Infiniti

1ne mnnItlLVlutuall'uncl' haC!the toUowing products: .Innniti

Liquid Fund

.Innniti .Innniti

Floating Rate Fund Short-term Fund

.Innniti

Bond Fund

INDUSTRY: DEC 2003

INFINITY: DEC 2003

INDUSTRY: DEC 2004

INFINITY: DEC 2004

INDUSTRY: JAN 2005

INFINITY: JAN 2005

• 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 investors with some short-term buying and selling by corporations as well. About 90% of the AUM in the different Infiniti equity mutual funds was from individual buyers. Figure 2 shows the distribution of ownership between individuals and institutions/corporates 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%

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

Month Schemes the tive the 616 2004 Unde Mana-to tive Totalfor CumulaTotalfor Ason 31st 6,364 10,853 31,934 104,818 14,620 14,703 35,008 2,061 115,775 2,072 27,31~ 10,597 16,548 5,053 17,802 6,405 11,469 2,804 2,376 Janua Cumula3,651 Apr 03 to Jan'04 Apr'03 Month Existing

(j)

New Schemes From Sales - All Schemes15 From 2,804 No. Amount Amount ~ 2.376 2

Redemption -

Jan'04 All Schemes

Total

Asset, geme 41

Category

30,000

E E

20,000

{J} (J) ::::> .....•

A) Bank Sponsored (5)

10,000

B)lnstitutions (3)

0-•

UTI

C) Private Sector. Dee 2003 •

Bank/lnstituion

Dee 2004 Sponsored

Jan •

2005

1. Indian (8) 21.168

Pvt. Sector 2. Foreign (1)

FIGURE3b:

3.Joint Ventures:

Increasing Role of Private Sector in Mutual Funds.

predominantly Indian (5)

12,513

12,513

114.296

10,741

100,158

34,46·

4. Joint Ventures:

Infiniti and the industry

predominantly

Foreign (9) 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 3 in India in 1994 when there were no mutual fund distributors. In 1997, Infiniti launched its Total Released on February 25, 2004 I (1 +2+3) own mutual fund and was #10 in terms of assets managed as of March 31, 22006. In 1997, Infiniti used to have to call brokers (who transacted on the stock exchange) and explain to them Grand Total as to what a mutual fund was. In March 2006, Infiniti Mutual Fund was ranked seventh out of (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.

I

657 616 424,227 476,435 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 18,498 II 145,371

•

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

'. 31st 872 ·-=H'~-· the Month 872 712 ' j; '1Apr' 482 Totalfor tive Cumulathe 2005 3Sales Mana69,611 51,318 587,971 598,416 59,725 60.207 678.962 Under 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 As onI'I:• to" - *424,227 Jan'05 Jan'05 273,210 60,576 Schemes Month 11,930 10,935 Apr' 72,214 7,535 28,802 6,890 3,450 04 to10,513 51,800 120,028 50,042 23,160 4,322 198,527 126,679 22,549 2,355 Totalfor 3,213 Cumula266,675 23,765 24,428 30,569 57.644" 672.115' 152,280 All Schemes January 8,992 23,765 126,437 Assets 7,535 04 ,. *476,435 >'*48.172 ,~145,372 All Schemes 4,322 If -Fund - ::- --'Mutual Data of January 2005 (Rs. in crores) Redemption (A+B+C) (3) Indian (1)@ gement Foreign (10)schemes Sponsored Predominantly 1. *Figuresfor Data isprovisional andventure hence, subject to revision. Indian. as Bank Sponsored Joint -predominantly 2. 3. #only new correspondingperiod where allotment last is year. completed Source: Infiniti. 4. @consequent to the change in shareholdingpattern ofSBI Funds Management Ltd It has been reclassified 1.Joint Ventures: 1.lndia (10) <{o

Total

Tablel2

Market Share by Assets Under Management Private Mutual Fund Firms

Released on February 9, 2005

of

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 distribution 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 during 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 India (seeTable 3).

6 Now called

7 hHn.

new fund offers to distinguish

1/IAfIA/lM ft:J/onrl1nhinrlil1

"1"\"'" 11f"l&:f"lA

tl1em from IPOs of stocks 1 J / •.•••.••.• /J..., ••.• ; •.••.••.••.• / •.•• "" ••• ,

of listed companies, 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 countries 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 investment 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 around one third of the money flowing into mutual funds in each of the last few years to 2005 has been retirement-related. 11

22%

Provident and Pension

-

3

Insurance

14%

Financial Produd Penetration is Low in India across Government

Segments

14% 3%

NA India 5.0-10.0 5-0 20-70 3.0-5.0 15-70 1.2 International Benchmarks 4.0 1.9 6.0 2.3 0.6 0.7 Products 40-80 (%)

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 family 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, excluding physical assets). New investment in mutual funds accounted for only 0.73% of financial assets of households in 2000-200113• The high percentage represented by deposits underlines the fundamentally 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). 9

Survey of Indian

/0 Fundamentals //

Investment

Not/anal

March 2003,

No.5. Investment

Management

/2 International

/3

Investors, Vol//.

Association

fund statistics

Income Statistics,

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 comparison to products that had a sovereign guarantee and had fairly high returns. Fraudulent activities 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 officer (CIG). Nandkumar, the Infiniti CIG had an approach that was a combination of top-down and bottom-up.14

SEBI-NCAER Company

Institute,

Washington.

estimate ..

to end June 2003, Centre for Monitoring

Investment Indian

Company

Economy.

Institute.

/4 A purely

top-down

movement,

capital

approach expenditures.

is typical

of a global

commodity

hedge fund manager

price trends, etc. A purely

who makes calls on the basis of say, predicted bottom-up

approach

firms and requires a longer term time horizon

(A mutual

fund can have long term commitments

the investor

period -

this allows greater predictability

is locked in for a pre-determined

tual funds are oDen-ended

in Inrlin j ~

inIlDt<-fn

•.r

•••...••.• ,.,;1-,.....1 •...•.•••

-~

._..Ju_

mA

is based

on extensive

exchange

rate

study of individual

in a closed ended fund (i.e. funds where

of funds flows for the MF); however,

most mu-

~ =

~,

-=

-

~

, ~t_".:;v

Bond Gilt Balanced Fixed Income Product Product AUM Plans Fixed 347.191 Income 2,556,786 Sales ~n. Short-term - _n 314;173 -19.585 ....• _283,097 _11,888,544 ••••Fixed w55,897 wnw tur-II •• J.:;v..-W '37,019 510,874 129,038 102.730 118.873 221,122 304,875 Equity (Diversified) 2,253,093 2.771,124 1,173,198 41,331,644 5.130.168 46,852 216.222 102.504 47,603,228 49,795,726 467.996 Monthly Hybrid Income 378,410 Fixed Maturity 533,233 2.695,061 1,646,051 (Sector) 604.587 226,073 335.968 Red Hybrid 44.374.053 Income Category Equity Equity Segment Fixed Income '¥,Plans (Period Liquid Funds) Ending 31st Oct 05 by Product Segment

S.

nore ,'IUI (Rs. Lakhs)

--------r --r ' ~ ~~ · 0 b0 tomers' wallets by undertaking mutual funds and insurance sales. Wealth management, which until recently had been a forte of a handful of foreign banks in the country is now also available from select private banks. J.

••••. '-'1. ••.•

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 distributor network of its own, has between 60,000-70,000 distributors (mostly individual operations) - 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 respectively. 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 registered 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 product, 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 (because 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.

Distributing a mutual fund AMCs distribute mutual funds through banks, brokers, non-banking financial companies and financial advisors. Indian banks have a large distribution reach (about 75,000 branches, and 20,000 ATMs). The largest bank, State Bank ofIndia, along with its associate banks had more than 10,000 branches. At the other end are American, European and Asian banks that have a smaller branch network. For example, Citibank had 37 branches in India as of October 2005. Banks that have 45% of the household-savings pool also possess the trust and retail relationships to be the distributor of choice for these products. ICICI Direct is the largest distributor and they do more business transactions than the largest banks (Table 5).

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 forwardlooking 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 is to say that they will offer the funds of several other management companies as well as their own. Among those that have adopted this approach are Infiniti, ICICI Prudential, HDFC, Standard Chartered, Birla Sunlife, Kotak Mahindra, HSBC and Citibank. CAMS' figures also show that the average assets under management with the top ten brokers of an AMC, for the period July-September 2003 was between 44.77% and 46.64%; and for the top 25 brokers of anAMC was 59.30% to 63.58%. Thus, clearly, relationships with brokers are extremely important to AMCs; they are likely to be able to negotiate commissions very effectively.

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

Top Three Banks

Number of Accounts (m)

of mutual funds. The head of retail channel sales was Arpit Aiyar. The sales and distribution structure for mutual funds for Infiniti was as follows:

SBI

90

9,093

PNB

35

4.022

ICICI Bank

10

600

Branches

a. The retail end:

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 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

16

T.• ,,,,

'"'v •••••...•.• n/L>C"

",ffhi""

Security (OASIS) Report, January

,..".'" 1I">,rol

~_~

ftru-,..

2000.

op 15

--

I

, I - - Bank - Ltd. ~ AUM 1 Sales Red 3 ABN Direct Tata Enam Birla Russell Infiniti Standard Citibank HDFC Kotak TD Sunlife Amro Securities to Mahindra Ltd. Bank Credit Waterhouse AMC NA Chartered Distribution Ltd. Ltd. 2Sweep Bank Pvt. N.Y. Ltd. 419,186 564,121 310,166 24,104,991 6,069,417 454,214 49,795,726 391,813 5.465.422 497,080 778,729 961,090 1,324.419 414,444 404,488 369,300 321,715 229,944 Distributor 23,167,298 2,577,834 1,140,293 47,603,228 435,375 531,813 456,531 1,117,095 2,580,231 392,187 345,280 229,392 211,786 210,776 •. Ltd. - Services 1,273,900 1,358,830 1,372,239 827,214 550,140 2,170,468 5,187.429 1,670,412 CO. 4,034,710 1,099,257 955,253 1,205,553 JM SPA The Morgan Hongkong Capital Stanley Services and Shanghai Ltd. 1,090,805 1,264,753 Retail Pvt. Ltd. 13 S.No IIBank ICICI Bank 11,888,545 12 arge reglOnamealers/brokers 14 - strong regionally e.g., 40 branches of blue4,116,180 chip were in I 418.733 1,288,895

I

ternationally). Historically, the best known financial service brands in Reliance India were SBI, UTI andI dustries empireinto between Mukesh and Anil Ambani, it was expected Capital Ltd. customers the mutual fund market.'8 Reliance Equity Fundthat had raised Rs. 5,700 crores

I

!

i,~ I 1I!II I,

j

'

Ii,

4 6

915 Securities Pvt. Ltd. 57811 Banking Corporation Ltd. 10

322,214

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 approached 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 transaction-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, 19 hffp://www, financialexpress. com/latesUul'-story.php?contenUd

= 120576 (accessed March 17. 2006).

20 Personal interview. Arpit Aiyar. head of channel sales. Infinifi. October 27. 2005,

!. Ij, - 5,998,967 Kolkata Sales 19,517 16,276 Trivandrum Vadodara Coimbatore Chennai Ahmedabad Lucknow Kochi Ludhiana Others AMEX NewOelhi Indore Patna Bhubaneshwar Bhilai Nasik Guwahati Madurai Pune AUM 11,407 91,026 13,051 19,392 10,515 11,888 7,298 47,469 28,451 41,010 17,551 Goa Surat Mumbai Citibank-Chennai 33,076,789 299,464 107,224 22,231 4,447,858 35,972 20,270 60,734 25,691 73,112 26,697 18,916 11,854 18,888 Ii102,658 22,878 60,169 23,116 20,639 29,737 13,839 6,517 5,110 2 ,223 10,1257,380 18,795 62,062 179,015 15,733 50,787 3,111,950 1,643,121 1,314,518 118,641 175,810 29,365 49,262 9 4,895 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 11,979 656,955 108,643 Jaipur 126,079 105,533 58,984 25,006 24,259 13,646 1,201,102 44,564 130,337 182,362 34,211,500 314,393 31,312 4,627,209 331,782 130,863 I 1,766,946 1,155,875 1,231,936 4,220,310 589,920 318,735 Chandigarh Kanpur Jamshedpur Vishakapatnam Vijayawada Bangalore Nagpur Rajkot Bhopal Udaipur 66,229 9,478 Redemptions 47,939 33. 29. 28. !24,499 25. 201,474 20. 71,314 162,460 7,643 373,252 24. 18. 19. 26. 05 (Rs Lakhs)r* 18,807 23. 11,256 For Infiniti,orthe distributor was the contact point with theactive. customer and most AMCs people were far distributor, make a previously inactive distributor more In regions many places, Overall, there was a matrix structure - there were three major (North,sales South and ~.JI

year utual

35.

"

I

I I

37. 4. 6. 13. 17. 27. 34. Location _3.7~Secund[ab"d 21. 31. 14. 11. 15.110. 32. 22. 12. 16. 5. 9. 30. Hyderabad 2. ___

I

I11,III I

~ I

m

___

••

_____

•

')

,i

n

_____

n_n

______________

53,890 13,241 90,435

~onthsEnding Oct 31,

38.

Moradabad

6,740

4,787

3,295

39

Mangalore

6,487

6,462

7,768

40

ICICI Web Trade-Mumbai

6,286

8,434

5,394

41

Ranchi

6,162

24,056

18,842

42

Varanasi

5,490

4,065

4,148

44

-----

Raipur

5,067

16,900

16,378

45

Trichy

4,854

4,302

1,515

46

FOF

4,746

8,526

14,803

47

Oehradun

4,702

2,700

2,038

48

Jalandhar

4,304

6,085

4,949

49

Jodhpur

4,171

4,649

3,825

50

Agra

3,537

3,092

1,730

51

Amritsar

3,289

2,820

2,013

52

Allahabad

3,175

1,864

53 Siliguri -----

3,143

3,008

3,024

54

Jamnagar

2,548

1,917

889

55

Hubli

2,168

1,602

391

56

Mysore

1,718

1,243

696

57

Trichur

1,692

6,111

3,888

58

Calicut

1,393

1,986

8,719

59

Panipat

1,042

2,117

1,437

60

Valsad

992

670

143

---------

61

Kottayam

1,497

685

62

Salem

915

1,141

575

63

Belgaum

795

445

67

64

Rajahmundry

674

484

512

65

Pondicherry

661

739

315

66

Patiala

618

681

271

67

Aurangabad

517

621

74

68

Ajmer

469

730

348

69

Guntur

316

311

20

209

71

140

70

72

Kota

N.A Warrangal

-----

136 120

Fee and commission structure 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. Given that the size of each corporate transaction is many hundreds or even thousands of times greater than the average retail investment, large investors are cheaper to service administratively. 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 can be negotiated on a case-by-case basis, now that rebating by agents has been disallowed. In addition, AMCs are under competitive pressure to keep overall fund costs down, so are absorbing some of the costs related to operation of funds themselves, though they also need to stay within the caps set by SEBI.

773

955

-----

inaIly, iliere was me Issue orn~rrorrwere1aITrrCncu-Dj.rnT'~~~'-'~-~--------.,sold initially as IPOs. Recently, under SEBI direction, these have been redesignated as new fund offers. New equity mutual fund schemes for the retail investor have a higher margin for the distributor (in the range of 6% as against 12% for an existing equity mutual fund scheme). 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 equivalent of a stock being offered at a par value ofRs. 10.

142 19

The other major cost to AMCs is the need to pay commissions to distributors. For the majority of fixed income funds that carry no front-end load, these commissions are paid as trail fees, a fixed percentage of the value of the investment that is paid to the distributor so long as 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 to pay trail commissions if there is no front-end load; the overall cap however, still remains. 50 if an AMC were to increase its management fee on the first slab of an income fund from the basic 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 the payment of trail fees will often have the effect of eroding the AMC's fee revenue. Most managers seem to regard a total expense ratio of 1.00% or lower for shorter term funds as the most that the market will bear, despite the fact that the application of the tapering 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 highlighting expenses. fablE':

8

A Typical Short-term

Fund

Short· term income fund expenses

Short maturity fund

Investment management and advisory fees Trustee fees

__ ~ •

--:;;--;_._!I

- ••• =

Custodian fees

145

52

112

o

o

Distribution and selling expenses

Panaji

74

Nellore

96

106

386

Registrar and transfer agent fees

75

Rourkela

43

145

106

Other expenses

11,888,545

47,603,228

49.795.726

and I CI CI web trade appear as locations since the reg-

-"

••

_:::-:-:' -

-

. •••

---__

0.35 0.01

:-_'=._.:'

0.35 0.01

0.08

0.08

0.25

0.25

0.01 7.-

Investor servicing and bank charges Total expense ratio

*Three entities viz: Citibank. Chennai/AMEX

_._-"-_--:':

'

-

139

73

Grand Total

Insta cash plus

0.04

_.

0.01 _•

0.04

0.07

0.07

0.9

0.9

c..uJ..,_Eo~•.•.• "'.fci"cLM"'m£'l~aDdum_oLQei.Jt

sse,lfYIanaflement.

_-------:'~;_:_-__:___;_:_.-----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 office, ete. This leaves AMC with 150 basis points that go toward marketing expenses and registration fees. AMC was left with about 20 to 50 basis points as profit. In addition, there were management fees that ranged from 1% to 1.25% depending on the size of the investment, 0.45% for the registrar and 1% for the custodian of the mutual fund. Table 9 gives the commission charged by Infiniti equity mutual funds.

Tablej

9

Size of the investment

Commission charged to the investor (entry load)

<

100 crores

2.5%

100-400 crores

2.25%

400- 700 crores

2.00%

>

1.75%

700 crores

Infiniti

1.014

0.67

0.996

1.041

* 0.396

0.718

0.451

0.512

39.05

107.16

45.28

49.18

a.AMC b. Distribution

bas % ofa * Commissions + Advertising

Source: Reports and accounts for the financial year 2002/3 for the above schemes.

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 would be prepared to see a higher fee on the understanding that the rebate from the distributor'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 above, if the company were to pay only 0.15% more24, it would reduce the AMC's gross income by just over 40%.

figures and the figures quoted above for a typical Indian money market fund is accounted for by the distribution expenses, with the distributor taking an amount that is only 30% less than the management company. Another scheme shows the distributor taking only 3% less in total than the management company. Table 10 shows the distributor margins for a sample of AMCs.

According to Arpit Aiyar, in India, the commission structure is largely driven by the AMCs. Apart from providing updates on the investments, the distributor did not do much servicing for the customer. In some cases, the distributor passed back some of the commission to the customer.

---- ---

Product launch

..

~

-~-

:.;1.06 13.00 1.25 1.525 10.10 87.26 001 SBr 0.925 0.154 1.277 0.642 Birla 059.98 N/a .766 Birla Infiniti 0.13 51.36 Infiniti SBI empleton ij-'-= =-t~

n

Birla

A crude arithmetical average of distributors' feesas a percentage of management feesfor balanced funds, growth funds and income funds would be 33%, 38%, and 60% respectively. On 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 underlying fund assets too ..

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 equivalent expense ratio would be between 0.4% and 0.6%. The main difference between these

.;::

SBI

Commission Charged by Infiniti Equity Mutual Funds

Source: Personal Interview. Rajat Jain, CMO. Infiniti (February 9, 2006).

~--. -----

Templeton

* 0.5 1.161 43.07 *20.58 0.256 Distribution Costs as a Percentage Balanced

ablel10

of the AMC Fee

In September 2005, Infiniti launched a first of its kind product for an equity fund house - the 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 Super 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

24 This is our assumption •••

22

Fundamentals,

VallI

No

4, September 2002, Investment

0

•••••••••

_

•• __

•••

_

AMC Is doing so or intends Company

that they are still 0 feature. and is purely

for //Iustration;

there is no reason to believe that this

•• _

to do so.

Institute. 25 Assumption:

Portfolio

appreciation

of

15% p. a, inflation rate of 5%.

Retail customer oenavlour

Infiniti Super SIP Product Features

In India, as an asset class, mutual funds lag behind other assets like fixed deposits (also called time deposits), government bonds, gold and property. Investors tend to consider stocks as risky, 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, this appears to be changing; in the three months to March 31, 2006, mutual funds in India 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, 2005 to 10,878 on March 16,2006 was pulling in more investors. Growth prospects in the Indian 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.

Free cover limit - insurance upto Rs.20 lakh with no medical test allows monthly SIP of: •

Flexibility to change schemes any number of times.

• Auto debit facility across 20 major locations in any bank. •

Redemption request directly credited into your bank account.

Plan in years

Rs. per month

21

8,333

16

11,111

11

16,666

6

33,333

Age eligibility

18 years-42 years

Minimum application

Rs.2,000/-

Options

6,11,16&21

Maximum defaults allowed

5

Choice of four dates

1st, 7th, 14th & 21st

Retail investors would like to use investment opportunities for low risk, long-term gtowth opportunities. However, in mutual funds the average holding tends to be only 240 days for equity funds (Figure 5). Some investors tend to try to time the market - they sell when the prices 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 money invested in a mutual fund equity scheme and buys another equity scheme, whether 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 what would be a good investment).

years

--r--

Retail investors would evaluate funds largely on the basis of past performance, the brand equity of the fund house, the amount of commission that they had to pay and distributor recommendations. More informed investors would also look at metrics such as the Sharpe's Ratio (that looked at the risk-return profile of the fund) and percentage of mutual funds in overall investments as part of their asset allocation.

Liquidity

Variable Cover Plan (6, 11 & 16 years)

Fixed Cover Plan (21 years)

• Withdraw

• Withdraw years

any amount, anytime

•

No loss of insurance cover

•

2% exit load if withdrawn with 2 years of each investment (no charge after 2 years)

appreciation

I after

240

240

3

177

200

• 2% exit load for withdrawal the first 3 years

within

120 80

Incremental cost to investor over normal loads - Plan

-

40

2.50% 2.75% Load SSIP 2.25%for 2.25% 2.25% 0.00% 0.05% 0.07% Peraverage year insurance Normal of equity insurancecost value

o Liquid

Income

Equity

FIGURE 5: Mutual Funds: Average Holding Period.

Exit load of 2% if withdrawn before two years

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

ExitJ.oad of

?0.-h

if

\A1ithrl.n:nAln

hoft""\r'o th,..oo

\.IO.!:\r'c.-,

these scams,

Harshad

Mehta and Ketan Parekh

were able to mabilise

lected stacks and the index to new highs. Retail investors •• - -- _ ••f •• " ~_..J __ ,I.&._ •.11 .. __ • _¥ J.h",

funds

through

fraudulent

means

10 drive the prices

of se-

were caught in the frenzy of rising prices and bought stocks at inflated prices . •• ..I .,,..'" A •.•,in" ',n ,..# I. ,•.•A,.. r'af,.,i/ inlloct"r~ IItIDrQ ',;aft hnlrlinrl thp. r.nn Investor

=:

ru«ncrOl-£\JU::FIJO were Ini11CatlOns oftliis tren ~IIJ.IIU"&

&...,•.•._.-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 culture 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-

,Un:S-duorrDyvaIue~ot Investments 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.

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

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 sensex crossed the 6,400 level.27 Table 12 provides the AUM by investor category.

Table

Trust Sales Red AUM 43.438,738 HNI (5 Lacs 473,598 -25 HNl100 573,123 462.574 Lacs -1 cr) (> <1(25 1cr) 1 &lac) < 5 Lacs) Lacs) Retail 1,081.643 ((> 53,075 61.116 1,139.993 567.415 40,827,385 7,098,784 47,603,228 670.585 49,795.726 561.903 502,292 418.217 3.468,866 253,127 3,505,377 469.244 990,172 700.801 52.322 889,910 11.888,544 1,027.236 Overseas Corp. Domestic Corp. Inv. segment 12

AUM as on Oct 05 End and Sales/Red for the 12 Months Ending 31st Oct 05 (Rs. Lakhs) S.No Source:/nfiniti.

Looking into the future The Indian retail investor market had moved from relying solely on deposits and bonds to government 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.

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

1.

Should Infiniti be going in for a pan-India banking presence? Or should it 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?