Strategic
Choices In Mutual Fund Business
Dr Ranjan Das & Raveendra
C.
Indian Institute of Management
Calcutta
If
you were to name one industry which has undergone the
most dramatic transformation in the post-liberalisation
era of the nineties, the financial services sector and
in particular, the mutual fund industry would be a strong
contender. There has been a paradigm change in the quality
and quantity of product and service offerings. After
being serviced by monopoly players for decades with
hardly any choice in product offerings, the Indian consumer
today is being wooed by virtually the Who's Who of global
and Indian players with a choice that was unimaginable
a decade back. In this backdrop, what strategic marketing
choices do mutual fund companies have, to survive and
thrive in this highly promising industry in the face
of such cut-throat competition?
Mutual funds are companies that pool funds from a large
number of investors and invest them on their behalf
for a financial return by buying, holding and selling
securities. Funds managed by institutional investors
are huge and growing rapidly, particularly as part of
the resolution of pension pressures in various parts
of the world. Global Assets under Management (AUM) rose
6 per cent to US $ 38.2 trillion in the first half of
2003, according to Cerulli Associates' latest Global
Update report. Cerulli predicts the global compound
annual growth rate for the industry to be 8 per cent
between 2002 and 2007.
INDIAN
MUTUAL FUND INDUSTRY1
The history of Indian mutual fund industry can be distinctly
divided into two phases - the period before liberalisation
when only public sector players existed with one dominant
player Unit Trust of India and the post-liberalisation
era where the industry was opened up to private players.
Unit Trust of India (UTI) was established in 1963 and
launched its legendary first scheme 'US-64' in 1964.
UTI witnessed a slow and steady growth over seventies
and eighties and by end of 1988 it had an AUM of Rs.
67,000 million. From 1987, non-UTI, public sector mutual
funds were allowed and a series of mutual fund companies
were set up by public sector banks and financial institutions.
At the end of 1993, the overall AUM of mutual fund industry
was Rs. 470,004 million.
The mutual fund industry was opened up for private participation
1993 and a new era was ushered in, paving the way for
an unprecedented choice of products and services to
Indian investors. Detailed guidelines were established
and the mutual fund industry (except UTI) came under
the regulation of Securities Exchange Board of India
(SEBI). Many reputed foreign mutual funds such as Templeton,
Alliance, Prudential group etc. set up operations in
India. As at the end of January 2003, there were 33
mutual funds with total assets of Rs. 1,218,050 million.
In February 2003, the Unit Trust of India Act 1963 was
repealed and UTI was broken into two separate entities.
One is the Specified Undertaking of the Unit Trust of
India, still under the control of Government of India
with AUM of Rs. 298,350 million as at the end of January
2003. The second is the UTI Mutual Fund Ltd, sponsored
by SBI, PNB, BOB and LIC. It is registered with SEBI
and functions under the Mutual Fund Regulations. As
at the end of October 31, 2003, there were totally 31
funds in India, with assets under management of about
Rs. 1,267,260 million.
TRENDS
IN MARKETING OF MUTUAL FUNDS IN INDIA
The changing marketing trends in the mutual fund industry
in India can be easily linked and traced to its history
of growth. The changes in marketing strategies can be
characterised by 4 stages which have evolved along with
the growth and evolution of the industry.2
l Product Focus
For the first three decades of the industry, from the
setting up of UTI till the entry of private sector players,
the only focus of the marketing strategy was different
product offerings. UTI and various other public sector
mutual funds focused on introducing an array of products
falling in different categories. The categorisation
was primarily based on two factors: one was the way
the schemes were traded and the other through different
composition of debt and equity securities in the scheme.
By the way Schemes were traded:
>Open-ended Schemes
>Close-ended Schemes
In an open-ended scheme there are no limits on the total
size of the corpus. Investors are permitted to enter
and exit the open-ended scheme at any point of time
at a price that is linked to the net asset value (NAV).
In case of close-ended schemes, the total size of the
corpus is limited by the size of the initial offer.
The entry and exit of investors is possible by only
trading on the stock exchanges. Due to liquidity constraints
posed by close-ended funds, they were soon rendered
obsolete and most of the prevailing schemes today are
open-ended schemes.
By Composition of Debt and Equity in the Scheme:
> Growth Schemes
>Income Schemes
>Balanced Schemes
>Money Market Schemes
The products were also differentiated by the composition
of equity and debt in various schemes. Growth schemes
invest predominantly in equities whereas Income schemes
invest only in fixed income debt securities. Balanced
schemes try to derive the benefits of both equity and
debt by investing in both. Money market schemes invest
in short term liquid securities like money market instruments
so that they serve as appropriate products for investing
short term funds.
There were other niche schemes to fulfil specific needs,
such as Tax Saving Schemes, Sector Specific Schemes,
Index Schemes (which are passively invested in a benchmark
Index) and so on.
In the Product Focus stage, the aim of the mutual fund
companies was to introduce a wide variety of products
and due to oligopolistic competition; there was no dearth
of subscribers. The only parameter on which the selling
was based was the relative performance of the products.
l Distribution Focus
Product focus continued for 2-3 years even after the
entry of private sector players in 1993. Initially,
the private sector companies introduced the same products
available from the pubic sector players and promised
superior performance. When they realised that they needed
to differentiate on some other parameter as well, they
focused on distribution. As it was difficult and time
consuming to replicate the wide-spread distribution
structure of Agents set up by UTI, they encouraged third-party
distribution companies to distribute their products
all over India. Specialist distribution companies such
as Karvy, Bajaj Capital, Integrated Enterprises etc.
had emerged. Special focus was given to investor servicing
so that investors could experience superior servicing
standards from private players. Some groups such as
Birla Mutual Fund even set up their own distribution
companies (Birla Distribution).
While the focus on improved distribution and investor
servicing did help the private players establish themselves
against large players like UTI, it had also resulted
in a lot of problems. In the rush to gain volumes and
thereby commission incomes, the distribution companies
many a time sold the wrong product to the wrong customer.
A growth product, which invests primarily in risky instruments
like equities was sold to old, retired people looking
for regular, steady income as pension. The ensuing dissatisfaction
has thus paved the way at last for the most critical
area for marketing, the Customer Ownership Focus.
l Customer Ownership Focus
Mutual fund companies began to segment their target
customers and position their various products based
on the target segment they proposed to address. The
target segment was broadly divided into institutional
segment and individual investor segment. The institutional
segment consisted of treasury departments of Corporates,
Trusts etc and suitable products such as Institutional
Income schemes and Money Market schemes were targeted
at them. The individual investor was in turn divided
into various segments such as Young Families with small
or no children, Middle-aged People saving for retirement
and Retired People looking for steady income. Suitable
products such as Growth and Balanced schemes for young
families and Income schemes for retired people were
marketed.
By proper segmentation and by targeting the right product
to the right customer, Mutual Fund companies hoped to
win the confidence of their customers and 'own' them
for a lifetime. l Specialised Product & Service
Focus
If one observes the trends in the recent past, Companies
have been taking the above customer focus further by
designing and launching specialised products and services.
As awareness levels of individual investors go up, focus
is on identifying one's investment needs depending on
one's financial goals, risk taking ability and time
horizon. Investors chose companies, which help them
in the above through specialised products and services.
For example, a common financial goal is to save and
invest for meeting the education needs of children.
A number of mutual funds such as Pru-ICICI Mutual Fund
and UTI Mutual Fund have launched products that are
designed to serve this specific need. A similar such
need is planning for a comfortable retirement.
In addition, there is a need for specialised services
that help investors assess their risk taking ability
and chose products accordingly. Some mutual fund companies
are launching a new product called 'Fund of Funds' which
is a Scheme that merely invests in a combination of
other mutual fund schemes (growth schemes, income schemes
etc.), based on the investment objective and risk profile
of the investor. (See Box for the characteristics of
a Fund of Funds)
DRIVERS
SHAPING THE FUTURE OF THE INDUSTRY
Some of the drivers that are shaping the industry which
are likely to have substantial influence on the marketing
strategies of the future are as follows:
* Consider this. The average projected life span of
an Indian after retirement (that is, after 60) is expected
to go up from 15 years to 20 years. And the number of
the elderly (those over 60) is expected to increase
significantly from 6.8 per cent of the population in
1991 to 8.9 per cent in 2016 and further to 13.3 per
cent by 20263 . One of the key recommendations of the
expert committee of Project OASIS (Old Age Social and
Income Security) constituted by the government on pension
reforms in 1999 is the creation of a privately managed,
individual choice based, voluntary Pension system. Pension
reform is likely to be a big driver. The government
is finalising guidelines for specialised pension funds
to operate in India.
* Advisory services are becoming more critical to investors
and independent financial advisors and planners are
gaining ground. The US accreditation body for Financial
Planners was set up in Delhi in the name of Association
of Financial Planners (AFP) and soon professional Certified
Financial Planners (CFPs) will be available to investors
to assist them in their financial planning needs. Banks
are planning to enter into advisory services in a big
way. An entirely new distribution channel will be created
consisting professional advisors who will exert substantial
influence on what products customers will buy.
*As investors turn more aware, either by themselves
or with the help of financial planners, there will be
demand for more specialised products; for example, based
on different styles of fund management on the Value-Growth
spectrum as well as on the Focussed-Diversified Investing
spectrum. In other words, two equity schemes will be
distinguished based on the fund management style - either
the value investing style or growth investing style.
* Digital marketing: E-commerce is gradually showing
signs of gaining acceptance and electronic sale of financial
products is especially gaining volumes. There is a likelihood
of the volumes reaching a significant size, thereby
spawning a new distribution paradigm.
*As Indian markets mature, regulatory restrictions are
easing, paving the way for introduction of innumerable
specialised products hitherto not introduced in India
such as hedge funds and derivative-based products.
WHITHER
FUTURE?
What strategic choices does the future hold for mutual
fund companies? Enormous possibilities exist for mutual
funds to differentiate themselves based on some of the
drivers given above. Individual companies, based on
their own objectives and strengths, can choose to position
themselves to exploit these opportunities. For example,
the opportunity of pension reform can be exploited by
some mutual funds by positioning themselves as the front-runners
in the Pension Fund arena. Similarly, companies that
pioneer distribution channels of Financial Planners
and E-commerce will stand to benefit enormously if these
trends gain significance.
In the words of Morgan Stanley Dean Witter4 , "In
the end, not all asset management (mutual fund) companies
will survive, [but] for firms that have built a 'culture
of excellence' over the years, have segmented their
customers efficiently, built brand, and delivered performance,
the ongoing opportunities to take market share have
never been more significant." (See Case Study on
Culture of Excellence)
Dr Ranjan Das is Professor of Strategic & International
Management at IIM Calcutta. He is also Consulting Editor
of Strategic Marketing;
Raveendra C. is a Doctoral Research Scholar at IIM Calcutta
Feedback to this article may be sent to smeditor@indiatimes.com
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