has been reclassified
Released on February 9, 2005 Private Mutual Fund Firms
Mutual Fund Market Share (Jan 06)
PrudentiallCICI 10.89%

Franklin Templeton 10.12%

HDFC 9.52%

Birla 6.53%

Reliance MF 5.36%

Standard Chartered 5.33%

Infiniti 4.95%

HSBC 4.85%

Tata 4.55%

SBI MF 4.11%

Kotak MF 3.91%

Excluding UTI

From Dec 01, Infiniti FM has steadily increased market share. Templeton acquired Pioneer in August
02; HDFC acquired Zurich in June 03 and Birla acquired Alliance in 2005.

Over the five years to 2010, India's working population looks set to grow by 100 million
and the consuming category to rise by 280 million. Penetration levels of financial products are
low - for example, only 8% ofIndia's population is currently insured and there are just 7
million (2% of bankable population) credit-card holders. Banks equipped with large distribu-
tion networks (branches, ATMs) and established customer relationships are the distributors
of choice for mutual funds and already account for 30% of private mutual fund sales.
Currently, fees contribute only 21 % ofincome for Indian banks, versus 30-35% for their peers
internationally .
The banks' focus on third-parry products has coincided with the rapid growth in demand
for these products. Mutual fund sales in the country have enjoyed a 77% compound annual
growth rate (CAGR) over the four years to 2005. The total ADM was close to Rs. 190,000
croreas of October 31, 2005, at Rs. 149,816 crore on March 31, 2005 against Rs. 18,645 crore
on March 31, 2004.
Mutual fund IPOs6 during the 12 months to March 31, 2005 added around Rs 6,000 crore
to the ADM, which is almost 24 per cent more than the total funds added by the industry dur-
ing the previous calendar year7• Penetration of rural areas by mutual funds is relatively lower,
with 13.7% of urban households owning mutual funds versus only 3.8% of rural households'.
In general, compared to the developed economies, financial product penetration is low in In-
dia (seeTable 3).

6 Now called new fund offers to distinguish tl1em from IPOs of stocks of listed companies,
7 hHn. 1/IAfIA/lM ft:J/onrl1nhinrlil1 "1"\"'" 11f"l&:f"lA 1 J / •.•••.••.• /J..., ••.• ; •.••.••.••.• / •.•• "" ••• , A/.Y'V'I"I"!,o;:'" ~ •.•_
__ ~~ .• ~--r-~-~_~O""VTl"'n:'-OVcr--·"::r.O"/O • ot fiouseholasown-mutUal runas,
. and the UK, where around 17% of households own mutual funds. However, both these coun-
11

tries have had mutual funds (Le. open-ended funds) markets since the 1930s and mutual fund
regulations since the 1940s (though as already mentioned, the UK has had closed ended in- Provident and Pension 22%
vestment trust companies since 1868). Both also have large, established, middle classes, which
are the classic investment fund target market. And, the scale of the US mutual fund industry,
which far outweighs any other - the US represents 55% of the value invested in mutual funds
worldwide12 is in good part due to retirement savings through mutual funds. Approximately
-

21 % of all retirement savings, worth some $2.1 trillion, are invested through mutual funds and
Insurance 14%
around one third of the money flowing into mutual funds in each of the last few years to 2005
has been retirement-related.

3 Financial Produd Penetration is Low in India across

Government 14%
Segments
International
NA
Products 40-80
(%)
5.0-10.0
5-0
20-70
3.0-5.0
15-70 India
Benchmarks 4.0
1.2
1.9
6.0
2.3
0.6
0.7 3%
surance bank loans

FIGURE 4:
Shares, Debentures and Mutual Funds Attract only a Small Proportion of Savings.

Source: National Income Statistics, Centre for

Monitoring the Indian Economy.

Personal Final Consumption Expenditure (PFCE).
Sources: amfindia.com, RBI, IRDA, Venture Infotek,
IRDA, CMIE, CLSA Asia-Pacific Markets.
As in most countries, investment in physical assets (mainly housing) accounts for the most
important percentage of household assets, owning a home is usually a first priority once a fam-
ily has any disposable income at all. This rose from 37% of the total to 44% of total household
savings during the period. Investment in shares and debentures (which includes mutual funds)
accounts for a tiny percentage of investment in financial assets (the percentage of the total, ex-
cluding physical assets).
New investment in mutual funds accounted for only 0.73% of financial assets of house-
holds in 2000-200113• The high percentage represented by deposits underlines the fundamen-
tally conservative nature of Indian investors and the relatively tiny percentage represented by
mutual funds in 2000-2001 is distorted by the shrinkage of UTI and the aftermath of the tech
boom. In addition, Indians have a fascination for gold, as an investment asset, buying close to
700 tonnes of the yellow metal annually (see Figure 4).
There were 11.8 million households investing in units of mutual funds constituting 6.7%
of all households, while in 1998-9 there were 15 million investor households or about 9% of all
households investing in mutual funds. In terms of actual numbers, this reflects a decline from
23 million unit holders in 1998-9 to 19 million unit holders in 2000-1. As of March 2005,
provident funds and employee provident funds (EPFs) - a government scheme for employee
savings - were not allowed to invest in mutual funds. Historically, government savings
schemes (RBI bonds, National Savings Certificates, etc.) have had relatively high fixed returns;
with the security that they offered (a sovereign guarantee), there was little motive for individual
investors to invest in mutual funds. Very high interest rates (as high as 16% at one point in
time) also decreased the attractiveness of mutual funds that were considered riskier in compar-
ison to products that had a sovereign guarantee and had fairly high returns. Fraudulent activi-
ties on the stock markets related to Harshad Mehta in the early 1990s and to Ketan Parekh in
the late 1990s also eroded investor confidence in mutual funds as an investment alternative for
individual buyers.
For Infiniti, India was a growing market and one that the company had high hopes on for
the future. Table 4 provides the structure of AUM by asset class for Infiniti. Each mutual fund's
investment approach was a function of goals and the inclinations of the chief investment offi-
cer (CIG). Nandkumar, the Infiniti CIG had an approach that was a combination of top-down
and bottom-up.14

9 Survey of Indian Investors, March 2003, SEBI-NCAER

/4 A purely top-down approach is typical of a global hedge fund manager who makes calls on the basis of say, predicted exchange rate
/0 Fundamentals Vol//. No.5. Investment Company Institute, Washington. movement, capital expenditures. commodity price trends, etc. A purely bottom-up approach is based on extensive study of individual
// Investment Management Association estimate .. firms and requires a longer term time horizon (A mutual fund can have long term commitments in a closed ended fund (i.e. funds where

/2 International fund statistics to end June 2003, Investment Company Institute. the investor is locked in for a pre-determined period - this allows greater predictability of funds flows for the MF); however, most mu-
tual funds are oDen-ended in Inrlin j ~ ._..Ju_ mA
/3 Not/anal Income Statistics, Centre for Monitoring Indian Economy.
inIlDt<-fn •.r •••...••.• ,.,;1-,.....1 •...•.••• -~
 ~ = -=
- _n
Bond
Gilt
~
Product
Balanced
~n. Short-term -19.585
....•
Product
Sales
Fixed
Fixed
347.191
2,556,786
314;173
'37,019
510,874
-
_283,097
AUM
Income
Plans
Income
129,038
102.730
, ~t_".:;v
_11,888,544
••••Fixed
w55,897
wnw tur-II •• J.:;v..-W nore ,'IUI --------- r - --r ' ~ ~~ · 0 b- 0
Red
••••. '-'1. ••.•

Equity 118.873
221,122
304,875
(Diversified)
2,253,093
2.771,124
1,173,198
41,331,644
46,852
216.222
102.504
47,603,228
49,795,726
467.996 5.130.168
J.

~, Fixed Monthly
Fixed
Income Hybrid
Income
Maturity
(Sector)
Hybrid
44.374.053
Equity
Equity 378,410
533,233
2.695,061
1,646,051
604.587
226,073
335.968 Segment
Income Category
'¥,Plans
(Period Ending 31st Oct 05 by Product Segment
Liquid Funds) (Rs. Lakhs) tomers' wallets by undertaking mutual funds and insurance sales. Wealth management, which
S. until recently had been a forte of a handful of foreign banks in the country is now also available
from select private banks.
Then there are 153,000 post offices that are capable of processing money orders'5 with
138,000 of these in rural areas (in total the post offices services 634,321 villages and 4,869
towns). In addition there are insurance sales forces linked to general and life insurance firms,
brokers and mutual fund distributors. UTI, which for historical reasons had the largest distrib-
utor network of its own, has between 60,000-70,000 distributors (mostly individual opera-
tions) - at one time it had around 100,000 agents. In the past, huge sales forces were built up
by LIC and UTI, which at one time may have had 100,000 and 500,000 sales people respec-
tively. They are still important for their owners, but a large number of individuals have broken
away to form large and small distribution firms or networks to serve independent AMCs.
As of early 2005, there was no direct regulatory control over distributors of mutual funds,
although Securities and Exchange Board ofIndia (SEBI) requires all distributors to be regis-
tered by the Association of Mutual Funds in India (AMPI). The distributor or financial adviser
performs three functions. The first is to give advice to buyers (of mutual funds, insurance prod-
uct, ete.) on the nature of the product and possible risks and returns. The second is to actually
distribute the product (have the buyer fill out the forms, collect and process the cheque (be-
cause mutual funds, unlike banks, are not part of the clearing system and so cannot collect
cheques), provide receipts and proof of purchase (number of units held in the mutual fund).
The third function is to promote different financial products to the retail investor and to act as
a liaison between the financial services firm and the retail investor.
There are very few direct outlets of AMCs. Distributors of mutual funds need to be certified
by the AMPI/SEBI certification programme. Some AMCs are closely tied in with forward-
looking banks, which have a business model that targets the personal finance markee6 and
which have a large number of branches. Many of the banks and securities houses that have their
own affiliated mutual funds have adopted what has come to be called 'open architecture', that
Distributing a mutual fund
is to say that they will offer the funds of several other management companies as well as their
AMCs distribute mutual funds through banks, brokers, non-banking financial companies and own. Among those that have adopted this approach are Infiniti, ICICI Prudential, HDFC,
financial advisors. Indian banks have a large distribution reach (about 75,000 branches, and Standard Chartered, Birla Sunlife, Kotak Mahindra, HSBC and Citibank.
20,000 ATMs). The largest bank, State Bank ofIndia, along with its associate banks had more CAMS' figures also show that the average assets under management with the top ten brokers of
than 10,000 branches. At the other end are American, European and Asian banks that have a an AMC, for the period July-September 2003 was between 44.77% and 46.64%; and for the
smaller branch network. For example, Citibank had 37 branches in India as of October 2005. top 25 brokers of anAMC was 59.30% to 63.58%. Thus, clearly, relationships with brokers are
Banks that have 45% of the household-savings pool also possess the trust and retail relation- extremely important to AMCs; they are likely to be able to negotiate commissions very effec-
ships to be the distributor of choice for these products. ICICI Direct is the largest distributor tively.
and they do more business transactions than the largest banks (Table 5).
Distributing infiniti equity funds
15 Number of Accounts in Top Three Banks as of December 2005 Infiniti had a two-tier distribution structure - one for retail sales and one for institutional sales
of mutual funds. The head of retail channel sales was Arpit Aiyar.
Top Three Banks Number of Accounts (m) Branches The sales and distribution structure for mutual funds for Infiniti was as follows:
SBI 90 9,093 a. The retail end:
PNB 35 4.022 i. 3,200 distributors empanelled - meaning that the distributor firms were certified by
AMFI (as per SEBI rules), and also had a registration number and then they registered
ICICI Bank 10 600 with the mutual fund (MF) firms to distribute the mutual funds of the AMC
(like Infini ti).
Source: CLSA Asia-Pacific Markets. ii. 80% of distributors did 20% of business. Distributors were split into categories.

15 Old Age Social and Income Security (OASIS) Report, January 2000.
16 T.• ,,,, '"'v •••••...•.•
n/L>C" ",ffhi"" ,..".'" 1I">,rol ~_~ ftru-,..
 1
3
S.No ABN
Direct
Tata
Enam
Birla
Russell
Infiniti
Standard
Citibank
HDFC
Kotak
JM
SPA
The
12 arge
TDSales
Sunlife
Amro
Morgan
, I
Red
Securities
to
Mahindra
Ltd.
Bank
DistributorCredit
Waterhouse
AMC
NA
Chartered
IIBank
961,090
23,167,298
2,577,834
1,140,293
47,603,228
435,375
531,813
456,531
1,117,095
2,580,231
1,273,900
1,358,830
1,372,239
827,214
550,140
2,170,468
5,187.429
1,670,412
4,034,710
1,099,257
955,253
1,205,553
Hongkong
Capital
1,090,805
ICICI
- - Bank
Stanley
BankServices
and
1,264,753 13
- Ltd.
Distribution
Ltd.
Ltd.
Bank
Pvt.
N.Y.
2Sweep
24,104,991
454,214
49,795,726
391,813
5.465.422
497,080
778,729 Ltd. AUM
419,186
564,121
310,166
6,069,417
1,324.419
414,444
404,488
369,300
321,715
229,944
CO.•. Ltd.
392,187
345,280
229,392
211,786
210,776
Shanghai
Ltd. Retail --
- Services
11,888,545 Pvt. Ltd. ~ I
! Ii, 4 915 Securities Pvt. Ltd.
57811
reglOnamealers/brokers
14 - strong regionally e.g., 40 branches of blue4,116,180
418.733 chip were in I i,~
I 1I!II
I,
6 10 Banking Corporation Ltd.
op 15
I 1,288,895 '
I 322,214
ternationally).
dustries empireinto
customers Historically,
between Mukesh
the mutual the best
and
fund known
Anil financial
Ambani,
market.'8 service
it was
Reliance brands
expected
Equity in Reliance
Fundthat
hadIndia were
raised SBI,
Capital
Rs. 5,700UTI
Ltd. andI
crores j Source: Infiniti

The Infiniti sales force was organised as follows. There were a total of 30 sales people that were
distributed between institutional and retail sales. Larger towns like Mumbai, Delhi, Chennai,
Bangalore, Calcutta, etc., had institutional salespersons who were responsible for the top 50
corporations in the area.
There were about 600 firms whose treasury operations could be considered for being ap-
proached and serviced by AMCs in India. These provided the bulk of the institutional business,
through a new customer segment that was coming Up.20Accotding to Champak Lal Popat,
head of institutional sales, the new thing in the institutional area was the advent of the SME
market - potentially better money in terms of stickiness. Larger firms tended to be transac-
tion-oriented and defected more often.

17 Internationally. independent mutual funds (those not associated with banks) tend to be bigger (this is an outcome of the enforced
separation ot commercial and investment banks In the aftermath ot the Glass Stegall Act in the 1930s in the US),
18 Personal interview. Arpif AiyaT, head of channel soles. October 27. 2005,
20 Personal interview. Arpit Aiyar. head of channel sales. Infinifi. October 27. 2005,
19 hffp://www, financialexpress. com/latesUul'-story.php?contenUd = 120576 (accessed March 17. 2006).
 Kolkata
~.JI Ij,
!. - 5,998,967
Trivandrum
Vadodara
Coimbatore
Chennai
Ahmedabad
Lucknow
Kochi
Ludhiana
Others
AMEX
NewOelhi
Indore
Patna
Bhubaneshwar
Bhilai
Nasik
Guwahati
Madurai
Pune
Goa
Surat
Mumbai
Citibank-Chennai
Jaipur
Chandigarh
Kanpur
Jamshedpur
Vishakapatnam
Vijayawada
Bangalore
Nagpur
Rajkot
Bhopal
Udaipur Sales
91,026
13,051
19,392
47,469
28,451
22,231 19,517
33,076,789
299,464
107,224 16,276
11,407
!24,499
4,447,858
35,972
20,270
60,734
25,691
73,112
26,697
18,916
11,854
18,888
5,110
10,1257,380
18,795 10,515
11,888
7,298
41,010
17,551
22,878
60,169
23,116
20,639
29,737
213,839
6,517
Ii102,658
62,062
179,015
15,733
3,111,950
1,643,121
1,314,518
118,641
175,810
29,365
656,955
108,643
1,201,102
44,564
331,782 ,223
50,787
49,262
9 4,895
126,079
130,337
182,362
34,211,500
314,393
31,312
4,627,209
130,863 AUM
1,670,982
928,158
851,579
553,251
44,693
36,203
24,883
86,564
61,295
58,451
21,047
19,247
18,851
13,890
12,436
18,470
11,979
105,533
58,984
25,006
24,259
13,646 I I
~onthsEnding Oct 31,
year
utual
35.
"

For Infiniti,orthe
distributor,
66,229
47,939
Redemptions
201,474
71,314
162,460
7,643
373,252
make
1,766,946
1,155,875
1,231,936
4,220,310
589,920
318,735
distributor
33.
29.
25.28.
20.
24.
18.
19.
26.
05
23.
a previously was the
9,478
(Rs Lakhs)r*
contact
inactive point with
distributor theactive.
more customer
18,807
11,256
and most
In regions
many AMCs people
places, were far
I I I

I11,III I
37. 4.
6.
13.
17.
27.
34. Location
_3.7~Secund[ab"d
15.110.
21.
31.
___
14.
11.
2.
32.
22.
m ___

30. Hyderabad
12.
16.
5.
9.
•• _____ •

')
,i
n _____ n_n ______________

(North,sales ~ 53,890
13,241
90,435
I
Overall, there was a matrix structure - there were three major South and
 38. Moradabad 6,740 4,787 3,295 inaIly, iliere was me Issue orn~rrorrwere1aITrrCncu-Dj.rnT'~~~'-'~-~- --------.,-
sold initially as IPOs. Recently, under SEBI direction, these have been redesignated as new
39 Mangalore 6,487 6,462 7,768
fund offers. New equity mutual fund schemes for the retail investor have a higher margin for
40 ICICI Web Trade-Mumbai 6,286 8,434 5,394 the distributor (in the range of 6% as against 12% for an existing equity mutual fund scheme).
41 Ranchi 6,162 24,056 18,842 Due to relatively low levels of investor awareness and education, many retail investors tend to
think of a new fund offer priced at Rs. 10 as being cheap since they believe that it is the equiva-
42 Varanasi 5,490 4,065 4,148
lent of a stock being offered at a par value ofRs. 10.
-----
44 Raipur 5,067 16,900 16,378
Fee and commission structure
45 Trichy 4,854 4,302 1,515
46 FOF 4,746 8,526 14,803 Corporate customers are clearly much more sensitive to fee rates than retail investors and are
unprepared to pay front-end loads for fixed income investments, notably at the shorter end.
47 Oehradun 4,702 2,700 2,038
Given that the size of each corporate transaction is many hundreds or even thousands of times
48 Jalandhar 4,304 6,085 4,949 greater than the average retail investment, large investors are cheaper to service administratively.
49 Jodhpur 4,171 4,649 3,825 Thus managers are prepared to cut their charges for larger transactions in units; it is not entirely
clear whether all managers have a published tariff for volume reductions or whether reductions
50 Agra 3,537 3,092 1,730
can be negotiated on a case-by-case basis, now that rebating by agents has been disallowed. In
51 Amritsar 3,289 2,820 2,013 addition, AMCs are under competitive pressure to keep overall fund costs down, so are absorb-
52 Allahabad 3,175 1,864 773 ing some of the costs related to operation of funds themselves, though they also need to stay
within the caps set by SEBI.
-----
53 Siliguri 3,143 3,008 3,024
The other major cost to AMCs is the need to pay commissions to distributors. For the ma-
54 Jamnagar 2,548 1,917 889
jority of fixed income funds that carry no front-end load, these commissions are paid as trail
-----
55 Hubli 2,168 1,602 391 fees, a fixed percentage of the value of the investment that is paid to the distributor so long as

-----
56
57
Mysore
Trichur
1,718 1,243 696
3,888
the investment remains with a particular fund. Such distribution costs are allowed for in 5EBI
regulations which allow an extra 1% on the maximum permitted management fee from which
1,692 6,111
to pay trail commissions if there is no front-end load; the overall cap however, still remains. 50
58 Calicut 1,393 1,986 8,719 if an AMC were to increase its management fee on the first slab of an income fund from the ba-
59 Panipat 1,042 2,117 1,437 sic permitted (1.25% to 2.25%), there would be nothing left for other expenses. In many cases
the competitive nature of the market would make such an increase impossible. This means that
60 Valsad 992 670 143
the payment of trail fees will often have the effect of eroding the AMC's fee revenue.
61 Kottayam 955 1,497 685
Most managers seem to regard a total expense ratio of 1.00% or lower for shorter term
62 Salem 915 1,141 575 funds as the most that the market will bear, despite the fact that the application of the tapering
63 Belgaum 795 445 67 scale of caps imposed bySEBI regulations would, for income funds, start at 2.25% and level off
at 1.5% for the amount of funds above Rs.700 crore. Table 8 depicts a short-term fund high-
64 Rajahmundry 674 484 512
lighting expenses.
65 Pondicherry 661 739 315
66 Patiala 618 681 271 fablE': 8 A Typical Short-term Fund
67 Aurangabad 517 621 74 Short· term income
68 Ajmer 469 730 348 fund expenses Short maturity fund Insta cash plus
69 Guntur 316 311 20 Investment management

-----
70 Kota 209 136 142 and advisory fees
Trustee fees
__ --:;;--;_._!I
'
_._-"-_--:':

-"
_:::-:-:' . 0.35
0.01
:-_'=._.:' 0.35
0.01
71 N.A 140 120 19 ~ • -
- ••• = •• - - •••

72 Warrangal 139 145 52

Custodian fees - ---- 0.08 0.08

-----
73
74
Panaji
Nellore
112
96 106
o
386
o Distribution and selling expenses

Registrar and transfer agent fees __

0.25

0.01 _.
0.25

0.01

75 Rourkela 43 145 106 Other expenses 7.- 0.04 _• 0.04

Grand Total 11,888,545 47,603,228 49.795.726 Investor servicing and bank charges 0.07 0.07

Total expense ratio 0.9 0.9

*Three entities viz: Citibank. Chennai/AMEX and I CI CI web trade appear as locations since the reg-
c..uJ..,_Eo~•.•.•
"'.fci"cLM"'m£'l~aDdum_oLQei.Jt sse,lfYIanaflement.
 Templeton SBI Birla Infiniti
_-------:'~;_:_-__:___;_:_.-----r--.~.-.~-~-~~n"UC01.,--rnc'Secon<1 category usuaITygot)U basISPOIntS.
• At the low end, distributors were paid in kind e.g., computer, a trip for the family, phone for the a.AMC 1.014 0.67 0.996 1.041
office, ete. This leaves AMC with 150 basis points that go toward marketing expenses and reg-
istration fees. AMC was left with about 20 to 50 basis points as profit. In addition, there were b. Distribution * 0.396 0.718 0.451 0.512
management fees that ranged from 1% to 1.25% depending on the size of the investment,
bas % ofa 39.05 107.16 45.28 49.18
0.45% for the registrar and 1% for the custodian of the mutual fund. Table 9 gives the com-
mission charged by Infiniti equity mutual funds.
* Commissions + Advertising
Tablej 9 Commission Charged by Infiniti Equity Mutual Funds Source: Reports and accounts for the financial

Size of the investment year 2002/3 for the above schemes.

Commission charged
to the investor (entry load)
< 100 crores A crude arithmetical average of distributors' feesas a percentage of management feesfor bal-
2.5%
anced funds, growth funds and income funds would be 33%, 38%, and 60% respectively. On
100-400 crores 2.25% this basis, one would probably rather be a distributor than a manager, particularly since such
distributors are often brokers, who would be earning commission on transacting the underly-
400- 700 crores 2.00%
ing fund assets too ..
> 700 crores 1.75% There was downward pressure both on the total amount of fees and on the amount that an
AMC could retain. Previously, until rebates to clients by distributors were banned23,a corporate
Source: Personal Interview. Rajat Jain, CMO. Infiniti (February 9, 2006).
would be prepared to see a higher fee on the understanding that the rebate from the distribu-
tor's trail commission would compensate for this. Now that is no longer possible, corp orates are
demanding lower absolute fees, while distributors, sensing their power in a highly competitive
market, are putting pressure on AMCs for higher trail commissions. In the example shown
Funds fell from approximately 0.55% to 0.32%22 up to 2001 but this figure excludes any
commissions to intermediaries, since distribution costs for such funds are negligible; the UK above, if the company were to pay only 0.15% more24, it would reduce the AMC's gross income
equivalent expense ratio would be between 0.4% and 0.6%. The main difference between these by just over 40%.
figures and the figures quoted above for a typical Indian money market fund is accounted for by According to Arpit Aiyar, in India, the commission structure is largely driven by the AMCs.
the distribution expenses, with the distributor taking an amount that is only 30% less than the Apart from providing updates on the investments, the distributor did not do much servicing
management company. Another scheme shows the distributor taking only 3% less in total than for the customer. In some cases, the distributor passed back some of the commission to the cus-
tomer.
the management company. Table 10 shows the distributor margins for a sample of AMCs.

-----
~--.:.;1.06
1.25
0.642 13.00
Birla
10.10
87.26
0.154
1.277
Birla
N/a
.766
0.13
.;::
51.36
Infiniti
---- ---
001 SBr
Infiniti
1.525
059.98
0.925
..
SBI
- -~-
*20.58
* 0.5
43.07
1.161
0.256
~ Product launch
n ablel10
ij-'-= =--
empleton
t~
Distribution Costs as a Percentage of the AMC Fee In September 2005, Infiniti launched a first of its kind product for an equity fund house - the
Balanced Super-SIP - a combination of investment in a mutual fund and a life insurance policy. Table
11 provides the product features of the Super SIP. If a distributor or broker were to sell one Su-
per SIP to a single investor for a 21 year plan, he25would get a commission ofRs. 5.61akhs over
the period (Rs. 2.71akhs in present value terms). The Super-SIP was the first product from an
AMC that had insurance bundled with it (previous offerings had come from insurance firms
(e.g., Birla Sun). Infiniti advertised the product heavily in different media including TV, print,
hoardings and magazines. They also conducted presentations with different distributors
around India. Rajat Jain expected to collect about Rs. 10 crores in funds from investors in the
launch period up to October 25,2005.

23 Market gossip Indicates that they are still 0 feature.

••• 0 ••••••••• _ •• __ ••• _ •• _

24 This is our assumption and is purely for //Iustration; there is no reason to believe that this
AMC Is doing so or intends to do so.
22 Fundamentals, VallI No 4, September 2002, Investment Company Institute.
25 Assumption: Portfolio appreciation of 15% p. a, inflation rate of 5%.
 Infiniti Super SIP Product Features Retail customer oenavlour
In India, as an asset class, mutual funds lag behind other assets like fixed deposits (also called
Free cover limit - insurance upto Rs.20 lakh with no medical test allows monthly SIP of:
time deposits), government bonds, gold and property. Investors tend to consider stocks as risky,
• Flexibility to change schemes any number of times. partly because of past systemic manipulations by individuals on a large scale; the Harshad
Mehta and Ketan Parekh scams in the early 1990s and early 2000s have not helped.26 However,
• Auto debit facility across 20 major locations in any bank.
this appears to be changing; in the three months to March 31, 2006, mutual funds in India
• Redemption request directly credited into your bank account. raised more than Rs. 15,000 crores through new fund offers and about 50% of this money
came from retail investors. The rise in the benchmark index BSE 30 from 6,600 on January 1,
Plan in years Rs. per month 2005 to 10,878 on March 16,2006 was pulling in more investors. Growth prospects in the In-
21 8,333 dian economy were considered bright with the Indian GOP growing at 8.5%, 7.5% and 8.1 %
in the three years to March 31, 2006.
16 11,111
Retail investors would like to use investment opportunities for low risk, long-term gtowth
11 16,666 opportunities. However, in mutual funds the average holding tends to be only 240 days for eq-
uity funds (Figure 5). Some investors tend to try to time the market - they sell when the prices
6 33,333 of stocks go up and buy when it dips. Sometimes, there is also pressure from the distributor to
churn, because the distributor can make more money on commission when an investor sells the
Age eligibility 18 years-42 years money invested in a mutual fund equity scheme and buys another equity scheme, whether
Minimum application Rs.2,000/- from the same mutual funds or from a different one. The distributor acts as an agent for both
the AMC (to sell the mutual fund) and for the investor (in an advisory capacity to inform as to
Options 6,11,16&21 years what would be a good investment).
Maximum defaults allowed 5 Retail investors would evaluate funds largely on the basis of past performance, the brand eq-
uity of the fund house, the amount of commission that they had to pay and distributor recom-
Choice of four dates 1st, 7th, 14th & 21st mendations. More informed investors would also look at metrics such as the Sharpe's Ratio

--r--
(that looked at the risk-return profile of the fund) and percentage of mutual funds in overall in-
vestments as part of their asset allocation.
Liquidity
Variable Cover Plan Fixed Cover Plan
(6, 11 & 16 years) (21 years) I 240
240

• Withdraw any amount, anytime • Withdraw appreciation after 3

years 177
• No loss of insurance cover 200
• 2% exit load for withdrawal within
• 2% exit load if withdrawn with 2
the first 3 years 120
years of each investment (no
charge after 2 years)
80
Incremental cost to investor over normal loads -
-
Plan - -
Load
2.25%for
2.50%
2.75% SSIP
2.25%
2.25%
0.00%
0.05%
0.07%
-
Peraverage
Normal
of year insurance
equity insurancecost
value
40

o
Liquid Income Equity

FIGURE 5:
Exit load of 2% if withdrawn before two years Mutual Funds: Average Holding Period.

Entry load structure for variable cover plan Source CAMS - Redemptions are for the period upto June 2005.
Plan Load for SSIP Normal equity fund loads (per year insurance cost)
21 year 5% 2.25% 0.1375%
"In these scams, Harshad Mehta and Ketan Parekh were able to mabilise funds through fraudulent means 10 drive the prices of se-
ExitJ.oad of ?0.-h if \A1ithrl.n:nAln hoft""\r'o th,..oo \.IO.!:\r'c.-, lected stacks and the index to new highs. Retail investors were caught in the frenzy of rising prices and bought stocks at inflated prices .
•• - -- _ ••f •• " - ~_..J __ ,I.&._ •.11 .. __ • _¥ J.h", •• ..I .,,..'" A •.•,in" ',n ,..# I. ,•.•A,.. r'af,.,i/ inlloct"r~ IItIDrQ ',;aft hnlrlinrl thp. r.nn Investor

~IIJ.IIU"&
,Un:S-duorrDyvaIue~otInvestments anClthere were roughly five categories:
1. High Net Worth Individuals - HNI (individuals with assets of more than Rs. 1 crore),
most of these have a lot of churn.
2. HNI 100 customers with assets between Rs. 25 lakhs and Rs. 1 crore.
3. HNI15 customers with assets under management between Rs. 5lakhs and Rs. 251akhs.
4. RetailS with assets between Rs. 1lakh and Rs. 5lakhs.
5. Those with assets under Rs. 11akh.
During 2005, the maximum growth was in the investor segment that was investing below
Rs. 11akh. Due to the rise in the value of the stock market indices (the BSE Sensex had gone up
from about 6,600 in January 2005 to close to 10,800 in March 2006), retail investor interest
was increasing. Figures indicate that a lot of retail investors had started investing when the sen-
sex crossed the 6,400 level.27 Table 12 provides the AUM by investor category.
ru«ncrOl-£\JU::FIJO were Ini11CatlOns
oftliis tren
&...,•.•._.-vvtot:cra~sys!em-o
Leading AMes such as Franklin Templeton and Infiniti were moving toward establishing
profitable practices in the distribution channel that would also enable long-term market
growth. Rajat Jain and Arpit Aiyar needed to evaluate the present distribution approach in light
of the rising competition, new offerings from the competition and a changing investment cul-
ture among retail investors. From a viewpoint of expanding its distribution reach in order to
compete better with its rivals, which was the right approach? Where should the focus be so far
as different distributor categories were concerned? What should be the role of the brand in sell-
ing mutual funds and increasing the AUM for Infiniti as compared to reach? All these questions
needed answers in the context of equity fund sales from Infiniti as well as in more specific terms
as Jain and Aiyar sat down to evaluate the launch of Super SIP and to make decisions about the
sales and distribution process for the Super SIP and other products.
Points for Discussion

Table 12
Trust
HNI
HNl100
Retail(>
(5
Overseas
Inv. <1(25
Sales
Red
((>
40,827,385
47,603,228
670.585 < 5 Lacs)
43.438,738
Lacs
473,598
573,123
462.574
1cr)
1
1,081.643
53,075
61.116 -25
Lacs
&lac)
1,139.993
49,795.726
502,292
418.217
3.468,866
253,127
3,505,377
469.244
segment
Domestic Corp.
Corp. AUM
-1 cr)
Lacs)
567.415
7,098,784
561.903
990,172
700.801
52.322
889,910
11.888,544
1,027.236
=: AUM as on Oct 05 End and Sales/Red for the 12 Months Ending 31st
Oct 05 (Rs. Lakhs)
1. Should Infiniti be going in for a pan-India banking presence? Or should it
S.No
Source:/nfiniti. focus on the route of using individual advisors?

2. How can Infiniti encourage distributors and investors to reduce churn and
focus on getting new business?

Looking into the future

The Indian retail investor market had moved from relying solely on deposits and bonds to gov-
ernment instruments like public provident funds and then to mutual funds for High Net
Worth Individuals (HNls).1t was now poised to expand in a big way into the retail market for
individual investors. It was beginning to look as if the small investor was finally overcoming his
reluctance to invest in mutual funds with the continuing bull run on the Indian stock markets.

27 Personal interview. Rajat Jain, chief marketing afficer, October 27, 2005.