Mutual funds in India

The first introduction of a mutual fund in India occurred in 1963, when the Government of India launched Unit Trust of India (UTI).^[1] UTI enjoyed a monopoly in the Indian mutual fund market until 1987, when a host of other government-controlled Indian financial companies established their own funds, including State Bank of India, Canara Bank and by Punjab National Bank.

Mutual funds are an under-tapped market in India

Despite being available in the market^[2] less than 10% of Indian households have invested in mutual funds. A recent report on Mutual Fund Investments in India published by research and analytics firm, Boston Analytics, suggests investors are holding back from putting their money into mutual funds due to their perceived high risk and a lack of information on how mutual funds work.^[3] There are 46 Mutual Funds as of June 2013.^[4]

The primary reason for not investing appears to be correlated with city size. Among respondents with a high savings rate, close to 40% of those who live in metros and Tier I cities considered such investments to be very risky, whereas 33% of those in Tier II cities said they did not know how or where to invest in such assets.

Distribution

Mutual Funds in India are being distributed by various channels , like : Corporate Distributors, Individual Distributors , Post Offices and Banks. All these distribution channels are broadly divided into two key types :

  1. One who sells Funds with low expense ratio but charges from the customers on their own, and 
  2. Another who sells funds with high expense ratio and get paid back as commission; they don't charge any fees from customers

The former one sells the MF plans labeled as 'Direct Plans' and the later one sells the MF Plans labelled as ' Regular Plan'

SEBI had issued a consultation paper on October 07, 2016 seeking public comments on the clarifications/amendments to SEBI (Investment Advisers) Regulations, 2013 (‘IA Regulations’). Large number of comments have been received on the proposals enumerated in the consultation paper. Based on the feedback received and meetings held with market participants ,the following proposals are stated below for public comments :

To prevent the conflict of interest that exists between “advising” of investment products and “selling” of investment products by the same entity/person, there should be clear segregation between these two activities. The investment adviser should act in the best interest of the client and should not receive commission from the product manufacturer. Further, the investment adviser shall act with due skill, care and diligence and shall ensure that its advice is offered after thorough analysis and taking into account the available investment alternatives and matching them with client’s suitability and needs.Thus, entities engaged solely in the business of “advising” on investment products shall not be permitted to sell any products to prevent conflict of interest.

Existing Provision : In terms of Regulation 22 of IA Regulations, banks, NBFCs and body corporates providing investment advisory services to their clients shall keep their investment advisory services segregated from distribution/execution services. Such entities are allowed to offer investment advisory services only through separately identifiable departments or divisions (SIDDs). The distribution or execution services can only be offered subject to the following:

   i. The client shall not be under any obligation to avail the distribution or execution services offered by the investment adviser.
  ii. The  investment  adviser  shall  maintain  arms-length  relationship  between  its activities as investment adviser and distribution or execution services.
 iii. All  fees and charges paid to distribution or execution service providers by the client  shall  be  paid  directly  to  the  service  providers  and  not  through  
      the investment adviser.

Proposal: Regulation 22 and other applicable provisions of IA Regulations are proposed to be amended as under :

i.There shall be clear segregation between the investment advisory activities and distribution/execution services. An entity offering investment advisory services shall not be permitted to offer distribution/execution services.

  ii. The existing  provision on  offering  execution/distribution  services  by banks, NBFCs  and  body  corporates through  separately  identifiable  departments  or 
      divisions (SIDDs)shall be omitted. 
  iii. Banks,  NBFCs  and  body  corporates offering  investment  advisory  services through  separately  identifiable  departments  or  divisions  (SIDDs)under  the 
       existing  framework shall  segregate  the  same  within  a  period  of  six  months through a separate subsidiary. 
   iv. Investment   advisers   who   provide   holistic   advice/financial   planning   on financial   products   across   multiple   categories,   viz.,   securities,   
       insurance, pension, deposits, etc. need to  obtain  permission from the  specific  regulator and comply with the regulations of the respective regulators, if any.
    v. Entities/persons  who  are  providing  advice  solely  on  non-securities  shall  not come under the purview of the SEBI (Investment Advisers) Regulations, 2013.

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Servicing

Larger Indian Mutual Fund Industry has benefited from outsourcing the activity of servicing their investors to two of the leading Registrar and Transfer Agents (RTAs) in India namely CAMS and Karvy. While CAMS commands close to 65% of the Assets servicing, rest is with Karvy. Franklin Templeton Mutual Fund services its investors through its own in-house RTA set up.

Both the RTAs have vibrant network of their local offices which enable the Mutual Fund Investors to transact locally. These touch points (or) Customer Service Centers (CSCs), provide a wide range of servicing including, financial transaction acceptance & processing, non financial changes, KYC fulfillment formalities, nomination registration, transmission of units apart from providing statement of accounts etc.

Average assets under management

Assets under management (AUM) is a financial term denoting the market value of all the funds being managed by a financial institution (a mutual fund, hedge fund, private equity firm, venture capital firm, or brokerage house) on behalf of its clients, investors, partners, depositors, etc.
The average assets under management of all mutual funds in India for the quarter Dec 2015 to Mar 2016 (in ₹ Lakh) is given below:^[6]

References