The Indian mutual fund industry has witnessed significant growth in the past few years driven by several favorable economic and demographic factors such as rising income levels and the increasing reach of Asset
Management Companies (AMCs) and distributors. However, after several years of relentless growth, the industry witnessed a fall of 8 percent in the assets under management in the financial year 2008-09 that has impacted revenues and profitability.
Recent developments triggered by the global economic crisis have served to highlight the vulnerability of the Indian mutual fund industry to global economic turbulence and exposed our increased dependence on corporate customers and the retail distribution system. It is therefore an opportune time for the industry to do well on the experiences and develop a roadmap through a collaborative effort across all stakeholders, to achieve sustained profitable growth and strengthen investor faith and confidence in the health of the industry. Innovative strategies of AMCs and distributors, enabling support from the regulator SEBI, and pro-active initiatives from the industry bodies CII and AMFI are likely to be the key components in defining the future shape of the industry.
This report summarizes the current state of the Indian mutual fund industry highlighting the key challenges and issues. We have also presented the 'Voice of Customers' to understand their needs and priorities as the industry defines the future roadmap for 2015. The report outlines an action plan for key stakeholders so as to surpass expectations of industry growth and profitability.
I acknowledges the inputs received from AMCs, distributors, customers and service providers and many websites for this report.
India has been amongst the fastest growing markets for mutual funds since 2004, witnessing a CAGR of 29 percent in the five year period from 2004 to 2008 as against the global average of 4 percent. The increase in revenue and profitability, however, has not been commensurate with the AUM growth in the last five years.
Low share of global assets under management, low penetration levels, limited share of mutual funds in the household financial savings and the climbing growth rates in the last few years that are amongst the highest in the world, all point to the future potential of the Indian mutual fund industry.
Challenges and Issues
Low customer awareness levels and financial literacy pose the biggest challenge to channelizing household savings into mutual funds. Further, fund houses have shown limited focus on increasing retail penetration and building retail AUM. Most AMCs and distributors have a limited focus beyond the top 20 cities that is manifested in limited distribution channels and investor servicing. The Indian mutual fund industry has largely been product-led and not sufficiently customer focused with limited focus being accorded by players to innovation and new product development. Further there is limited flexibility in fees and pricing structures currently.
Distributors and the mutual fund houses have exhibited limited interest in continuously engaging with Customers post closure of sale as the commissions and incentives have been largely in the form of upfront fees from product sales. Limited focus of the public sector network including public sector banks, India Post etc on distribution of mutual funds has also impeded the growth of the industry. Further multiple regulatory frameworks govern different verticals within the financial services sector, such as differential policies pertaining to the PAN card requirement, mode of payment (cash vs cheque), funds management by insurance companies and commission structures, among others.
Future Outlook in a Dynamic Environment
The Indian industry AUM is likely to continue to grow in the range of 15 to 25 percent from the period 2010 to 2015 based on the pace of economic growth. In the event of a quick economic revival and positive reinforcement of growth drivers identified, KPMG in India is of the view that the Indian mutual fund industry may grow at the rate of 22 to 25 percent in the period from 2010 to 2015, resulting in AUM of INR 16,000 to 18,000 billion in 2015. In the event of a relatively slower economic revival resulting in the identified growth drivers not reaching their full potential, KPMG in India is of the view that the Indian mutual fund industry may grow in the range of 15 to 18 percent in the period from 2010 to 2015, resulting in AUM of INR 15,000 to 17,000 billion in 2015.
Industry profitability may reduce further as revenues shrink and operating costs escalate. Product innovation is expected to be limited. Market deepening and widening is expected with the objective of increased retail penetration and participation in mutual funds. The regulatory and compliance framework for mutual funds is likely to get aligned with the other frameworks across the financial services sector.
Action Plan for Achieving Transformational Growth
There is a need for a collaborative effort across all key stakeholders to harness the future growth potential and reach out to the customer.
Given that customer awareness is the pre-requisite for the achievement of the industry growth potential, there is a need for planning, financing and executing initiatives aimed at increasing financial literacy and enhancing investor education across the country through a sustained collaborative effort across all stakeholders that is expected to result in a massive increase in mutual fund penetration. AMCs should focus on product innovation and introduction of flexibility in pricing.
Public sector thrust into mutual funds distribution and focus on strengthening presence beyond Tier 2 cities will entail training of the public sector employee base through the "Train the Trainer" approach, so that they may be\ inducted as trainers to support customer awareness campaigns to be facilitated by CII, NISM and AMFI.
Opening up of the public sector branch network in Tier 3 and Tier 4 towns will include India Post, Nationalized Banks, Regional Rural Banks and Cooperative Banks. This will also require a boost to be provided to Investor Service Centers (ISCs) through R&T Agents should be given a thrust.
It is proposed that harmonization of policies across multiple regulatory frameworks in the financial services sector must be taken up on high priority through constitution of a Steering Committee under the aegis of the Ministry of Finance, comprising the Financial Services Regulators for mutual funds and capital markets, pension, insurance, banking and other verticals along with representation from the CBDT.
Given that the industry needs to collectively work towards riding over the dynamic and relatively less favorable economic environment at present, the next phase for the industry is likely to be characterized by a stronger focus on customer centricity, cost management and robust governance and regulatory framework - all aimed at enabling the industry to achieve sustained, profitable growth, going forward.