SPECIALIZATION PROJECT REPORT ON

Study on Commissions earned by Distributors

With reference to Mutual Funds

SIVA SIVANI INSTITUTE OF MANAGEMENT

Approved by AICTE

By

Priyanka.Areti

Contents CHAPTER-1 .............................................................................................................................................. 4

INTRODUCTION ................................................................................................................................... 1

ORGANISATION OF A MUTUAL FUND .................................................................................................. 2

NEED/IMPORTANCE OF STUDY ............................................................................................................ 5

OBJECTIVES ......................................................................................................................................... 5

LIMITATIONS: ...................................................................................................................................... 5

SCOPE OF STUDY ................................................................................................................................. 6

METHODOLOGY................................................................................................................................... 6

REVIEW OF LITERATURE....................................................................................................................... 7

CHAPTER-2 ........................................................................................................................................... 9

Brief Profile of Organizations:- ........................................................................................................... 10

Franklin Templeton India ...................................................................................................................... 16

INDUSTRY PROFILE ............................................................................................................................ 19

History of the Indian Mutual Fund Industry .................................................................................... 19

Key Developments over the Years ................................................................................................. 22

Current Trend in the Industry......................................................................................................... 24

CHAPTER-3 ............................................................................................................................................ 27

MUTUAL FUNDS DEFINITION ............................................................................................................. 28

Disadvantages of Mutual Funds ..................................................................................................... 29

MUTUAL FUND VARIANTS ................................................................................................................. 30

MUTUAL FUND SCHEMES .................................................................................................................. 34

COSTS INVOLVED IN MUTUAL FUNDS ................................................................................................ 36

Different commissions on Mutual funds earned by Agents ................................................................ 38

CHAPTER-4 ......................................................................................................................................... 39

DATA ANALYSIS AND INTERPRETATION .............................................................................................. 39

CHAPTER-4 ............................................................................................................................................ 45

DATA ANALYSIS AND INTERPRETATION .............................................................................................. 46

CHAPTER-5 ............................................................................................................................................ 55

SUMMARY ......................................................................................................................................... 56

CONCLUDING OBSERVATIONS ........................................................................................................... 57

BIBILOGRAPHY ................................................................................................................................... 58

List of Tables

Table 1:Assets under Management in Rs (Cr) ............................................................................ 18 Table 2: AUM of MF industry in different options .................................................................... 22 Table 3: Average Growth in AUM ............................................................................................ 24 Table 4:Upfront fee and Trail commissions of AMC's ............................................................... 39 Table 5:ICICI Prudential Asset Management Company............................................................. 40 Table 6:Birla Sunlife ................................................................................................................. 41 Table 7:HDFC Asset Management Company ............................................................................ 41 Table 8:Franklin Templeton Asset Management Company ....................................................... 42 Table 9:DSP Blackrock ............................................................................................................. 42 Table 10:HSBC Asset Management Company .......................................................................... 43 Table 11:ING Mutual FUND .................................................................................................... 44 Table 12:TATA Mutual Fund .................................................................................................... 44 Table 13:Equity commissions.................................................................................................... 46 Table 14: Debt commissions ..................................................................................................... 47 Table 15:Debt Commissions for >10 cr .................................................................................... 48 Table 16:Balanced Fund Commissions ...................................................................................... 49 Table 17:Calculation for Equity ................................................................................................ 50 Table 18:Calculation for Debt ................................................................................................... 50 Table 19: Calculation for Balanced ........................................................................................... 51 Table 20: Highest commission summary ................................................................................... 51 Table 21: Equity Returns ........................................................................................................... 52 Table 22: Debt returns ............................................................................................................... 52 Table 23: Balanced fund returns ............................................................................................... 53 Table 24:Summary of Fund Performance ................................................................................. 53 Table 25: Points summary for commissions .............................................................................. 54 Table 26:Points summary of performance ................................................................................. 54 Table 27: Summary of Total Points ........................................................................................... 56

CHAPTER-1

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INTRODUCTION

A Mutual Fund is a trust that pools the savings of a number of investors who share a

common financial goal. The money thus collected is then invested in capital market instruments

such as shares, debentures and other securities.

The income earned through these investments and the capital appreciation realized are shared by

its unit holders in proportion to the number of units owned by them. Thus a Mutual Fund is the

most suitable investment for the common man as it offers an opportunity to invest in a

diversified, professionally managed basket of securities at a relatively low cost.

The mutual fund industry in India has come a long way. Significant spurts in size were

noticed in the late 80s, when public sector mutual funds were first permitted, and then in

the mid-90s, when private sector mutual funds commenced operations. In the last few

years, institutional distributors increased their focus on mutual funds.

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

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ORGANISATION OF A MUTUAL FUND

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

mutual fund:

SEBI

SEBI regulates mutual funds, depositories, custodians and registrars & transfer agents in the

country.

Sponsors

The application to SEBI for registration of a mutual fund is made by the sponsor/s.

Thereafter, the sponsor invests in the capital of the AMC.

Trustee

The trustees have a critical role in ensuring that the mutual fund complies with all the

regulations, and protects the interests of the unit-holders.

AMC

Day to day operations of asset management are handled by the AMC. It therefore arranges for

the requisite offices and infrastructure, engages employees, provides for the requisite software,

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handles advertising and sales promotion, and interacts with regulators and various service

providers.

Custodian

The custodian has custody of the assets of the fund. As part of this role, the custodian

needs to accept and give delivery of securities for the purchase and sale transactions of the

various schemes of the fund.

Other Service providers

RTA

The RTA maintains investor records. Their offices in various centres serve as Investor Service

Centres (ISCs), which perform a useful role in handling the documentation of investors

Auditors

Auditors are responsible for the audit of accounts.Accounts of the schemes need to be

maintained independent of the accounts of the AMC.

Fund Accountants

The fund accountant performs the role of calculating the NAV, by collecting information

about the assets and liabilities of each scheme.

Distributors

Distributors have a key role in selling suitable types of units to their clients i.e. the investors in

the schemes.

Collecting Bankers

The investors moneys go into the bank account of the scheme they have invested in. These bank

accounts are maintained with collection bankers who are appointed by the AMC

KYC Registration Agencies

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To do away with multiple KYC formalities with various intermediaries, SEBI has mandated a

unified KYC for the securities market through KC Registration Agencies registered with SEBI.

EXAMPLE:-

Constitution of SBI Mutual Funds

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NEED/IMPORTANCE OF STUDY

Mutual fund has many variants which cater to even small savers and many advantages

like professional management, tax benefits, Systematic investment, diversifies portfolio,

simplicity and liquidity. Each fund has a predetermined investment objective that tailors the

fund's assets, regions of investments and investment strategies.

Investors need to know certain details when they are investing in a mutual fund. A lot of the

information obtained is useful for making investment-related decisions but some of it is received

because it has to be supplied as per the provisions of the law. This area covers some details

related to the commission that is earned by the distributor when they use their services. However,

in reality there is a lot of ignorance as well as disinterest among the investors about this matter

and that is the reason that they need to put in some efforts on this front.

OBJECTIVES

The Main objective is to determine the commissions earned by Mutual funds Agents.

The other objectives of the study are as follows:-

To understand the best commission paying AMC

To analyze the commissions given by various AMCs for different varieties of Mutual

fund like Equity, Debt and Balanced mutual fund options that is attracting customers to

invest in mutual funds.

To understand the mutual fund industry.

LIMITATIONS:

The study is limited to only 9 AMC s and top performing mutual funds in each category.

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SCOPE OF STUDY

The study is limited to understanding the best mutual fund in Equity, Debt and Balanced funds to

distributors /agents based on performance of top performing funds and present based

commissions structure which may vary from time to time based on regulations, market scenario.

METHODOLOGY

DATA:-

The study is based on secondary data.

The study is concluded with secondary data analysis, Hence the sample of 9 AMCs were

selected and top selling mutual fund in each of the options like Equity ,Debt and Balnced funds

are selected .

The commission given by each of the AMC to distributers is collected from company websites

The Nature of the project comprises of Descriptive and Inferential statistics to understand the

commissions earned by the distributers for 1,00,000 investment in any option.

DATA SOURCES:-

Secondary data was collected for Birla Sunlife, DSP Blackrock, SBI,ICICI,HDFC,HSBC,

Franklin Templeton, ING and TATA AMCs for Equity, Debt and Balanced options. Their

upfront and trail commissions were collected. The top performing fund of each AMC in different

options was collected with past 5 years returns.

Secondary data for the project was collected from from various websites like

www.amfiindia.com; www.nsim.ac.in; www.sbimf.com; www.mutualfundsindia.com,

www.moneycontrol.com, www.icici.com,

TOOLS USED FOR ANALYSIS:-

Microsoft Excel was used to analyze the data.

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REVIEW OF LITERATURE

Santosh Anagol,Shawn Cole and Shayak Sarkar have made a research study on Understanding

the Advice of Commissions-Motivated Agents: Evidence from the Indian Life Insurance Market

an audit study to test two types of predictions emerging from recent theoretical

models on commissions and financial advice. The first prediction is that agents will have an

incentive to recommend more expensive, less suitable, products to consumers. Throughout our

three experimental designs, we and that life insurance agents rarely recommend term insurance.

Even in audits where there should be no commitment savings motivation, we still find that agents

predominantly recommend whole insurance.

They also found that agents cater to customers' pre-conceptions of what the right product is

for them as much as (if not more than) to objective information about what the right product is.

This suggests that, at least in our sample, agents do not actively try to de-bias customers. This

result holds even in the case where an agent has an incentive to de-bias the customer because a

de-biased customer would purchase a higher commission product. These results suggest that

relying on competition to de-bias consumers of their misconceptions may not lead to markets

that inform consumers.

Theodore E. Day,Yi Wang, and Yexiao Xu in their research paper,Investigating

Underperformance by Mutual Fund Portfolios examine the relation between performance and

turnover on a pre-expense basis. The study concludes that that there is a strong negative

correlation between pre-expense performance and portfolio turnover clearly indicates that, in

general, high mutual fund turnover is not driven by superior information.

Santosh Anagol, Vijaya Marisetty, Renuka Sane, and Buvaneshwaran Venugopal primary

empirical methodology in Distribution Fees and Mutual Fund Flows: Evidence from a Natural

Experiment in the Indian Mutual Funds Market paper is to compare the impact of the entry load

ban on funds that charged high entry loads prior to the ban versus funds that charged low entry

loads to the ban. They studied the impact of a ban on entry-loads which reduced the ability of

Indian mutual funds to pay commissions to financial product brokers. Aggregate data shows that

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net flows in to mutual funds declined dramatically in the three years after the entry load ban was

introduced. They expected that if entry load ban led to increased search costs for customers as

brokers were no longer interested in selling products, fund growth should be lower for previously

high entry load funds relative to low entry load funds. The evidence found was contrary.

Dr.Nishi Sharma(2012)studied Indian Investors Perception towards Mutual Funds trough

Factor Analysis and concluded Factor 1 as Scheme / Fund related Attributes which includes

Regular Updates on every trading day (regarding investment, NAV etc.), Safety of Investment,

Full Disclosure of Information regarding Scheme / Fund like objective, periodicity of valuation,

schemes sale/ repurchase etc., Favorable Credit Rating of Scheme, Factor 2 as Monetary

Benefits which includes six variables viz., Capital Appreciation, Charges (Expense Ratio, Entry

Load and Exit Load), Regular Return on Investment, Early Bird Incentives, Fringe Benefits like

Tax Benefits, Free Insurance, Free Credit Card, Loans on Collateral etc., Liquidity and Factor 3

as Sponsors Attributes which includes four variables viz., Reputation of Sponsor, Sponsors

Expertise, Promptness in Service and Retaliation of Investors Grievances.

Marsha Bishop, Dave Seerattan, Patrick Kent Watson, in their research paper The Structure and

Performance of Equity Mutual Funds in an emerging economy: the case of Trinidad & Tobago

Made a comparison is made between mutual funds created, managed and distributed by the

locally owned commercial banks and the largest non-bank equity fund, the Income and Growth

Fund of the Trinidad and Tobago Unit Trust Corporation over the period June 2001 to May

2005. Both types of funds have similar total fees although the fee structure may differ slightly in

terms of the various types of fees and whether some additional expenses are charged to the fund.

The return dynamics of the funds are affected, however, by the relative dominance of these asset

classes. The major difference in terms of the corporate structure between the UTC and the

bank-based funds did not seem to have an impact on relative performance since the expected

impact of this normally comes through differences in the total fee ratio.

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CHAPTER-2

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Brief Profile of Organizations:-

The Asset Management companies of mutual funds Birla Sunlife, DSP Blackrock, SBI,ICICI

prudential ,HDFC,HSBC, Franklin Templeton, ING and TATA are discussed in this section.

They are top Asset Management companies in India. ICICI prudential, Birla Sunlife are some of

the fastest growing AMCs whereas HDFC is the leading organization with 108,990 Cr Assets

under management.

Birla Sun Life Asset Management Company Ltd

Birla Sun Life Asset Management Company Ltd. (BSLAMC), the investment managers of Birla

Sun Life Mutual Fund, is a joint venture between the Aditya Birla Group and the Sun Life

Financial Services Inc. of Canada. The joint venture brings together the Aditya Birla Group's

experience in the Indian market and Sun Life's global experience.

Established in 1994, Birla Sun Life Mutual fund has emerged as one of India's leading flagships

of Mutual Funds business managing assets of a large investor base. Our solutions offer a range of

investment options, including diversified and sector specific equity schemes, fund of fund

schemes, hybrid and monthly income funds, a wide range of debt and treasury products and

offshore funds.

Birla Sun Life Asset Management Company has one of the largest team of research analysts in

the industry, dedicated to tracking down the best companies to invest in. BSLAMC strives to

provide transparent, ethical and research-based investments and wealth management services.

Birla Sun Life Asset Management Company follows a long-term, fundamental research based

approach to investment. The approach is to identify companies, which have excellent growth

prospects and strong fundamentals. The fundamentals include the quality of the companys

management, sustainability of its business model and its competitive position, amongst other

factors.

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DSP BLACKROCK -The Asset Management Company

DSP BlackRock Investment Managers Pvt. Ltd. is the investment manager to DSP BlackRock

Mutual Fund.

The philosophy of DSP BlackRock Investment Managers Pvt. Ltd. has been grounded in the

belief that experienced investment professionals, using a disciplined process and sophisticated

analytical tools, can consistently add value to client portfolios.

DSP BlackRock Investment Managers Pvt. Ltd. takes a three dimensional approach to the

management of the organization, incorporating functional, product and regional elements in

support of clients' goals. The functional dimension looks at the company's operations by specific

task, such as account management or operations. The product dimension brings together the

cross-disciplinary expertise critical to managing client assets in each class. Finally, the regional

aspect of the company's model recognizes the unique, geography-specific needs of clients as well

as the importance of local regulatory issues.

DSP BlackRock Investment Managers is one of the premier asset management companies in

India. It is a joint venture between the DSP Group and BlackRock.

The DSP Group, headed by Mr. Hemendra Kothari, is one of the oldest financial services firms

in India. It has a track record of over 145 years and was one of the founding members of the

Bombay Stock Exchange.

BlackRock is the largest listed asset management company in the world. It is a premier provider

of investment solutions through a variety of product structures, including individual and

institutional separate accounts, mutual funds and other pooled investment vehicles, and the

industry-leading iShares ETFs to investors around the world. BlackRock is a truly global firm

that combines the benefits of worldwide reach with local service and relationships. It has a deep

presence in every major capital market in the world, which results in greater insights into

increasingly interconnected financial markets. Managing assets for investors in North and South

America, Europe, Asia, Australia, the Middle East and Africa, the firm today employs more than

9,300 talented professionals and maintains offices in 26 countries around the world.

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SBI Funds Management Pvt. Ltd

With 25 years of rich experience in fund management, we at SBI Funds Management Pvt. Ltd.

bring forward our expertise by consistently delivering value to our investors. We have a strong

and proud lineage that traces back to the State Bank of India (SBI) - India's largest bank. We are

a Joint Venture between SBI and AMUNDI (France), one of the world's leading fund

management companies.

With our network of over 222 points of acceptance across India, we deliver value and nurture the

trust of our vast and varied family of investors.

Excellence has no substitute. And to ensure excellence right from the first stage of product

development to the post-investment stage, we are ably guided by our philosophy of growth

through innovation and our stable investment policies. This dedication is what helps our

customers achieve their financial objectives.

SBIs expert team of experienced and market savvy researchers prepare comprehensive

analytical and informative reports on diverse sectors and identify stocks that promise high

performance in the future. SBI also seeks to provide investors with opportunities for progressive

growth through our innovative products, superior stock selection and active portfolio

management. Accordingly, SBI also enhance and optimize asset allocation and stock selection

based on internal and external research. Derivatives are used to hedge and rebalance portfolios to

keep the risk factors at reasonable levels,

SBI objective is to endeavor to outperform the benchmarks through well researched investments

in Indian equities. This is achieved by implementing an active management style based on

fundamental analysis, leading to the construction of a portfolio. It could be blended, large cap,

mid cap, or specific sector oriented - which aims at capturing the growth potential of Indian

equities.

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ICICI Prudential Mutual Fund

ICICI Prudential Mutual Fund (the Fund) offers a wide range of retail and corporate investment

solutions across different asset classes like Equity, Fixed Income and Gold.

The Fund House has continuously aimed to provide investors with financial solutions to aid them

in achieving their lifecycle objectives. It has constantly been on the forefront of innovation and

has introduced products aligned to meet customer needs leading to a well-diversified portfolio of

around 57 mutual fund products. The success of the endeavors is evident in the mutual fund

investor base that has witnessed significant growth from 210 to over 2 Million currently.

ICICI Prudential Mutual Fund gained from managing funds as per its investment objectives and

was able to deliver superior risk adjusted returns. The consistent long term performance was

achieved on the strength of fundamentals, process driven investment approach with enough

flexibility for the fund managers to manage their funds in their unique style and insight.

The fund house over the last 18 years has garnered trust of its investors and has emerged as the

leading and preferred investment solution provider in India. The fund house has always aimed to

fulfill its fiduciary responsibility of managing investor's wealth with prudence and due diligence.

ICICI Prudential Asset Management Company Ltd. (IPAMC/ the Company) is the joint venture

between ICICI Bank, a well-known and trusted name in financial services in India and Prudential

Plc, one of UKs largest players in the financial services sectors. IPAMC was incorporated in the

year 1993. The Company in a span of over 18 years since inception and just over 13 years of the

Joint Venture, has forged a position of preeminence in the Indian Mutual Fund industry as the

third largest asset management company in the country, contributing significantly to the growth

of the Indian mutual fund industry.

The Company manages significant Mutual Fund Asset Under Management (AUM), in addition

to Portfolio Management Services and International Advisory Mandates for clients across

international markets in asset classes like Debt, Equity and Real Estate with primary focus on

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risk adjusted returns.

IPAMC has witnessed substantial growth in scale. From merely 2 locations and 6 employees

during inception to the current strength of over 700 employees with reach across around 150

locations, the growth momentum of the Company has been exponential. The organization today

is an ideal mix of investment expertise, resource bandwidth & process orientation. IPAMCs

Endeavour is to bridge the gap between savings & investments to help create long term wealth

and value for investors through innovation, consistency and sustained risk adjusted performance.

HDFC Asset Management Company Limited (AMC)

HDFC Asset Management Company Ltd (AMC) was incorporated under the Companies Act,

1956, on December 10, 1999, and was approved to act as an Asset Management Company for

the HDFC Mutual Fund by SEBI vide its letter dated July 3, 2000.

In terms of the Investment Management Agreement, the Trustee has appointed the HDFC Asset

Management Company Limited to manage the Mutual Fund. The paid up capital of the AMC is

Rs. 25.241 crore as on September 30, 2013.

Zurich Insurance Company (ZIC), the Sponsor of Zurich India Mutual Fund, following a review

of its overall strategy, had decided to divest its Asset Management business in India. The AMC

had entered into an agreement with ZIC to acquire the said business, subject to necessary

regulatory approvals.

HSBC Global Asset Management

HSBC Global Asset Management in India is part of the core global investment management

business of the HSBC Group. With dedicated investment professionals across Europe, Africa,

Asia-Pacific and the Americas, HSBC Global Asset Management has strong global investment

capabilities that are delivered to clients locally. For institutions, corporates and financial

intermediaries, a comprehensive range of investment management solutions are offered. For high

net worth individuals, HSBC Global Asset Management works with relationship managers to

provide bespoke portfolio management services.

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We have been dedicated to managing global assets on behalf of clients for more than 25 years.

As far back as 1994, it was recognised that in an increasingly global economy, the

internationalisation of assets would need a credible global organisation to ensure that the best

possible solutions could be delivered to clients. The Group responded by uniting its separate

regional businesses under the HSBC banner to create a single powerful investment manager

aimed at delivering global investment capability combined with significant local expertise.

HSBC Global Asset Management has funds under management of USD416.3 billion as on 30

September 2009.

HSBC Asset Management (India) Private Limited is the Investment Manager to HSBC Mutual

Fund, set up locally by the HSBC Group. HSBC Mutual Fund is the brand name adopted by

HSBC Asset Management (India) Private Limited. The business is working on ambitious plans

to position itself as one of the leading Private Sector Fund Managers in the Indian financial

market - one of the most promising markets in Asia. It also aims to expand its customer base by

extending its product range to include a wide variety of investment products and enhance its

reputation in India of being a provider of international quality investment products and services.

ING Investment Management India

ING Investment Management is the principal asset manager of ING Group. Against the

background of ING Group realizing its global ambitions, ING Investment Management has also

expanded across borders. Nowadays we are active in well over 25 countries.

In India, ING is present in fields of banking and asset management in the form of ING Vysya

Bank and ING Investment Management respectively. The presence in both fields signifies the

importance that the group attaches to the Indian markets and the group's operations here, as well

as its bullish future outlook on the country.

ING Investment Management (I) Pvt Ltd has been associated with innovation and responsive

adaptability with sharp minds at work. ING Investment Management has sealed a position of

strength and is considered as one of the top contenders to challenge the market leaders. ING

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Investment Management has enjoyed many firsts and has always maintained a pioneering

outlook.

ING Investment Management India operates under two divisions

Mutual Fund:

Under the Mutual Fund division, ING offers a range of equity, debt and alternative asset

class funds in Single Manager & Multi Manager category. Each fund follows a stringent

investment process backed by in house research. Multi Manager business offers open

architecture, zero brand bias and active management. The belief to construct a Multi

Manager fund is not by simply combining the third party mutual funds with the best

performance records. Instead, use core research and proprietary investment tools to blend

funds which offer the potential for superior, consistent performance in the future.

Portfolio Management Service (PMS):

ING Private is the umbrella brand of ING Investment Management (India) Pvt. Ltd. in

India for all PMS product offerings. This exclusive offering especially created for high

net worth individuals and institutional investors, offers investment solutions that are built

on INGs global and local quantitative strategy expertise, using years of in-depth research

that together enable innovation in product design.

Franklin Templeton India

Franklin Templeton's association with India dates back to more than a decade as an investor. As

part of the group's major thrust on investing in markets around the world, the India office was set

up in 1996 as Templeton Asset Management India Pvt. Limited. It flagged off the mutual fund

business with the launch of Templeton India Growth Fund in September 1996, and since then the

business has grown at a steady pace.

Since starting its operations in India, Franklin Templeton has invested a considerable amount of

time, effort and resources towards investor and distributor education, the belief being - to be

successful in the long term, the fundamentals need to be corrected, at whatever cost! This has

resulted in various advertising campaigns aimed at educating investors, participation in seminars

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and distributor training programs. Franklin Templeton has played a pivotal role in steering the

industry to its current stage, and as long term players, we continue to strive to achieve the

objective of 'making mutual funds an investment of choice' for both individual and institutional

investors.

In July 2002, Franklin Templeton India acquired Pioneer ITI, another leading fund house in India

to create an organization with rich investment experience over market cycles, one of the most

comprehensive product portfolios, footprint across the country and an in-house shareholder

servicing function. The huge synergies that existed in the two organizations have helped the

business grow at a rapid pace, catapulting the company to among the top fund houses in India.

The Tata Asset Management

Backed by one of the most trusted and valued brands in India, Tata Mutual Fund has earned the

trust of lakhs of investors with its consistent performance and world-class service.

Tata Mutual Fund manages around 19,722 crores (average AUM for the quarter of October

December 2013) worth of assets across its varied offerings. Tata Mutual Fund offers an

investment option for everyone, whether you are a businessman or salaried professional, a retired

person or housewife, an aggressive investor or a conservative capital builder.

The Tata Asset Management philosophy is centred on seeking consistent, long-term results. Tata

Asset Management aims at overall excellence, within the framework of transparent and rigorous

risk controls.

We are a part of the Tata group, one of India's largest and most respected industrial groups,

renowned for its adherence to business ethics.

The Group has always believed in returning wealth to the society that it serves. Thus, nearly two-

thirds of the equity of Tata Sons, the Group's promoter company, is held by philanthropic trusts,

which have created a host of national institutions in the natural sciences, medical care, energy

and the arts. The trusts also give substantial annual grants and endowments to deserving

individuals and institutions in the areas of education, healthcare and social uplift.

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Table 1:Assets under Management in Rs (Cr)

Mutual Funds Sep-13 Dec-13 Change % Change

HDFC Mutual Fund 103,046 108,990 5,944 5.77

ICICI Prudential Mutual Fund 85,174 97,191 12,017 14.11

Birla Sun Life Mutual Fund 77,256 84,998 7,742 10.02

SBI Mutual Fund 58,706 64,561 5,855 9.97

Franklin Templeton Mutual Fund 43,688 44,258 569 1.3

DSP BlackRock Mutual Fund 30,486 32,642 2,156 7.07

Tata Mutual Fund 17,966 19,723 1,757 9.78

HSBC Mutual Fund 6,718 7,652 933 13.89

ING Mutual Fund 760 672 -87 -11.5

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INDUSTRY PROFILE

History of the Indian Mutual Fund Industry

The mutual fund industry in India started in 1963 with the formation of Unit Trust of India, at

the initiative of the Government of India and Reserve Bank of India. The history of mutual funds

in India can be broadly divided into four distinct phases

First Phase 1964-87

Unit Trust of India (UTI) was established on 1963 by an Act of Parliament. It was set up by the

Reserve Bank of India and functioned under the Regulatory and administrative control of the

Reserve Bank of India. In 1978 UTI was de-linked from the RBI and the Industrial Development

Bank of India (IDBI) took over the regulatory and administrative control in place of RBI. The

first scheme launched by UTI was Unit Scheme 1964. At the end of 1988 UTI had Rs.6,700

crores of assets under management.

Second Phase 1987-1993 (Entry of Public Sector Funds)

1987 marked the entry of non- UTI, public sector mutual funds set up by public sector banks and

Life Insurance Corporation of India (LIC) and General Insurance Corporation of India (GIC).

SBI Mutual Fund was the first non- UTI Mutual Fund established in June 1987 followed by

Canbank Mutual Fund (Dec 87), Punjab National Bank Mutual Fund (Aug 89), Indian Bank

Mutual Fund (Nov 89), Bank of India (Jun 90), Bank of Baroda Mutual Fund (Oct 92). LIC

established its mutual fund in June 1989 while GIC had set up its mutual fund in December

1990.

At the end of 1993, the mutual fund industry had assets under management of Rs.47,004 crores.

Third Phase 1993-2003 (Entry of Private Sector Funds)

With the entry of private sector funds in 1993, a new era started in the Indian mutual fund

industry, giving the Indian investors a wider choice of fund families. Also, 1993 was the year in

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which the first Mutual Fund Regulations came into being, under which all mutual funds, except

UTI were to be registered and governed. The erstwhile Kothari Pioneer (now merged with

Franklin Templeton) was the first private sector mutual fund registered in July 1993.

The 1993 SEBI (Mutual Fund) Regulations were substituted by a more comprehensive and

revised Mutual Fund Regulations in 1996. The industry now functions under the SEBI (Mutual

Fund) Regulations 1996.

The number of mutual fund houses went on increasing, with many foreign mutual funds setting

up funds in India and also the industry has witnessed several mergers and acquisitions. As at the

end of January 2003, there were 33 mutual funds with total assets of Rs. 1,21,805 crores. The

Unit Trust of India with Rs.44,541 crores of assets under management was way ahead of other

mutual funds.

Fourth Phase since February 2003

In February 2003, following the repeal of the Unit Trust of India Act 1963 UTI was bifurcated

into two separate entities. One is the Specified Undertaking of the Unit Trust of India with assets

under management of Rs.29,835 crores as at the end of January 2003, representing broadly, the

assets of US 64 scheme, assured return and certain other schemes. The Specified Undertaking of

Unit Trust of India, functioning under an administrator and under the rules framed by

Government of India and does not come under the purview of the Mutual Fund Regulations.

The second is the UTI Mutual Fund, sponsored by SBI, PNB, BOB and LIC. It is registered with

SEBI and functions under the Mutual Fund Regulations. With the bifurcation of the erstwhile

UTI which had in March 2000 more than Rs.76,000 crores of assets under management and with

the setting up of a UTI Mutual Fund, conforming to the SEBI Mutual Fund Regulations, and

with recent mergers taking place among different private sector funds, the mutual fund industry

has entered its current phase of consolidation and growth.

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The graph indicates the growth of assets over the years.

Current Mutual funds Market 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). Until 1987, UTI enjoyed a monopoly in the Indian mutual

fund market. Then a host of other government-controlled Indian financial companies came up

with their own funds. These included State Bank of India, Canara Bank, and Punjab National

Bank. This market was made open to private players in 1993, as a result of the historic

constitutional amendments brought forward by the then Congress-led government under the

existing regime of Liberalization, Privatization and Globalization (LPG). The first private sector

fund to operate in India was Kothari Pioneer, which later merged with Franklin Templeton.

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Key Developments over the Years

The mutual fund industry in India has come a long way. Significant spurts in size were

noticed in the late 80s, when public sector mutual funds were first permitted, and then in

the mid-90s, when private sector mutual funds commenced operations. In the last few

years, institutional distributors increased their focus on mutual funds.

The emergence of stock exchange brokers as an additional channel of distribution, the

continuing growth in convenience arising out of technological developments, and higher

financial literacy in the market should drive the growth of mutual funds in future.

AUM of the industry, as of March 31, 2012 has touched Rs 587,217 from 1309 schemes

offered by 44 mutual funds. These were distributed as follows:

(Source:www.amfiindia.com)

Table 2: AUM of MF industry in different options

In some advanced countries, mutual fund AUM is a multiple of bank deposits. In India,

mutual fund AUM is not even 10% of bank deposits. This is indicative of the immense

potential for growth of the industry.

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The high proportion of AUM in debt, largely from institutional investors is not in line with

the role of mutual funds, which is to channelize retail money into the capital market.

Various regulatory measures to reduce the costs and increase the conveniences for

investors are aimed at transforming mutual funds into a truly retail vehicle of capital

mobilization for the larger benefit of the economy.

The mutual fund industry has registered a compound annual growth rate (CAGR) of 18% from

2009 - 2013, but the national population is still largely underbanked with a very low level of

financial inclusion.

Investors pumped in more than Rs 37,000 crore in various mutual fund schemes in May 2013

taking the total funds mobilisation during the first two months of the current fiscal to Rs 1.44

lakh crore. The funds mobilisation in May comes after net inflow of Rs 1.06 lakh crore in the

preceding month.

As per the latest data available with market regulator Securities and Exchange Board of India

(SEBI), there was a net inflow of Rs 37,435 crore during May as against Rs 1.06 lakh crore

infused in April. The April's figure was the highest net inflow by investors in mutual fund (MF)

schemes in a single month since April 2011, when investors had put in Rs 1.84 lakh crore.

At gross level, mutual funds mobilized Rs 7.03 lakh crore in May, while there was redemption

worth Rs 6.65 lakh crore as well during the period. This resulted in a net inflow of Rs 37,435

crore.

The fund mobilization has also helped the total asset under management (AUM) of mutual funds

to grow to Rs 8.68 lakh crore as on May 31, 2013. The net mobilization by investors in various

mutual fund schemes during the current fiscal (April-May) reached Rs 1.44 lakh crore.

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Current Trend in the Industry

The financial services landscape is transforming,with a plethora of changes taking place on the

regulatory front. Against this backdrop, asset management companies (AMCs) realise that they

need to re-structure their businesses in order to meet the evolving needs of their clients and

provide them with complete investment solutions. Although emerging markets such as India

provide a wide range of opportunities, it is important to tap into these avenues to fuel the growth

of the mutual fund industry.

Amidst volatility and uncertainty in the markets,average assets under management (AUM)

posted a growth of 23% for the year ended March 2013. This was considerably higher than the

12% growth reported in March 2012. The industry has grown at a compound annual growth rate

(CAGR) of 18% from 2009 -2013.

Table 3: Average Growth in AUM

The Indian population is largely under-banked with a very low level of financial inclusion

leaving room for further penetration.The extent of under-penetration in the market is a sore point

with the banking and financial services

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industry, with a large amount of savings being channelised into gold and real estate rather than

the capital market. The GDP growth has slowed down, sluggish at 5% in 2012-13, with savings

and investment rates following a downward trend. In 2010-11, the savings and investment rates

were 34% and 36.8%, respectively, which declined

to 30.8% and 35%, respectively, in 2011-12 and 31.8% and 35.4% in 2012-13.

Against the above backdrop, distributing mutual fund products continues to be a challenge. Post

the regulatory changes in August 2009, which restricted entry load on mutual funds,the industry

went through a period of sluggish

growth, resulting in a lack of incentive to sell mutual fund products. Subsequently, a number of

independent financial advisors (IFAs) and other distributors stopped pushing mutual fund

products to investors and dropped out

of the market. In order to shift the sales incentive plans from the traditional front-ended schemes

to trail

orientation, SEBI recently announced significant changes to the commission

structures.Commissions are now payable through a trail mechanism where the advisor receives

commission on the assets retained by a scheme

or fund on an on-going basis. This takes away the temptation to cause investment churn for

commissions. Also, in order to deepen the penetration beyond the top 15 metros or cities, the

regulation now permits fund- houses to

charge an additional fee of up to 0.3% more for the expense on the investment flows from small

cities and towns.

However, this is associated with mutual funds drawing 30% of new inflows from these smaller

towns. This is

likely to push distributors to penetrate markets further, increasing the sales of mutual fund

products and thereby bringing in new investors.

The independent financial advisor (IFA) is a crucial link in the distribution chain of mutual

funds. This segment has potential in widening the distribution network and expanding the client

base on a sustainable basis. To encourage first-time distributors, AMFI has placed a waiver of

around 3,000 INR on registration fees for first-time distributors, for a period of five months,

valid until 30 June, 2013. IFAs exercise a strong influence over customers and thereby have the

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key to building a strong relationship with their clientele. Right from scheme selection to asset

allocation and asset diversification, it is the IFAs who can mould the customers thoughts and

direct their investments into appropriate channels. IFAs draw up a financial plan based on the

financial goals and requirements of their clients before suggesting any investments. They are also

responsible for monitoring these investments at regular intervals

to ensure that there is limited diversion from the ultimate financial goal of the investor, and to

advise the best possible path in conditions of market volatility and uncertainty.The recipe for

success of the advisory model is basic. The starting point is to understand what yourcustomer

intends to achieve as part of his or her financial plan and the kind of returns he or she is looking

at over a period of time. Also, there is a need to focus on asset allocation. IFAs also need to

gauge the extent of risk which the investor can take and suggest funds or schemes suited to his or

her appetite.

Hence, it is of prime importance that IFAs are empowered with professional training and

education. This can be done through regular knowledge summits, seminars, etc across cities. The

AMC community is also supportive of the

IFA fraternity, extending support for business development, training requirements and investor

education.

AMFI is running a 360 degree campaign, Savings ka naya tarika, which was first

launched in September 2011. Thisnation-wide campaign with a budget of 100 million INR

proved to be extremely successful, receiving a response of over 30,000 messages (SMS) from

investors. Mutual fund booklets were sent out to these people who had responded to this

campaign, with a call centre also being set-up to address queries of investors.

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CHAPTER-3

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MUTUAL FUNDS DEFINITION

A mutual fund is a collection of stocks and/or bonds. A mutual fund as a company is that brings

together a group of people and invests their money in stocks, bonds, and other securities. Each

investor owns shares, which represent a portion of the holdings of the fund.

An Investor can make money from a mutual fund in three ways:

1) Income is earned from dividends on stocks and interest on bonds. A fund pays out nearly all

of the income it receives over the year to fund owners in the form of a distribution.

2) If the fund sells securities that have increased in price, the fund has a capital gain. Most funds

also pass on these gains to investors in a distribution.

3) If fund holdings increase in price but are not sold by the fund manager, the fund's shares

increase in price. An Investor can then sell your mutual fund shares for a profit..

Funds will also usually give you a choice either to receive a check for distributions or to reinvest

the earnings and get more shares that is Growth option or Dividend option

Net asset value (NAV), which is a fund's assets minus liabilities, is the value of a mutual fund.

NAV per share is the value of one share in the mutual fund

When one buy shares, one pays the current NAV per share plus any sales front-end load. When

one sells shares, the fund will pay the customer NAV less any back-end load.

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Advantages of Mutual Funds

Professional Management - The primary advantage of funds is the professional management of

your money. Investors purchase funds because they do not have the time or the expertise to

manage their own portfolios and mutual fund is a relatively inexpensive way for small investors

Diversification - By owning shares in a mutual fund instead of owning individual stocks or

bonds, your risk is spread out.

Economies of Scale - Because a mutual fund buys and sells large amounts of securities at a

time, its transaction costs are lower than what an individual would pay for securities transactions.

Liquidity Like an individual stock, a mutual fund allows the customer to request that your

shares be converted into cash at any time.

Simplicity - Buying a mutual fund is easy and the minimum investment is small.

Disadvantages of Mutual Funds

Professional Management - Management is by no means infallible, and, even if the fund loses

money, the manager still gets paid.

Costs - Creating, distributing, and running a mutual fund is an expensive proposition.

Everything from the manager's salary to the investors' statements cost money. Those expenses

are passed on to the investors.

Dilution - It's possible to have too much diversification. Because funds have small holdings in

so many different companies, high returns from a few investments often don't make much

difference on the overall return. Dilution is also the result of a successful fund getting too big.

Taxes - When a fund manager sells a security, a capital-gains tax is triggered. Investors who are

concerned about the impact of taxes need to keep those concerns in mind when investing in

mutual funds. Taxes can be mitigated by investing in tax-sensitive funds or by holding non-tax

sensitive mutual fund in a tax-deferred account.

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MUTUAL FUND VARIANTS

Each fund has a predetermined investment objective that tailors the fund's assets, regions of

investments and investment strategies. At the fundamental level, there are three varieties of

mutual funds:

1) Equity funds (stocks)

2) Fixed-income funds (bonds)

3) Money market funds

1.Equity Funds

The primary objective is to invest in equity shares.

The investment style box gives a clear idea about the Equity fund investments to customers .

Value:-The term value refers to a style of investing that looks for high quality companies that are

out of favor with the market. These companies are characterized by low P/E and price-to-book

ratios and high dividend yields.

Growth:-The opposite of value is growth, which refers to companies that have had strong growth

in earnings, sales and cash flow.

Blend:-A compromise between value and growth is blend, which simply refers to companies that

are neither value nor growth stocks and are classified as being somewhere in the middle.

Large Cap and Value:-A mutual fund that invests in large-cap companies that are in strong

financial shape but have recently seen their share prices fall would be placed in the upper left

quadrant of the style box .

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Small Cap and Growth :-The opposite of this would be a fund that invests in startup technology

companies with excellent growth prospects. Such a mutual fund would reside in the bottom right

quadrant.

Global/International Funds

An international fund (or foreign fund) invests only outside your home country. Global funds

invest anywhere around the world, including your home country.

It's tough to classify these funds as either riskier or safer than domestic investments. They do

tend to be more volatile and have unique country and/or political risks. But, on the flip side, they

can, as part of a well-balanced portfolio, actually reduce risk by increasing diversification.

Although the world's economies are becoming more inter-related, it is likely that another

economy somewhere is outperforming the economy of your home country.

Specialty Funds

This classification of mutual funds is more of an all-encompassing category that consists of

funds that have proved to be popular. This type of mutual fund forgoes broad diversification to

concentrate on a certain segment of the economy.

Sector funds

Sector funds are targeted at specific sectors of the economy such as financial, technology, health,

etc. Sector funds are extremely volatile. There is a greater possibility of big gains, but you have

to accept that your sector may tank.

Regional funds

Regional funds make it easier to focus on a specific area of the world. This may mean focusing

on a region or an individual country . An advantage of these funds is that they make it easier to

buy stock in foreign countries, which is otherwise difficult and expensive. Just like for sector

funds, you have to accept the high risk of loss, which occurs if the region goes into a bad

recession.

Socially responsible funds

Socially-responsible funds (or ethical funds) invest only in companies that meet the criteria of

certain guidelines or beliefs. Most socially responsible funds don't invest in industries such as

tobacco, alcoholic beverages, weapons or nuclear power. The idea is to get a competitive

32 | P a g e

performance while still maintaining a healthy conscience.

Index Funds

The last but certainly not the least important are index funds. This type of mutual fund replicates

the performance of a broad market index . An investor in an index fund figures that most

managers can't beat the market. An index fund merely replicates the market return and benefits

investors in the form of low fees.

2.Bond/Income Funds

Income funds purpose is to provide current income on a steady basis. When referring to mutual

funds, the terms "fixed-income," "bond," and "income" are synonymous. These terms denote

funds that invest primarily in government and corporate debt. While fund holdings may

appreciate in value, the primary objective of these funds is to provide a steady cash flow to

investors.

Bond funds are likely to pay higher returns than certificates of deposit and money market

investments, but bond funds aren't without risk. Because there are many different types of bonds,

bond funds can vary dramatically depending on where they invest.

3.Money Market Funds

The money market consists of short-term debt instruments, mostly Treasury bills. This is a safe

place to park your money. A typical return is twice the amount you would earn in a regular

checking/savings account and a little less than the average certificate of deposit (CD).

Others

Balanced Funds

The objective of these funds is to provide a balanced mixture of safety, income and capital

appreciation. The strategy of balanced funds is to invest in a combination of fixed income and

equities. A typical balanced fund might have a weighting of 60% equity and 40% fixed income.

The weighting might also be restricted to a specified maximum or minimum for each asset class.

33 | P a g e

The portfolio manager is therefore given freedom to switch the ratio of asset classes as the

economy moves through the business cycle.

Capital Protected Schemes

Capital Protected Schemes are close-ended schemes, which are structured to ensure that

investors get their principal back, irrespective of what happens to the market. This is ideally done

by investing in Zero Coupon Government Securities whose maturity is aligned to the schemes

maturity.

Real Estate Funds

They take exposure to real estate. Such funds make it possible for small investors to take

exposure to real estate as an asset class.

Exchange Traded Funds

Exchange Traded funds (ETF) are open-ended funds, whose units are traded in a stock

exchange.A feature of open-ended funds, which allows investors to buy and sell units from the

mutual fund, is made available only to very large investors in an ETF.

Commodity Funds

The investment objective of commodity funds would specify the commodities it proposes to

invest in. As with gold, such funds can be structured as Commodity ETF or Commodity Sector

Funds.

In India, mutual fund schemes are not permitted to invest in commodities, other than Gold

Therefore, the commodity funds in the market are in the nature of Commodity Sector Funds, i.e.

funds that invest in shares of companies that are into commodities. Like Gold Sector Funds,

Commodity Sector Funds too are a kind of equity fund.

Fund of Funds

The feeder fund was an example of a fund that invests in another fund. Similarly, funds can be

structured to invest in various other funds, whether in India or abroad. Such funds are called fund

of funds.

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MUTUAL FUND SCHEMES

Wide variety of Mutual Fund Schemes exist to cater to the needs such as financial position, risk

tolerance and return expectations etc. The table below gives an overview into the different

options available to customers.

Open-ended funds are open for investors to enter or exit at any time, even after the NFO.

Close-ended funds have a fixed maturity. Investors can buy units of a close-ended scheme, from

the fund, only during its NFO.

Interval funds combine features of both open-ended and close-ended schemes. They are

largely close-ended, but become open-ended at pre-specified intervals.

In a Dividend Payout Option, the fund declares a dividend from time to time.

In a Dividend Reinvestment, the amount is reinvested in the same scheme and additional units

are allotted to the investor.

In a Growth Option, the NAV would therefore capture the full value of portfolio gains.

Direct Option can be chosen to deal directly with AMC without intermediaries and have no entry

load.

Regular option is an option to invest through intermediaries and any further updations are

assisted by intermediaries for a nominal fee as entry fee.

35 | P a g e

OTHER OPTIONS AVAILABLE TO INVESTORS

The investor also has an option to opt for one time investment or systematic Investment plan,

known as SIP is an approach where the investor invests constant amounts at regular intervals.

SIP:-Mutual funds also offer facilities that help investor invest amounts regularly through a

Systematic Investment Plan (SIP).

SWP:-Withdraw amounts regularly through a Systematic Withdrawal Plan (SWP)

STP:-Move moneys between different kinds of schemes through a Systematic Transfer Plan

(STP).

Such systematic approaches like SIP and STP promote an Systematic Approach to Investments

investment discipline, which is useful in long-term wealth creation and protection. SWPs allow

the investor to structure a regular cash flow from the investment account.

Actively Managed Funds and Passive Funds

Actively managed funds are funds where the fund manager has the flexibility to choose the

investment portfolio, within the broad parameters of the investment objective of the

scheme. Since this increases the role of the fund manager, the expenses for running the

fund turn out to be higher. Investors expect actively managed funds to perform better than

the market.

Passive funds invest on the basis of a specified index, whose performance it seeks to track.

Thus, a passive fund tracking the BSE Sensex would buy only the shares that are part of the

composition of the BSE Sensex. The proportion of each share in the schemes portfolio

would also be the same as the weightage assigned to the share in the computation of the

BSE Sensex. Thus, the performance of these funds tends to mirror the concerned index.

They are not designed to perform better than the market.

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COSTS INVOLVED IN MUTUAL FUNDS

Fees can be broken down into two categories:

1. Ongoing yearly fees to keep you invested in the fund.

2. Transaction fees paid when you buy or sell shares in a fund (loads).

The Expense Ratio

Two kinds of expenses come up:

Initial Issue Expenses These are one-time expenses that come up when the scheme is offered

for the first time (NFO). These need to be borne by the AMC.

Recurring Expenses These can be charged to the scheme. Since the recurring expenses drag

down the NAV, SEBI has laid down the expenses, which can be charged to the scheme.

The ongoing expenses of a mutual fund is represented by the expense ratio. This is sometimes

also referred to as the management expense ratio (MER). The expense ratio is composed of the

following:

The cost of hiring the fund manager(s) - Also known as the management fee, this cost is

between 0.5% and 1% of assets on average.

Administrative costs - These include necessities such as postage, record keeping, customer

service etc.

On the whole, expense ratios range from as low as 0.2% (usually for index funds) to as high as

2%. The average equity mutual fund charges around 1.3%-1.5%. You'll generally pay more for

specialty or international funds, which require more expertise from managers.

Asset management companies (AMCs) manage the assets of the mutual funds and take the

investment decisions. AMCs charge investors for professional fund management and regular

operational costs which include investment management and advisory fees, sales/agent

commissions and ongoing service fees, legal and audit fees, registrar and transfer agent fees,

37 | P a g e

fund administration expenses, and marketing and selling expenses. All these expenses charged to

an investor are together called the 'total expense ratio' (TER); it is an annual charge on AUM in

percentage terms. According to the Securities and Exchange Board of India's (SEBI's)

guidelines, TER needs to be lower as AUM increases. The net asset value (NAV) of a mutual

fund scheme is net of all liabilities including TER, and hence a lower TER results in higher

returns and vice versa. In a recent circular, SEBI has included service tax under 'cost to investors'

(earlier paid by AMCs).

Loads

Loads are just fees that a fund uses to compensate brokers or other salespeople for selling you

the mutual fund.

Front-end loads - These are the most simple type of load: you pay the fee when you purchase

the fund.

Back-end loads (also known as deferred sales charges) These are charged one sells a fund

within a certain time frame.

A no-load fund sells its shares without a commission or sales charge.

Transaction Charges

In order to enable people with small saving potential and to increase reach of Mutual Fund

products in urban areas and smaller towns, SEBI has allowed a transaction charge per

subscription of Rs. 10,000/- and above to be paid to distributors of the Mutual Fund

products. However, there shall be no transaction charges on direct investments. The

transaction charge, if any, shall be deducted by the AMC from the subscription amount and paid

to the distributor; and the balance shall be invested.

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Different commissions on Mutual funds earned by Agents

There are 3 components of commissions earned by Mutual Funds Agents

1) Commission from Client

This is the commission which customer pays to the agents for their service. It generally ranges

from .5% 2% . It should depend on the quality of advice your agent provides . This is the

commission you will pay to agent every time you do the investment . After the abolision of entry

loads, client has to compensate the agents directly. So if you invest Rs 10,000 per month and

your agent charges commission @1% , he gets 1% of 10,000 = Rs 100 every month. This is the

amount you have to pay agent apart from Rs 10,000 Investment.

2) Upfront Commission

Upfront commission is the commission paid by AMC (mutual funds company) to agent in the

first year. The commission varies from one AMC to another and varies across different

categories of mutual funds. Equity Mutual funds generally give higher upfront

commissions,whereas debt funds give lower commissions. let us see an example of this

commission; if upfront commission is 0.5% , and your SIP is Rs 10,000 per month , then upfront

commission would be 0.5% of 10,000 = Rs 50 per month , ie : Rs 600 for 1st year . So even if

you dont pay your agent any commission he will earn upfront commission from AMC .

3) Trail Commission

This commission is mostly hidden from general public. This is most important part of

commissions and main earning of mutual funds agents in long run. Trail commission is the

commission paid to agents by AMC in subsequent years. The most important point you should

know is that trail commission is percentage of total AUM (total worth of customer) . So if your

total Worth of investments in a particular year is Rs 10 lacs and trail commission is 0.5% . AMC

will pay 0.5% of 10 lacs = Rs 5,000 to the agent. This is the commission paid to your agent out

of your money, Its adjusted from NAV. Which means that if an agent has 100 clients who have

Rs 10 lacs of investments (current worth , not investment) with an AMC, then total AUM (assets

under management) of that agent is total worth of all the customers, which is Rs 10 lacs X 100 =

Rs 10,00,00,000 (10 crores) . So he will get 0.5% of 10 crores = Rs 5 lacs.

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Table 4:Upfront fee and Trail commissions of AMC's

Upfront fee and trail commissions

CHAPTER-4

DATA ANALYSIS AND INTERPRETATION

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Table 5:ICICI Prudential Asset Management Company

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Table 6:Birla Sunlife

Table 7:HDFC Asset Management Company

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Table 8:Franklin Templeton Asset Management Company

Table 9:DSP Blackrock

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DSP BLACKROCK ASSET MANGEMENT COMPANY

Table 10:HSBC Asset Management Company

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Table 11:ING Mutual FUND

Table 12:TATA Mutual Fund

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CHAPTER-4

46 | P a g e

DATA ANALYSIS AND INTERPRETATION

The commission for Equity products of selected AMCs to distributers.

Table 13:Equity commissions

Equity

AMC Max upfront Max Trail

Birla Sun life Mutual fund 1 0.75

DSP Blackrock 1.25 0.5

SBI 1 0.5

ICICI 2 1.5

HDFC 0.75 0.5

HSBC 0 1.4

Franklin Templeton 0.75 0.5

TATA 0.75 0.5

ING 1 0.5

ICICI prudential pays the highest maximum upfront commission followed by DSP Blackrock for

equity products .ICICI pays the highest trail commission followed by HSBC which only pays the

trail commission.

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The commission for Debt products of selected AMCs to distributers for investment less than

10 crore rupees.

Table 14: Debt commissions

Debt

AMC Max upfront Max Trail

Birla Sunlife Mutual fund 1.25 0.5

DSP Blackrock 1.75 0.7

SBI 0.5 0.5

ICICI 2.5 1.75

HDFC 1.15 0.4

HSBC 0 1.1

Franklin Templeton 1.5 0

TATA 1 0

ING 0 1.5

ICICI prudential pays the highest maximum upfront commission followed by DSP Blackrock for

equity products .ICICI pays the highest trail commission followed by ING which only pays the

trail commission.

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The commission for Debt products of selected AMCs to distributers for investment greater than

10 crore rupees.

Table 15:Debt Commissions for >10 cr

Debt

AMC Max upfront Max Trail

Birla Sun life Mutual fund 0.4 0.5

DSP Blackrock 1.75 0.7

SBI 0.5 0.5

ICICI 2.5 1.75

HDFC 1.15 0.4

HSBC 0 1.1

Franklin Templeton 1.5 0

TATA 1 0

ING 0 1.5

ICICI prudential pays the highest maximum upfront commission followed by DSP Blackrock for

equity products .ICICI pays the highest trail commission followed by ING which only pays the

trail commission.

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The commission for Balanced products of selected AMCs to distributers

Table 16:Balanced Fund Commissions

Balanced

AMC Max upfront Max Trail

Birla Sun life Mutual fund 1.25 0.75

DSP Blackrock 1.75 0.5

SBI 1 0.5

ICICI 2 1.5

HDFC 0.75 0.5

HSBC 0 1.4

Franklin Templeton 0.75 0.5

TATA 0.75 0.5

ING 1 0.5

ICICI prudential pays the highest maximum upfront commission followed by DSP Blackrock for

equity products .ICICI pays the highest trail commission followed by HSBC which only pays the

trail commission. ICICI has been consistently giving the highest upfront as well as trail

commissions. If an investment of 1,00,000 rupees is made in equity, debt and balanced products

of the selected AMC so after 1year of the investment it appreciates by 6%. The total commission

at the end of 1 year can be calculated. Based on the total commission as calculated below the

top 3 are selected in each product category. The following tables calculate total commission

received by distributors for Rs.1,00,000 sales and continuance of mutual fund for 1 whole year

by the holder of Mutual fund units.

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Table

17:Calculation for

Equity Equity

for 1 lakh

investment

AMC

Max

upfront Max Trail

Max

upfront

at 6%

rate

Max

Trail

Total

commission

Birla Mutual fund 1 0.75 100 106000 795 895

DSP 1.25 0.5 125 106000 530 655

SBI 1 0.5 100 106000 530 630

ICICI 2 1.5 200 106000 1590 1790

HDFC 0.75 0.5 75 106000 530 605

HSBC 0 1.4 0 106000 1484 1484

Franklin

Templeton 0.75 0.5 75 106000 530 605

TATA 0.75 0.5 75 106000 530 605

ING 1 0.5 100 106000 530 630

Table 18:Calculation

for Debt Debt

for 1 lakh

investment

AMC

Max

upfront

Max

Trail Max upfront

at 6%

rate

Max

Trail

Total

commission

Birla Mutual fund 1.25 0.5 125 106000 530 655

DSP 1.75 0.7 175 106000 742 917

SBI 0.5 0.5 50 106000 530 580

ICICI 2.5 1.75 250 106000 1855 2105

HDFC 1.15 0.4 115 106000 424 539

HSBC 0 1.1 0 106000 1166 1166

Franklin Templeton 1.5 0 150 106000 0 150

TATA 1 0 100 106000 0 100

ING 0 1.5 0 106000 1590 1590

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Table 19: Calculation for Balanced

Balanced

for 1 lakh

investment

AMC Max upfront

Max

Trail Max upfront

at 6%

rate

Max

Trail

Total

commission

Birla Mutual

fund 1.25 0.75 125 106000 795 920

DSP 1.75 0.5 175 106000 530 705

SBI 1 0.5 100 106000 530 630

ICICI 2 1.5 200 106000 1590 1790

HDFC 0.75 0.5 75 106000 530 605

HSBC 0 1.4 0 106000 1484 1484

Franklin

Templeton 0.75 0.5 75 106000 530 605

TATA 0.75 0.5 75 106000 530 605

ING 1 0.5 100 106000 530 630

From the above tables the top 3 in each category is listed in table below

Table 20: Highest commission summary

Highest commission

Rank Equity Debt Balanced

1 ICICI ICICI ICICI

2 HSBC ING HSBC

3 BIRLA HSBC BIRLA

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BASED ON THE RETURNS FOR PAST 5 Years PERFORMANCE

Table 21: Equity Returns

Best in Equity Returns

Large cap

AMC Fund name 1M 3 M 6 M 1 yr 2 yr 3 yr 5 yr Rank

Birla Mutual fund Birla SL Frontline Equity (G) 10.5 3.8 4 8.1 11.6 1.6 14.2 1

DSP DSP-BR Top 100 Equity - RP (G) 7 1.9 0.9 -0.7 5.8 -1 10.6

SBI SBI Blue Chip Fund (G) 11.5 2.1 0.5 6.2 12.3 0.6 11.2 3

ICICI ICICI Pru Top 100 Fund (G) 9.5 8.9 6.8 8.1 13.3 3.3 12.3 2

HDFC HDFC Top 200 Fund (G) 10.2 0.9 -1.6 -2.2 4.5 -2.9 12.3

HSBC HSBC Dynamic Fund (G) 8.8 3.2 1.5 -2.5 3.7 -3.4 4.5

Franklin Templeton Franklin India Bluechip (G) 10.3 2.5 1 2.9 6.7 0.2 12.7

TATA Tata Pure Equity Fund (G) 10 5 5.5 5.4 9.9 -0.1 12.6

ING ING Large Cap Equity Fund (G) 9.9 2.1 -1.1 -1.6 6.4 -2.2 8 Table 22: Debt returns

Best in Debt Returns

AMC Fund name 1M 3 M 6 M 1 yr 2 yr 3 yr 5 yr Rank

Birla Mutual

fund Birla SL Income Plus -B RP (G) 0 -5.4 -1.8 4 7 6.9 8.2

DSP DSP-BR Strategic Bond-Inst (G) 1.4 -0.2 2.4 7.4 8.6 8.4 0 2

SBI SBI Magnum Income Fund (G) 0.8 -3.6 -0.4 5.7 8.9 8.2 7.2

ICICI ICICI Pru Long Term Plan-RP

(G) 0.8 2.2 4.3 8.4 8.9 8 7.3 3

HDFC HDFC Medium Term

Opportunities (G) 2.1 0 2.3 6.9 8.7 8.5 0

HSBC HSBC Flexi Debt Fund - IP (G) 1 -2.2 0.2 5.6 8.1 8 8.7

Franklin

Templeton Templeton India IBA (G) 1.4 -2.2 2.5 7.1 9.5 9 8.6

1

TATA Tata Income Fund (App.) 1.9 -1.1 2.3 7.7 8.7 7.6 5.9

ING ING Income Fund (G) 1.1 -3.9 -1.5 4.6 6.2 6.1 7.2

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Table 23: Balanced fund returns

Best in Balanced Returns

AMC Fund name 1M 3 M 6 M 1 yr 2 yr 3 yr 5 yr Rank

Birla Mutual fund Birla Sun Life 95 Fund (G) 6.9 1.7 1.7 3.5 6.8 1.6 14.6

DSP DSP-BR Balanced Fund (G) 4.5 -1.5 -2.9 -4.5 1.7 -2.3 9

SBI SBI Magnum Balanced Fund (G) 5.7 1.6 2.4 8.3 10.9 1.2 10.4 3

ICICI ICICI Pru Balanced Fund (G) 7.7 2.9 2.8 7 10.6 6.3 12.8 2

HDFC HDFC Balanced Fund (G) 6.2 1.1 -0.5 -2 4.6 2.8 13.9

HSBC - - - - - - - -

Franklin Templeton FT India Balanced Fund (G) 7.3 0.3 1.8 3.8 7 1.9 10

TATA Tata Balanced Fund (G) 9.1 2.8 3.6 4 10.5 4.3 14.5 1

ING ING Balanced Portfolio (G) 7.5 2.3 2.1 4.7 6 0.8 8.8

Based on the above tables the top3 in each category can be listed as

Table 24:Summary of Fund Performance

Rank Equity Debt Balanced

1 Birla Mutual fund

Franklin

Templeton TATA

2 ICICI DSP ICICI

3 SBI ICICI SBI

From the highest commission paid to distributors as well as the performance of mutual fund the

AMCs products would have high marketability. To choose the best AMC based on rankings the

below points can be given for each AMC

Rank Points

rank1 3

rank2 2

rank3 1

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Based on commissions

Highest commission

Rank Equity Debt Balanced

1 ICICI ICICI ICICI

2 HSBC ING HSBC

3 BIRLA HSBC BIRLA Table 25: Points summary for commissions

AMC selected points

ICICI 9

HSBC 5

BIRLA 2

ING 2

Based on Performance over past 5 years

Rank Equity Debt Balanced

1 Birla Mutual fund

Franklin

Templeton TATA

2 ICICI DSP ICICI

3 SBI ICICI SBI Table 26:Points summary of performance

AMC selected points

Birla Mutual fund 3

ICICI 5

SBI 2

Franklin

Templeton 3

DSP 2

TATA 3

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CHAPTER-5

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SUMMARY

Table 27: Summary of Total Points

AMC Total points

Birla Mutual fund 5

DSP 2

SBI 2

ICICI 14

HDFC 0

HSBC 5

Franklin Templeton 3

TATA 3

ING 2

ICICI Prudential has scored the highest in Commissions being paid to distributors as well as the

performance over the past 5 years have been positive. It is the best choice for any distributor or

agent to take ICICI products and earn good commissions.

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CONCLUDING OBSERVATIONS

HDFC should improve its performance and market its products by paying more

commissions. The fund managers of HDFC should design better portfolios to achieve

best returns which would improve its market. Currently the AUM of HDFC is growing at

5.77% whereas reliance, ICICI and Birla are growing at 9.91%,14.11% and 10.2 %

respectively. The AUM of HDFC is leading with 108,990 Cr is the largest as per the

December 2013 reports but can be easily overtaken with better performance by

competitors and low commissions.

ICICI has best portfolios performance as well as rigorous marketing by paying high

commissions and is Fastest growing AUM at 14.11% from September 2013 to December

2013.

The mutual fund distributors play a major role in promoting products and awareness to

the investors and commissions motivate them. The returns of Mutual funds should be

positive to retain customer base and for the distributors to earn trail commissions which

are based on performance.

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BIBILOGRAPHY

Santosh Anagol1, Vijaya Marisett, Renuka Sane, and Buvaneshwaran Venugopal (2012), Distribution Fees and Mutual Fund Flows: Evidence from a Natural Experiment in the Indian Mutual Funds Market, participants at Wharton and the IGIDR Emerging Markets Finance Conference. Dr.Vikas Kumar,Performance Evaluation Of Open Ended Schemes Of Mutual Funds, International Journal of Multidisciplinary Research Vol.1 Issue 8, December 2011, ISSN 2231 5780.

Santosh Anagol,Shawn Cole and Shayak Sarkar (2013)Understanding the Advice of Commissions-Motivated Agents: Evidence from the Indian Life Insurance Market, Harvard Business school. Indian mutual fund industry Unearthing the growth potential in untapped markets,PWC, Mutual fund summit, 2013. Websites

www.amfiindia.com

www.nsim.ac.in

www.sbimf.com

www.mutualfundsindia.com

www.investopedia.com

Economic Times

Indian express

www.moneycontrol.com