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1 CHAPTER I OVERVIEW OF THE STUDY

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1

CHAPTER I

OVERVIEW OF THE

STUDY

2

“Healthy small investor – wealthy nation” – Dr.Kirit Somaiya

Saving is defined as excess of current income over current expenditure. Savings are

closely linked with nation’s economic growth. Being developing nation, importance

of savings to Indian economy is vital. High level of savings help the economy to

progress on a continuous growth path as investment is mainly financed out of savings.

Savings rate of our country is phenomenal. Gross domestic savings have increased

continuously from an average of 9.6 percent of GDP (Gross Domestic Product) during

the 1950s to 36.9 per cent of GDP in year 2007 -08. Savings are made via three

sectors i.e. public sector, private sector and household sector. Contribution of public

sector is erratic and hovering around 2 percent. Rather during 1998 -2003, public

sector’s contribution turned negative. Private sector savings are relatively better as it

had risen from 3.1 percent in 1990-91 to 8.1 percent currently. Contribution of private

sector towards capital accumulation is negative as their credit off take is larger than

their savings. Star saver and capital accumulator of our economy is household or retail

sector. A remarkable feature of the Indian macroeconomic story since independence

has been the continuous rise in her household savings over the decades, Mohan,

Rakesh (2008)1.

1.1 Composition of Household sector’s savings

Household / retail sector is consistently & increasingly contributing towards national

savings. Currently, household savings are 22.5 percent to the India’s GDP.

Considering household credit figures, researcher can easily state that Indian investors

understand the merits of saving over consumption. Thus, the widening of savings -

investment gaps of the public and private corporate sectors combined was financed

from household financial savings and partly from foreign savings. So any study

related to Household sector savings has importance.

After independence, Indian household’s savings in physical assets constituted the

largest portion as compared to the financial assets in the initial years of the planning

periods as Indian financial system was characterized by poor infrastructure and low

level of financial deepening. Rural households were keen on acquiring farm assets

while the portfolio of urban households constituted consumer durables, gold, jewelry

and house property. However, with the development of the financial infrastructure,

strengthening of the cooperative credit institutions, taking over of the banks

3

associated with the former princely states and transferring them into the public sector

(1954), strengthening and consolidation of the banking system in India (1950s and

1960s), nationalization of the insurance companies, establishment of Unit Trust of

India (1964), major term lending institutions for agriculture and industry (1964) and

nationalization of the major scheduled commercial banks (1969/1970), had a

cascading effect in raising the financial savings in our country . During 1980’s, the

financial savings overtook physical savings and became larger component of

household savings.

There are myriad choices for financial savings available to the household investor.

Investment avenues are in abundance. The household financial assets include broadly

currency, deposits, and net claims on government (small savings schemes, postal

savings schemes, and Government bonds), share and debentures, Mutual Funds,

Insurance, Pension Funds and Provident Fund. All these investment avenues are

different from each other in terms of risks involved, likely returns, amount required,

and liquidity. These investment avenues need varying degree of investor’s

involvement also. The comparison of these instruments is illustrated in Table 1.1.

Table 1.1 – Comparison of financial saving instruments*

Investment Option

Sa

fety

Liq

uid

ity

Retu

rn

s

Am

ou

nt

Req

uir

ed

Acti

ve

Inv

olv

em

e

nt

Req

uir

ed

Equity Shares Low High Moderate

to high Moderate Yes

Mutual Fund Moderate High Moderate

to high

Moderate Generally No

Public Provident

Fund

High Low Moderate Low No

Public sector

Bonds

High Moderate Low Low No

Bank Deposits High High Low to

Moderate

Low No

Post office Savings

/ NSC

High Low Low Low No

Company Deposits Moderate Low Low to

Moderate

Moderate Generally No

Company

Debentures

Moderate Low Moderate Moderate Generally No

*Table is indicative / illustrative

All these investment avenues behave in tandem and closely linked with global as well

as local macro-economic factors. Amongst all these avenues equity shares’ long term

returns are higher but at the same time it is volatile and risky. At the other end, Bank

4

deposits and Government debt oriented products are safer but returns are lower. This

comparison is shown in the Table 1.2 below.

Table 1.2 – Bank Deposits returns Vs Equity share returns

Bank deposits

(relatively

riskless security)

BSE 100

1984 - 1991 Inflation adjusted

Returns

1.13 22.4

Standard Deviation 0.74 28.1

1991 - 2004 Inflation adjusted

Returns

1.28 12.6

Standard Deviation 1.73 37.2

(Figures in percentage)

Compiled from: - Mehra, Rajnish (2006)2, The Equity Premium in India.

In Kaushik Basu (Ed.), The oxford Companion to Economics in India,

New Delhi: Oxford University Press.

Household sector savings are highly tilted towards bank deposits (See Figure 1.1).

Indian household / retail investors are increasingly keeping their money in bank

deposits, despite the fact that inflation adjusted returns are marginal. In the current

scenario of higher inflation, bank deposits are almost losing preposition for retail

investors. Then, why retail investors are increasingly parking money in bank

deposits? The answer lies in their bitter experiences with other savings avenues in the

past two decades.

Graph 1.1 – Household savings composition since 1994

Source: - Reserve Bank of India Annual Report 20083

Since 1991, household investor’s participation in equity markets is momentary &

having wide fluctuations ranging from 0.8 percent to 8 percent. In 1994 - 95,

household’s investment in equity shares was almost 8 percent. But after that, it has

sharply declined to 3.4 percent till 1998 – 99. Stock markets saw many scams like

5

Harshad Mehta Scam (1992), Vanishing Company Scam (1995 - 99), Name changing

scam (1999 - 00), dotcom scam (1999 - 00), Ketan Parekh Scam (1999 - 2001). These

scams shattered household investor’s confidence in equity share investment.

The three most important and persistent worries of household investors have been

identified during Indian household investor’s survey in 20044, as (a) too much

volatility of stock market prices, (b) too much price manipulation and (c) deficient

corporate governance.

This shattered confidence is evident as on average 1.13 percent household savings

were channelized in equity markets during 2000 -2006. During this period stock

markets were booming. Observing this phenomenal growth, lot of retail investors

were attracted towards equity markets, that is why equity savings has increased to 4

percent. In this return chasing behavior, lot of retail investor burnt their fingers as our

markets crashed towards end of 2007. The retail investors who had invested in

plantation companies, chit funds, non bank finance companies (NBFC) like CRB

finance during 1990s had lost their money. This made retail investor cautious about

private or corporate sector savings avenues; this may have pushed them to keep their

hard earned money into safe instruments like bank deposits, government schemes.

But, retail investors are in sticky situation as bank deposits returns are marginal and

their experiences in equity markets & other financial markets are disappointing. Again

markets for equity shares, derivatives and other assets have increasingly become

complex, mature and information-driven. A typical individual investor especially

Indian is not likely to have the knowledge, skills, and time to keep track of and

understand the causes and implications of the price changes and trends. So, mutual

funds being the combiner of various savings instruments are regarded as the ideal

investment vehicle for today’s complex and modern financial scenario.

1.2 Concept of Mutual Fund

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

common financial goal. Anyone with an investible surplus as little as a few hundred

rupees can invest in Mutual Funds. These investors buy units of a particular Mutual

Fund scheme which has a defined investment objective and strategy. The money thus

collected is then invested by the fund manager in different types of securities, ranging

from shares to debentures to money market instruments, depending upon the scheme’s

stated objectives. Fund manager a professionally qualified and experienced manager

6

who manages the funds in a way to increase the returns on the money invested by the

people. Thereby, the investor avoids direct involvement with the financial markets

and avoids any disadvantage that may accrue to him because of asymmetric

information or any other reason.

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

the scheme is shared by its unit holders in proportion to the number of units owned by

them. This is typically shown in the Figure 1.1.

Mutual funds design their portfolio as individual investments react differently to the

same condition. Mutual fund diversifies their investment portfolio by investing in

various asset classes, sectors, geographies to make it balanced and the value of the

overall portfolio should gradually increase over time, even if some securities lose

value. This is nothing but diversification of the portfolio to curtail the risks. Most

importantly, mutual funds engage professionals to manage their investments

otherwise retail investors do not have competency like them and also cannot afford

them individually. Diversification coupled with professional management works as a

cushion to safeguard retail investors. Rao, D. N. & Rao, S. B., (2009)6 studied

performance of balanced and income mutual funds in India during decline phase

during October 2007 to January 2009, a kind of bear (declining markets) run. He

observed that both the funds outperformed the Market over bear run period which

confirms that mutual fund shield investors in bad markets.

Figure 1.1 – Mutual Fund Operation Flow Chart

Source: - “The investor’s concise guide – Making mutual funds work for you”5 from AMFI

Mutual funds are subject to many government regulations that protect investors from

fraud. It is easy to get your money out of a mutual fund by redeeming units. Mutual

fund expenses are often no more than 1.5 percent of your investment. Periodically,

mutual funds disclose various scheme related information to public which makes

7

them transparent. Lot of mutual fund schemes comes with tax benefits also. Most

importantly mutual funds offer wide variety of schemes to the investors. This fact

makes mutual fund an ideal investment product for masses. Mutual funds cater to the

wide range of needs of different classes of investors.

In short, mutual funds possess several advantages like diversification, professional

management, tight regulation, liquidity, low cost, transparency, flexibility, wide

variety of choice, tax benefits. Thus, Mutual Funds can be the most suitable

investment for small or retail investors as it offers an opportunity to invest in a

diversified, professionally managed basket of securities.

1.3 Global Evolution of Mutual Fund

Historians may differ on the exact origin of mutual funds Rachana, Baid (2007)7. As

per Rouwenhorst, K. G. (2004)8, Mutual funds emerged early in the second half of the

18th century in The Netherlands. In 1774, the Dutch merchant and broker Abraham

Van Ketwich invited subscriptions from investors to form a trust named Eendragt

Maakt Magt—the maxim of the Dutch Republic, “Unity Creates Strength.” It was a

closed end Mutual fund aimed to provide small investors an opportunity to diversify

by investing in Austria, Denmark, Germany, Spain, Sweden, Russia, and a variety of

colonial plantations in Central and South America.

Consequently, this concept has travelled across countries but it really flourished and

blossomed into the world’s largest Mutual Fund industry in United States of America

(USA). The first USA based mutual fund was formed when three executives dealing

in securities in Boston came together & put their money for investment purposes in

1924 and created a mutual fund i.e. fund for the mutual benefit of the three members.

However, the first recognized US based mutual fund was instituted on 21st

March

1924 that was called the ‘Massachusetts Investors Trust’ that grew from a $50,000 to

$392000 in a year with 200 shareholders. Subsequently ‘Massachusetts Investors

Trust’ went public in 1928. In a brief period of five years there were around 19 open-

end mutual fund schemes and 700 closed-end mutual fund schemes operating in the

American financial market, till the stock market crashed in 1929 that resulted in

‘Great Depression’ in the economy.

The great depression compelled the authorities in USA to take steps to regulate the

mutual fund industry. This led to the enactment of the Securities Act of 1933 and the

establishment of the Securities Exchange Commission (SEC) that necessitated

8

registration of all mutual funds operating in the US market to be registered with the

Securities Exchange Commission (SEC) and made various rules for the mutual fund

industry like drafting a prospectus that would contain detailed information about the

fund, the securities and the fund manager managing the mutual fund. It also drafted

the Investment Company Act of 1940 whose guidelines the mutual funds had to

comply. This act regulates the organization and functioning of mutual funds and

other companies. The act primarily tries to minimize the conflict of interest that arises

in investing, reinvesting and trading in securities and simultaneously offer the

securities to public for investment. According to this act, the companies operating in

this sector have to reveal their financial condition to the investing public and the

investment policies during the initial sale of stock and continue to do on a regular

basis along with other information relating to the investment objectives, company

structure and operations. Falling short of any compliance to the act, the Securities

Exchange Commission can directly supervise the investment operations or judge the

merits of their investment schemes. Today, almost this model is followed across all

the countries of the world.

From above discussion, researcher can straightforwardly deduce that though the

concept of mutual fund is rooted in Netherlands but the modern concept of

mutual fund is originated in USA.

As Fernando, Deepthi; Klapper, Leora; Sulla, Víctor Sulla & Vittas Dimitri (2003)9

observed the global growth of Mutual funds were explosive one during 1990s, now

the mutual fund concept is reached to all the continents and regarded as one of the

crucial part of financial services sector of any country.

1.4 Evolution of Mutual Fund Industry in India

Many researchers viz Kamiyama, Tetsuya (2007)10

;Agrawal, Deepak (2011)11

; Mitra,

Anupam (2009)12

; Acharya, D & Sidana, Gajendra (2007)13

; Kumar, Raj and Sharma,

Priyanka (2009)14

have traced the evolution cum history of mutual funds India.

The development of India's mutual fund industry can be divided into four distinct

phases. The first phase was spanned from 1964 until 1987. In 1963, India's central

bank, the Reserve Bank of India (RBI), established the Unit Trust of India (UTI);

subsequently its control was passed from the RBI to the Industrial Development Bank

of India in 1978. The first fund launched by the UTI was the Unit Scheme 1964 (US -

64), which had assets worth of Rs 67 billion, at the end of 1988.

9

The second phase was from 1987 until 1993, known for entry of public sector banks

in Mutual Fund Industry. SBI Mutual Fund was established by the State Bank of India

in June 1987. This was followed by several other funds introduced by public sector

banks and insurance companies. At the end of 1993, India's mutual fund industry

assets had grown to Rs 470 billion.

The third phase was from 1993 to 2003. This phase is known for spate of regulations

and emergence of private players in this industry. In 1993, the Securities and

Exchange Board of India (SEBI) introduced a comprehensive set of regulations

governing mutual funds, known as SEBI (Mutual Fund) Regulation 1993, to regulate,

and require the registration of, all non-UTI funds. These regulations were further

completely overhauled in 1996, and now it is the SEBI (Mutual Funds) Regulation

1996 that regulates mutual funds. Since 1993, private-sector asset management

companies have been actively involved in the Indian mutual fund industry. In July

1993, the first private-sector fund was registered named Kothari Pioneer, later it was

merged with Franklin Templeton. The number of asset management companies has

continued to grow. This phase also saw number of mergers and acquisitions in the

sector. At the end of January 2003, India's mutual fund industry had 33 asset

management companies managing assets totaling Rs 1.218 trillion, and the largest of

them was UTI, with assets of Rs. 445.4 billion. UTI saw its “almost death” when

fiasco came to light in the form of two big blows in 1997 and 2001.

The fourth phase began in 2003. On the backdrop of US – 64 fiasco, UTI is demerged

by repealing The Unit Trust of India Act 1963 in February 2003. The first was the

Specified Undertaking of the Unit Trust of India (SUUTI), which was made up of

UTI's flagship fund Unit Scheme 1964 and closed-end funds, and managed assets as

of the end of January 2003 totaling Rs 298.3 billion. The other entity was UTI Mutual

Fund, the major shareholders of which were four public-sector financial institutions,

including the State Bank of India. These funds were registered with the SEBI and

subject to SEBI's mutual fund regulations. This split up of UTI, along with mergers

and acquisitions within India's mutual fund industry propelled the industry into a new

era of growth and restructuring. The buzzword is globalization and achieving growth

by penetrating in the market through various distribution channels.

As shown in the figure 1.2, mutual fund growth is exponential after year 2003. This

phenomenal growth is attributed to various factors. One of the important recent

developments in the Mutual Fund Industry has been the aggressive explosion of the

10

private players. The recent years have seen a private sector wave in the opening up of

the sector, as the large number of private sector companies has entered in the Indian

Mutual Fund Industry.

Another major change in the last few years has been the globalization of the industry

as lot of foreign companies entered by way of mergers, acquisitions, stake sale; etc .

Currently, there is a general restructuring going on in the industry. An increased

foreign participation and competition in the Mutual Fund industry paved way for

many new practices such as product innovation, sharp improvements in the service

standards and disclosures, usage of technology, broker education and support, advent

of new distribution channels, etc.

FIGURE 1.2 - GROWTH OF MUTUAL FUND ASSETS UNDER

MANAGEMENT

Source: www.amfi.org.in15

With the industry of more than four decades, Mutual Fund industry must have

respectable presence in global Mutual Fund industry. An important criterion, which is

used by the analysts to judge any country’s mutual fund industry, is amount of MF

11

assets to GDP (PPP basis) ratio. Let me compare Indian mutual fund industry vis-a-

vis to some other nations in terms to mutual fund assets under management as

compare to Gross Domestic Product – purchasing power parity basis (GDP) that

country. The table 1.3 shows how Indian mutual fund industry is placed against other

countries: -

Table 1.3 – Global comparison in terms of Mutual Fund asset size in terms of

country’s GDP

Country Mutual Fund

asset size in terms

of country’s GDP

Country Mutual Fund asset

size in terms of

country’s GDP

Bahrain** 44% Luxemburg More than 100%

Egypt* 13% Hong Kong More than 100%

Kuwait* 8.2% Australia** 133.4 %

Morocco* 32.1% USA++ 78.6%

Saudi Arabia* 31.9% Japan++ 14.3%

United Kingdom++ 34.9% Russia++ 26%

India++ 1.3% Brazil++ 23.1%

*Figures are for the year 2009, **Figures are for the year 2010,

++ Figures are for the year 2006

Source: - Macko, Willam & Sourrouille, Diego (2010), “Investment Funds in

MENA”, Financial Flagship series of World Bank,16

Indian economy is ranked amongst the top 10 globally (in terms of GDP), and placed

fourth-largest [in terms of purchasing power parity (PPP)]. However, when it comes

to MF assets under management (AUM), Rao, P. H., & Mishra, V. K, (2007)17

observed that India’s rank is twenty fifth in year 2006 which is not very satisfactory,

rather dismal. Add to this, out of total mutual fund assets in India only 36% are owned

by retail investors while rest is by corporate / institutional investors. This further

underlines that retail or household investors’ participation in Indian mutual fund

industry is well below the global standards.

While comparing Indian mutual fund industry and studying global evolution of

mutual funds, researcher came across with phenomenon of integration or

convergence. As this phenomenon does have strong linkage with mutual funds so we

will further explain the same in the next section.

12

1.5 Defining mutual funds on the backdrop of financial integration /

convergence

The drivers behind financial service integration and financial convergence are

customer demand as well as the pressure on institutions to find new growth

opportunities and revenue streams.

Berghe, Van den; Verweire, K; Carchon, S.W.M. (1999)18

, Financial Convergence

includes all possible interfaces between different categories of financial service

providers. Financial services integration occurs when firms in one sector create and

sell products containing significant elements traditionally associated with products of

another sector. Kist, Ewald (2001)19

found that the banking, insurance, asset

management, investment and pension industry is converging into each other to form

integrated financial services.

It is necessary to understand this convergence especially related with mutual funds.

Professional asset management is central aspect of mutual funds (that is why it

referred as a part of asset management industry). Importantly professional asset

management is also vital aspect for other financial services like pension / retirement

products, insurance, etc. Understanding these overlaps will facilitate us to understand

the concept of mutual fund in this modernised world of financial markets.

Walter, Ingo (1999)20

observes that the structure of the asset management industry in

European union encompasses significant overlaps amongst the three types of asset

pools i.e. mutual funds, portfolio services & pension funds, to the point that they are

sometimes difficult to differentiate. He further noted the linkage between defined-

contribution pension funds and the mutual fund industry, and the association of the

disproportionate growth in the former with the expansion of mutual fund assets under

management. There is a similar but perhaps more limited linkage between private

clients’ assets or (known as Portfolio Management services i.e. PMS in India) and

mutual funds.

In US, There is considerable overlap between Mutual Funds and retirement (pension)

assets as various retirement plans like DC (Defined contribution) Plans, IRA

(Individual Retirement Account), 401(K) Plans, 403(B) Plans, Private retirement

plans are increasingly mobilizing funds into Mutual Fund industry.

Due to this complex interfaces amongst various financial services, even Fernando,

Deepthi & et al (2003)21

faced difficulty in setting the boundaries for mutual funds as

“Annual mutual fund report” of ICI (Investment Company Institute, USA) publishes a

13

table with aggregate data on mutual funds around the world but also includes a strong

warning which is as follows: -

………….because of differences in definitions and coverage, the published data

lacks comparability. These differences are due to the inclusion, or exclusion, of

closed end funds, unit-linked funds (popularly known as ULIPs in India)

operated by life insurance companies, and retirement funds that operate on

mutual fund principles (such as the AFP system of Chile or the defined-

contribution pension plans prevailing in Australia, New Zealand, South Africa

and the United States).

In the UK, nexus between ULIPs and mutual fund is stronger as insurance companies

invest fund raised under ULIPs in Mutual Funds, Aneel Keswani and David Stolin

(2010)22

.

Even, Chakrabarti, Rajesh (2009)23

clustered various financial products like mutual

funds, unit-linked insurance plans, and Venture Capital Funds both domestic and

foreign as a part of Asset management Industry in India. Internationally, he also found

“professional management of assets” is the common factor amongst all these

products. Further he said pooling of funds is not prerequisite, even professional

management of the assets of high net worth individuals (HNI) may also be considered

part of this asset management industry. As both Mutual Funds and Unit Linked

Insurance Policies (ULIPs) are pooling money from investors this similarity has even

enticed Das, Bhagaban; Mohanty, Sangeeta and Shil, N.C., (2008)24

to compare

investor’s behavior towards both the products.

This increased convergence is mainly responsible for spat between two Indian

regulators pertaining to regulations of Mutual funds & ULIPs.

Both the Mutual Funds and ULIPs resembles due to following two reasons: -

a) Products are similar in terms of its composition & features.

b) Similar Companies / Corporate houses / brands involved in offering both the

products

a) Products are similar in terms of its composition & features.

As far as similarities between mutual fund and Unit Linked Insurance Products are

concerned one would found an ample discussion in the Securities exchange board of

India (SEBI) order passed against insurers offering ULIPs issued on 6th

April 2010.

This 11 page order discusses the features of ULIPs. It was found that ULIPs are

predominantly Mutual Funds with small component of life insurance. It will be

14

interesting to pluck out some text from this order to establish point No. 1. Order

observes,

From the examination of the product documents of the ULIPs and the investment

options offered therein by the entities it is noted that:

a. the contributions or payments made by the investor are pooled;

b. the contributions or payments are made to such ULIPs by the investor

with a view to receive profits, income;

c. the investment made by the investor in the ULIPs is managed on behalf

of the investor;

d. the investor does not have day to day control over the management and

operation of the ULIPs.

The aforementioned attributes are those of a collective investment scheme and

also of the mutual funds.

Again Insurance companies themselves consider ULIPs differently as compare to

traditional insurance policies. It is also found that in their product brochure for ULIPs,

the entities have under the heading “risks of investments”, inter alia, disclosed and

declared that:

a. unit linked life insurance products are different from traditional

insurance products and are subject to risk factors.

b. the premium paid in unit linked life insurance policies are subject to

investment risks associated with capital markets and the unit price of the

units may go up or down based on the performance of the fund and factors

influencing the capital market and the insured/policyholder is responsible

for his/her decisions.

…………….direct the entities mentioned in paragraph 1 of this order not to issue

any offer document, advertisement, brochure soliciting money from investors or

raise money from investors by way of new and/or additional subscription for any

product (including ULIPs) having an investment component in the nature of

mutual funds, till they obtain the requisite certificate of registration from SEBI.

This order paved the way for one of the most talked regulatory tussle between

Insurance Regulatory Development Authority (IRDA) & Securities Exchange Board

of India (SEBI). The matter was referred to various apex bodies and at the last SEBI’s

order is set aside and ULIPs remained under the regulations of IRDA. This entire

regulatory battle was intensely discussed in electronic as well as print media. Lots of

15

articles were written and published about how the ULIP charges are irrationally

higher as compare to Mutual Funds. Due to this, investors became increasingly aware

about hidden charges in ULIPs. Therefore, IRDA understood this trend and took

some immediate steps and issued new ULIP guidelines. ULIPs under the new set of

the guidelines were re-launched by the life insurers. New ULIPs become more similar

to the Mutual Funds as the cost structure is completely changed to make it comparable

with MF. Still in terms of hidden expenses, ULIPs are dearer as compare to Mutual

Funds. As far as this cost structure is concerned an innovation in the form of life style

wrap was earlier suggested by Korivi, Sunder Ram & Venkatesh, B.S., (2007)25

to

reduce management expenses ratio, by introducing Life-Style Wraps. These are

essentially index funds (type of mutual fund) that will have a term insurance wrapped

around it. They call it Life-Style Wraps because these products can satisfy the cash

flow requirements to support investors’ life-style needs.

From Investor’s perspective, both products are similar in terms various decisions one

has to take while investing in these products. Both the products are investing in

various asset classes like equity, debt, money market, etc. Investor has to decide the

type of fund he or she should invest; again he has to decide the combination of asset

classes and weightage for each one. It is not only one time decision but he or she has

to take periodic review to see whether the allocation is fitting to the prevailing

situation in the financial markets.

b) Similar Companies / Corporate houses / brands involved in offering both the

products

A close & detailed look over various organizations offering Mutual funds and life

insurance products (including unit Linked Insurance Plans i.e. ULIPs) will reveal that

both the industries are similar in terms of members involved in it.

The table 1.4 & 1.5 shows that almost seventy percent life insurers are involved in

mutual fund industry while almost forty percent mutual fund companies are also

operating in life insurance industry.

Researcher has seen how the overlap amongst pension funds, insurance and mutual

funds are globally. Researcher has also examined the similarities between some

insurance products (mainly ULIPs) and mutual fund on the backdrop of recent

regulatory tangle between two regulators (SEBI & IRDA).

16

Table 1.4 - Mutual Fund Companies’ participation into Life Insurance Industry

Year

Total Number of

Mutual fund

Companies

(Column I)

Pure Mutual

Fund companies

(Column II)

MF Companies

or their JV

partners

offering life

insurance

(Column III)

As on

31st March

2010

38

(100)

22

(57.89)

16

(42.11)

As on

31st March

2011

43

(100)

25

(58.13)

18

(41.87)

Figures in the brackets indicate percentage within row

Table 1.5 - Life Insurance Companies’ participation into Mutual Fund Industry

Year

Total Number of

Life Insurance

Companies

(Column I)

Pure Life

Insurance

companies

(Column II)

Insurance

Companies or their

JV partners offering

Mutual Funds

(Column III)

As on

31st March

2010

23

(100)

9

(39.13)

14

(60.87)

As on

31st March

2011

23

(100)

7

(30.43)

16

(69.57)

Figures in the brackets indicate percentage within row (Technically, third column should be same for table 3.2 and table 3.3 but there are four

Mutual Fund companies came together and formed two insurance companies Canara Robeco

+ HSBC = CanaraHSBC, Tata + AIG = Tata AIG)

Importantly, there is close similarity amongst distribution intermediaries involved in

both MF and ULIPs. As this study is focusing on “role of distribution intermediaries”

pertaining to Mutual Funds. These similarities are giving birth to question,

“Should researcher treat ULIP as a mutual fund for the purpose of our study?”

This question has compelled researcher to define mutual funds, specifically for the

purpose our study.

The situation currently in India is summed up in the latest statement made by Mr.

Yogesh Agarwal, chairman, Pension Fund Regulatory and Development Authority

(PFRDA). He spoke to Business standard Reporter on 19th April 2011, “……….

entities, not products, are regulated in India under the current regulatory framework”

17

He also said pension products offered by insurance companies would continue to be

regulated by the Insurance Regulatory and Development Authority (IRDA), while

those offered by mutual funds would be regulated by the Securities and Exchange

Board of India (SEBI).

In this scenario of financial convergence, we will treat ULIPs as well as NPS as

mutual fund. So our definition of the mutual funds is as follows: -

Mutual funds include all those investment services where investors’ money is pooled

(making it collective investment) and it is invested in various securities including

financial and physical so that benefits of diversification & risk sharing will happen

with the help of professionals.

In a nutshell the following features are standards to term a financial product as

mutual Fund: -

1) Investors money is pooled

2) Money is invested in various securities

3) Professional management

Mutual funds includes all Unit Linked Insurance Products (including retirement

products), Pension Products from Pension Fund Regulatory Development Authority

i.e. PFRDA e.g. New Pension Schemes.

Pension sector reforms are on cards and some steps has been taken in the recent past.

One of the prominent developments in this regard is setting up of Pension fund

Regulatory Authority (PFRDA). PFRDA was established by Government of India on

23rd

August, 2003. The Government has, through an executive order dated 10th

October 2003, mandated PFRDA to act as a regulator for the pension sector. The

mandate of PFRDA is development and regulation of pension sector in India.

PFRDA constituted and launched a product named New pension Scheme (NPS) in

2004 for Government employees & after this PFRDA has allowed every citizen to

invest in NPS from 1st April, 2009 on a voluntary basis. After almost two years,

there are only 38857 accounts (as on 5th

February 2011) are opened, even though

8894 offices are distributing the product. This means still NPS as product has not

gained any presence in country till date & it is in very nascent stage. As a result,

researcher dropped the NPS (though it resembles with Mutual Fund) from the

working definition of mutual funds. Rather this study will be useful to PFRDA to

strengthen NPS distribution. In given situation, there is need to redefine the definition

18

of mutual fund in the context of our study. So the final definition of mutual fund is as

follows: -

Mutual funds include all those investment services where investors’ money is

pooled (making it collective investment) and it is invested in various securities

including financial and physical so that benefits of diversification & risk sharing

will happen with the help of professionals. In a nutshell, the following features

are essential to term a financial product as Mutual Fund: -

1) Investors money is pooled

2) Money is invested in various securities

3) Professional management

Mutual funds includes the all Unit Linked Insurance Products offered by life

insurance companies.

1.6 Statement of Research problem

Thus Indian MF industry has long history. In the last decade, ULIPs became popular.

As discussed earlier mutual fund & ULIP investments have many merits over other

investment avenues. Considering this, mutual fund & ULIP investments should be

popular and widespread in our country. But in reality, at the end of March 2009, there

are only 4,60,75,763 individual investors30

investing in mutual funds. As per IRDA’s

annual report, by the end of year 2007 – 08, total number of ULIP policies in India

issued was 5611400031

. For a nation with billion plus population, these figures seem

to be small. MF /ULIP penetration will be in single digit.

Also the same concern has been endorsed by erstwhile SEBI chairman Mr. C. B.

Bhave while addressing to Mutual fund industry in Mutual Fund Summit 2009 on 17th

June 2009,

“The importance of the individual investors is tremendous and that lesson we

will take home not because somebody tells us that you need to go to retail and

you need to go the individual investors but because it is in industry’s interest

from the interest of a stability of scheme that we want more individual

participation. Thus, I would urge the industry to shed this idea from their mind

that they are going to retail investor in order to fulfill what the regulator wants

or the government wants. They must go to the retail investor because that is

what they need. It is in their interest that retail investors have a larger portion

of their scheme.”

19

Mutual funds/ ULIPs and retail investors are like “made for each other”,

therefore, the poor participation of retail investors in them is a curious and

surprising phenomenon. It contradicts the theory underlying these products.

In marketing, when a quality product or service is not able to reach the consumers

then the onus is on marketing mix elements other than product. Distribution

intermediaries act as a link between manufacturer of the product i.e. mutual fund /

insurance company in our case and the investor. There are diverse set of Mutual fund /

ULIP distribution Intermediaries like individual agents, corporate agents, brokers,

distribution houses, banks, non-banking financial companies (NBFCs). The scenario

in which distribution intermediaries are working is rapidly changing. These changes

are spelled out as below: -

1) Changing Indian investors - Changing socio - economic environment

paves way for more demanding investors. New work culture, and growing

number of working couples created need of convenient, quick and doorstep

delivery of financial services. Disposable income of Indian middle class has

increased due to rise in salary levels of both public (especially after sixth pay

commission) as well as corporate sector employees. This makes the task MF

distribution intermediaries more important and challenging.

2) Changing Regulatory framework – Currently, regulators are making

stricter regulations for mutual fund industry. AMFI (Association of mutual

funds in India) has taken the initiative for developing a cadre of trained

professional intermediaries. AMFI launched the certification programme in

association with NSE’s Certification in Financial Markets (NCFM) in July

2000. SEBI has made AMFI Certification compulsory in a phased manner.

Regulators want to bring element of advice while selling financial products.

3) Increased use of technology in financial services - In addition to tough

regulatory environment, technological changes are also affecting the Indian

mutual fund / ULIP distribution. Today Information Technology has changed

the nature of financial markets and financial transactions. The pace and reach

of change are unlikely to slowdown in the foreseeable future. Banks and

capital markets are forerunner in adopting technology. Technologies such as

smart cards, bank accounts with biometric identification, mobile ATMs,

electronic payments networks, branchless banking services through mobile

phones, telephone are making financial inclusion possible. These technologies

20

are helping financial services organization to penetrate deep in the market. In

near future, may be technology will bring new ways of MF distribution.

Distribution Intermediation itself has undergone a change over the past few decades.

Mutual fund / ULIP distribution business has been going through lot of changes.

Rather, researcher is observing new distribution paradigm in Indian mutual fund /

insurance industry. Just look at the two statements made by industry insiders.

Jaideep Bhattacharya, chief marketing officer of UTI Asset Management Co.

Ltd. spoke during MF summit 2009 “It’s a new environment. People (Mutual

fund distribution intermediaries) will have to move from distribution to

advisory model,”

Mr. Avinash Ramnath, national sales head of Canara Robeco Asset

Management Ltd. said in same event “The writing is on the wall. The onus is

on the distributors to create an ownership of customers by improving the

quality of services. Platforms can be one way of doing it,”

As per the report titled “Asset management outlook in India”33

by Indian Chamber of

commerce & Ernst & Young in 2008, 90 percent executives working in the industry

kept distribution on their agenda for the next two years.

Though the industry is recognizing significance of distribution, but recent articles

written in print media and various discussions taking place in electronic media about

rampant “mis-selling” of mutual fund, insurance products (especially unit linked

insurance products) and other financial services compel the researcher to enquire

more. Again, the cost of financial services distribution is enormous as Indian investor

pays large amount of money to intermediaries under various heads such as fee,

commission or expenses, either directly or indirectly. Just to buttress this fact, as per

IRDA Annual Report 2007 -0834

, Indian insurance industry had paid whooping INR

14704 crore as a commission to distribution intermediaries. Even, Mutual Fund

industry pays around 2 percent as a commission to their intermediaries.

Are our investors getting back something from distribution intermediaries? If yes,

then what and how much? Are these commissions justified in terms of what they offer

to retail investors? This entire context has made researcher more curious. This has

further enticed researcher to undertake research study with following research

problem.

What is the present role of mutual fund intermediaries & what will be the role

in near future in the backdrop of changing environment?

21

1.7 Significance of the Study

Mutual Fund Company acts as non bank financial company and fund lot of business

activities. Mutual fund companies are important institutional investors as they are

pooling money from both retail and corporate savers to form capital for business

activities. Our study endeavors to help mutual fund industry to spruce up their

distribution channels. This will make mutual fund industry stronger. This is good

news for those businesses that depends on MF companies as a funding source.

Again mutual fund being strong domestic institutional investors, their role in

corporate governance is large. Mutual fund companies being significant shareholder

can directly influence corporate decisions by voting against management at

shareholder meetings. Thus stronger mutual fund industry will be strong crusader for

corporate governance. Currently, our stock markets are mainly influenced by foreign

institutional investors (FIIs) as they bring lot of liquidity in the market. As our

markets more volatile (Refer Table 1.2), stronger MF industry will act as a buffer

against these FIIs and volatility in our stock markets may be reduced.

So anything which will help in making MF industry stronger does have spillover

effect on Indian corporate and stock markets.

Financial markets are integrating, lot of financial services are bundled together to

create convenience for customers. Even financial services distribution is also

integrated. More and more distribution intermediaries are involved in selling multiple

financial products. This means though our study is focused on MF distribution but its

result do have some sort of implications for other financial services also. As

mentioned earlier, pension reforms are ongoing and soon lot of pension products will

be introduced. This study will definitely useful for pension industry as pension

products are similar to mutual funds in terms of product composition and features.

Thus, this study is significant for Indian pension industry.

This study is significant from regulators’ perspective also. Lot of government bodies

and regulators like SEBI, AMFI, IRDA, and FPSB are working towards investor

education, investor protection or rather investor empowerment per se. This study will

also give vital cues for further research in this regard.

Lot of economists like Adam Smith, David Ricardo, J. S. Mill, Keynes recognized the

causal nexus between income, saving, investment and economic development and

growth of the nation even from earlier times. Our study is focused on household

22

savings towards mutual funds. Indirectly, this study becomes significant from

economic development of our country.

In a nutshell this study does have larger ramifications for retail investors, corporate

companies, stock markets, regulators & policy makers.

1.8 Chapter scheme

The study comprises of seven chapters. Apart from background or overview of the

problem, Chapter I outline research problem, its significance. Chapter II will focus

distribution intermediaries prevailing in global as well as Indian markets. Research

methods and methodology will be spelled out in Chapter III. Chapter IV analyzes the

data while Chapter V will summarize the main findings and will offer some

suggestions also.

23

References:

1) Mohan, Rakesh (2008), “Growth Record of the Indian Economy, 1950-2008: A Story of

Sustained Savings and Investment”, Based on the keynote address at the conference on

“Growth and Macroeconomic Issues and Challenges in India” organized by the Institute of

Economic Growth, New Delhi, on February 14, 2008 also published Economic & Political

Weekly, May 2008, pp. 61-71

2) Mehra, Rajnish (2006), The Equity Premium in India. In Kaushik Basu (Ed.), The oxford

Companion to Economics in India, New Delhi: Oxford University Press.

3) Reserve Bank of India (2008), Annual Report, Mumbai

4) Society of Capital Market Research & Development (2004), Indian household investor’s

survey – 2004, New Delhi : Author

5) Association of Mutual Funds in India (2008), The investor’s concise guide – Making mutual funds work for you (3rd Edition), Mumbai : Author

6) Rao, D. N. & Rao, S. B., (2009), “Can Balanced and Income Mutual Funds Outperform the

Stock Market? An Empirical Study in the Indian Context” Retrieved March 23, 2011, from

SSRN: http://ssrn.com/abstract=1367032

7) Baid, Rachana (2007), “Mutual Funds Products & services” New Delhi: Taxmann

Publications Pvt. Ltd.

8) Rouwenhorst, K. G., (2004), “The origins of Mutual Fund”, In William N. Goetzmann and

K.Geert Rouwenhorst (Ed,), Origins of Value - The Financial Innovations that Created

Modern Capital Markets, New York : Oxford University Press

9) Fernando, Deepthi; Klapper, Leora; Sulla, Víctor Sulla & Vittas Dimitri (2003), “The

Global Growth of Mutual Funds”, World Bank Policy Research Working Paper 3055, The

world Bank Development Research Group Finance 10) Kamiyama, Tetsuya (2007), “India's Mutual Fund Industry”, Nomura Capital Market

Review Vol.10 No.4, pp 58 – 72.

11) Agrawal, Deepak (2011),“Measuring Performance of Indian Mutual funds”, Finance India ,

June 2011, Electronic copy available at: http://ssrn.com/abstract=1311761

12) Mitra, Anupam (2009), “Mutual funds– are they for mutual benefit?”, NSE Newsletter, Sept

2009

13) Acharya, D & Sidana, Gajendra (2007), “Classifying Mutual Funds in India: some results

from clustering”, Indian journal of business & economics, Vol. 6, No.1, 2007, pp 71-79

14) Kumar, Raj & Sharma Priyanka (2009), “Mutual funds: expanding horizons”, SCMS

Journal of Indian Management, January - March, 2009, pp 100 – 118

15) “History of Indian Mutual Fund industry” (n.d.) retrieved July 11, 2009, from http://www.amfiindia.com

16) Macko, Willam & Sourrouille, Diego (2010), “Investment Funds in MENA”, Financial

Flagship series of World Bank, Retrieved from

http://siteresources.worldbank.org/INTMNAREGTOPPOVRED/Resources/MENAFlagshipM

utualFund12_20_10s.pdf

17) Rao, P. H., & Mishra, V. K, (2007), “MUTUAL FUND: A RESOURCE MOBILIZER IN

FINANCIAL MARKET”, Vidyasagar University Journal of Commerce, Vol. 12, March 2007,

pp 109 -115

18) Berghe, Van den; Verweire, K; Carchon, S.W.M. (1999), “Convergence in the financial

service industry”, Tokyo : OECD 19) Kist, Ewald (2001), “Integrated Financial services – A framework for success: synergies in

insurance, banking, and asset management”, The Geneva papers on risk and insurance Vol.

26, No. 3, pp 311 – 322.

20) Walter, Ingo (1999) “The Asset Management Industry in Europe: Competitive Structure

and Performance under EMU” In Jean Dermine & Pierre Hillion (Eds.) European Capital

Markets with a Single Currency, Oxford: Oxford University Press

21) ibid

22) Keswani, Aneel & Stolin, David (2010), “Investor reaction to past performance : Evidence

from UK distribution channels”, retrieved on January 12 2011, from

http://www.cassknowledge.com/sites/default/files/article-

attachments/482~~aneel_kewani_investor_reaction_to_mutual_fund_performance.pdf

23) Chakrabarti Rajesh (2009), “Asset Management Industry In India” retrieved on April 23, 2009, from http://ssrn.com/abstract=1428473

24

24) Das, Bhagaban; Mohanty, Sangeeta and Shil, N.C., (2008) “Mutual Fund vs. Life

Insurance: Behavioral Analysis of Retail Investors”, International Journal of Business and

Management, Vol. 3, No. 10, pp 89-103

25) Korivi, Sunder Ram & Venkatesh, B.S., (2007), “Life-style Wraps: Cost-efficient

Alternative to ULIPs”, Proceedings of 11th APRIA Conference, Taipei : National Chengchi

University 26) Insurance Regulatory Development Authority (2008), IRDA Annual Report 2007 – 08,

Hyderabad : Author

27) Higher exit load in mutual fund with insurance (2008), retrieved March 21, 2010, from

http://www.business-standard.com/india/news/higher-exit-load-in-mutual

fundinsurance/327901/

28) Product Details (2008), retrieved December 11, 2008, from

http://www.sbimf.com/Product_Details.asp?ProductId=27

29) Anand, Abhishek; Verma, Shruti & Khare, (2009), Fund schemes with insurance cover a

big draw for investors, retrieved March 21, 2010, from http://www.mydigitalfc.com/mutual-

funds/fund-schemes-insurance-cover-a-big-draw-investors-827

30) Rao,C.S.,(2007), “Indian Insurance Industry Since 2000 – A Remarkable Journey”, A.D.

Shroff Memorial Lecture on 10th August, 2007 at Bombay House Auditorium, Mumbai 31) Securities Exchange Board of India (2009), “Annual Report 2008-09”, Mumbai : Author

32) ibid

33) Ernst & Young (2008), “Asset management outlook in India”, Mumbai : Author

34) Ibid

35) Kotler, Keller. (2005). Marketing Management (12th ed.). New Delhi: Prentice Hall India

Private Limited

36) Pune per capita income higher than India's (2008), Retrieved October, 11, 2011, from

http://articles.timesofindia.indiatimes.com/2008-08-05/pune/27945189_1_esr-capita-income-

pune-district

25

CHAPTER II

MUTUAL FUND / INSURANCE

DISTRIBUTION

INTERMEDIARIES

& RETAIL INVESTORS

26

2.1 Importance of distribution channels for Financial Services

The financial services refer to services provided by the financial industry. Thus the

financial industry comprises of a broad range of organizations that deal with the

management of money. Among these organizations are banks, insurance companies,

consumer finance companies, investment funds and stock broking companies.

Lovelock (1983)1 classified services based on various criterions like nature of service

acts, who receives the service, nature of service delivery, type of relationship, need

for customization, need for judgment by customer contact staff, demand – supply

fluctuations, availability of service outlet, customer – service provider interaction.

Researcher applied these bases to financial services and the scenario emerged is as

follows: -

- Financial services are intangible and they are directed towards things.

- Continuous nature of service delivery.

- Formal relationship between service provider and customer

- High level of customization is needed.

- High level of judgment is needed from customer contact staff

- Low demand fluctuations. Demand is met without major delay.

- Service availability at multiple outlets

- Mainly organization comes to customer but increasingly even customer

goes to organization. Due to technology both i.e. buyer and seller transact

at arm’s length.

These all characteristics of financial services make distribution channels very

significant. Mutual funds and insurance are those modern financial services which

are needed by corporate as well as retail customers. This entire chapter will portray

various retail distribution channels prevailing in both insurance and mutual fund

industry.

2.2 Mutual Fund / Insurance Distribution Channels worldwide

There are wide differences across the countries in terms of how mutual funds are

distributed. Let us start with mutual fund distribution channels prevalent in USA.

Mutual Fund distribution structure prevailing in USA is well described in various

literatures. An official source for classifying Mutual Fund distribution intermediaries

27

in USA is reports and various publications of Investment Company Institute (ICI). ICI

classifies MF distribution channels into three types as shown in Table 2.1 below: -

Table 2.1 – Mutual Fund distribution channels in USA

Type of

Channel

Employer or

Retirement

Channel

Sales force Channel Direct Channel

Channel

Members

Employees are

investing in defined Contribution plans

through employers

Full service Broker Direct Mutual

Fund company

Independent Financial Planner

Discount Broker or NTF (Non

Transaction Fee)

supermarket Banks

Insurance Agent

Share of channel as

on 2001

48 percent 37 percent 15 percent

Compiled from: www.ici.org

U.S. mutual fund distribution has been concentrated on full-service broker-dealers

which maintain large retail sales force capable of penetrating the household or retail

sector and which are compensated mainly on the basis of commissions. In recent

years, discount brokers have made substantial presence in mutual fund distribution,

compensating for reduced sales effort and limited investment advice by lower fees

and expenses. Insurance agents account for another 15 percent of U.S. mutual fund

distribution which focus on mutual funds with an insurance wrapper like fixed and

variable annuities and guaranteed investment contracts. Bank branches have played a

limited role in the U.S. Bank channel accounting for the relatively small 13 percent

share in United States Mutual fund market.

Apart from USA, Europe is dominant region for Mutual Fund Industry. The European

countries like Luxemburg, France, UK, Ireland and Italy are amongst top 10 countries

in terms of Mutual Fund industry asset size. These five countries together manage

27.4 percent of total mutual fund assets of the entire world. This makes European

Mutual Fund distribution channels important to our study.

As shown in the table below, mutual fund distribution through bank branches

dominates in countries such as Germany (80 percent), France (70 percent), and Spain

(61 percent), while U.K. distribution concentrated among independent advisers (See

Table 2.2). But Italian distribution roughly split between bank branches and

independent sales forces. Overall, contrary to US, European mutual distribution is

dominated by bank channel.

28

Table 2.2 – Share of various Mutual Fund /Insurance distribution channels in

European Union

USA Germany United

Kingdom France Italy Spain

Bank 8 80 10 70 43 71

Full service brokers 31.2

Dedicated Sales Force 25

Independent Sales force 20.3 14 50 44.1

Discount Brokers 8.6 6

Direct Channels 31.9 15 1.1

Others 30 11.8 29

Compiled from: Ingo Walter (1999)2 “The Asset Management Industry in Europe:

Competitive Structure and Performance Under EMU”

A closer look at United Kingdom shows that Investment Management Association

(IMA) disaggregates Mutual Fund (referred as Unit Trusts) flow data by investor type

and distribution channel into the seven Categories. From retail investor’s perspective,

IMA classifies distribution channels into four types.

1) Direct investment from Mutual Fund Company

2) Independent Financial Advisor;

3) Tied sales force;

4) Private clients - refers to portfolio management services offered by banks,

stockbrokers and law firms

The table 2.3 below describes each channel in detail.

Table 2.3 – Mutual Fund distribution prevalent in United Kingdom

Channel Description

Direct

investment

All sales and repurchases where the unit holder places the deal directly with the

Mutual fund company. This type of business is likely to arise as a result of "off

the page" advertising, direct mail-shots or spontaneous customer response to

newspaper editorial coverage or fund performance rankings.

Independent

Financial

Advisor

All sales and repurchases of unit trusts where the order is placed through an

Independent Financial Adviser / Intermediary. Such advisers will normally be

members of a recognized professional body

Tied sales force

All sales and repurchases of units in question where the order is placed through a company's Direct Sales Force or tied agents. It is important to remember that tied

agents could, for instance, include a bank or building society branch selling units

on behalf of a unit trust management company from a different parent group.

Private clients All sales and repurchases of units arising as a result of orders from an in-house

private client discretionary portfolio management service. . These could be

execution-only or advisory services, or they could even take the form of

discretionary services whereby the provider may trade on behalf of the individual

investor.

29

Aslam, John (2010)3 has classified Mutual fund distribution channel as a direct &

indirect distribution channel. Lakshmikutty Sreedevi and Baskar Sridharan (2003)4

also observed distinction of channels in the developed markets as personal

distribution systems and direct response systems. Personal distribution systems

include all channels like agencies of different models and brokerages, bancassurance,

and work site marketing. Direct response distribution systems are the method

whereby the client purchases the insurance directly. This segment, which utilizes

various media such as the Internet, telemarketing, direct mail, call centers, etc., is just

beginning to grow.

In a nutshell, when it comes to insurance distribution channels one-size does not fit all

Dumm & Hoyt (2002)

5. Multiple distribution channels are the key feature of

insurance as well as mutual fund distribution.

2.3 Mutual Fund / Insurance Distribution Channels in India

Categorizing distributions channels in India is a difficult task, in particular given the

relatively poor disclosure by AMFI & SEBI of distribution activity in the mutual fund

as well as life insurance industry (as compared with disclosure of performance data).

Daniel Bergstresser, et al (2004)6 has also encountered with this problem while

conducting study on Mutual Fund industry in USA.

As per IRDA, Insurance (ULIPs) products are sold in India through various channels

like agents, corporate agents (including banks), brokers, referral & direct channels. As

per AMFI, mutual fund distribution channels are classified as corporate agents

(including banks) and individual agents. As far as direct channels are concerned,

mutual fund companies are exploring various ways to reach directly. Direct channels

like mutual fund company’s offices, websites, telephone, mobile, ATM kiosks are

evolved in the recent past. All these channels and channel intermediaries are common

for both insurance (ULIPs) and mutual funds. Again distribution structure is changing

and embracing newer and newer ideas increasingly. Both the industries are observing

emergence of innovative distribution channels. A prominent channel has emerged in

the form of banks. Both AMFI and IRDA do not report data separately for the bank.

They have included banks as a corporate channel.

As researcher has already discussed how bank as a distribution channel is evolving

worldwide. This phenomenon is gaining its importance in India also. Karunagaran

(2006)7 concludes that going by the present pace, bancassurance would turn out to be

30

a norm rather than an exception in future in India and it would be a ‘win-win

situation’ for all the parties involved - the customer, the insurance companies and the

banks. Syed Shahabuddin (2008)8 bank channel has slowly realized its own potential

and is now emerging as a big player for mutual fund industry. Considering this, one

should accord bank as a separate distribution channel.

In a nutshell, need for multiple distribution channels is obvious for both Mutual funds

and ULIPs as low level of penetration of both the products, diverse needs of

customers, low level of awareness amongst the customers, increasing number

customers emphasizing service.

But the way Distribution intermediaries as classified by the regulators are increasingly

becoming obsolete as newer and newer distribution channels are emerging.

In this dynamic set up, researcher would classify Mutual Fund distribution

intermediaries for the purpose of study as below: -

1) Individual Mutual Fund agents / Individual financial advisor / Brokers.

2) Institutional or Corporate Agents (Group of people working together as a

company or partnership firm, Mutual fund branch offices, National or

regional level organizations operating through branches, Distribution

houses, etc)

3) Banks.

4) Emerging distribution intermediaries (all those channels which are not

covered by Sr. No. 1, 2, 3)

After classifying Mutual Fund / Insurance distribution intermediaries in India,

researcher will now define the term “Retail investors” in next section.

2.4 Definition of Retail Investors

Retail investors are referred in various ways like non institutional investors, small

investors, individual investors, non professional investors, household investors.

Stefan Bender (2006)9 a retail investor is an individual who buys and sells securities

for their own behalf not for an organization. Retail investors (non-professional

investors) typically trade in much smaller quantities than institutional investors. Retail

customers define the end of the distribution chain.

AMFI reports mutual fund folio data periodically in which data is shown for three

types of investors i.e. corporate or institutional investors, HNI (High Net worth

Individuals), Individual (small / retail) investors. AMFI terms those individuals whose

mutual fund portfolio is more than Rs. 5 Lakhs as HNI (High Net worth Individuals).

31

From this, researcher can make out that retail mutual fund investors those investors

who invest less than Rs. 5 Lakhs in mutual funds & other similar products.

In a nutshell, retail investors are those investors who exhibits following

characteristics; -

1) Their investments are in small amounts (in terms of volumes and value)

on behalf of themselves.

2) Total investments made in Mutual funds are less than Rs. 5 Lakhs.

3) Objectives behind investing are personal or family.

2.5 Role of Mutual Fund distribution intermediaries in relation to retail investors

Taking a leaf from previous subsection one can easily classify these distribution

channels into direct and indirect channels. Indirect channels include independent

financial planners, Individual financial agents (IFAs), banks, tied agents, brokers.

Direct channels will be Mutual Fund Company itself, NTF supermarkets, etc.

In India, indirect channels (comprising individual agents, corporate agents including

banks) are the dominant channels but a lot of direct channels are emerging. Mutual

fund investors prefer indirect channel as against the direct ones. Globally, in most of

the countries investors initially use indirect channels and then slowly shifted towards

the direct channels. Even today, in the sophisticated markets like USA investors

prefer indirect as against direct channels.

John Aslam (2008)10

further studied possible reasons behind Mutual Fund investor’s

propensity to engage financial advisors and found that behavioral influences as well

as knowledge plays vital role. These influences are tabulated (Table 2.4) as follows: -

Table 2.4 – Influences for engaging advisor while purchasing Mutual Funds

Behavioral Influences Knowledge Influences

1) Investor desire for convenience rather than

low cost in fund investing; 2) Influence of fund and distributor advertising

and marketing on the investor;

3) Investor feelings of inertia rather than action;

4) Investor feels the need to combine financial

services “under one roof”

5) Investor has feelings of insecurity rather than

confidence;

6) Investor feels the need to validate fund

decisions before transacting;

7) Investor feels the need for a referee in

spousal disagreements over investing and

money; 8) Investor tries to time the market, especially

short term;

1) Investor is a novice rather than

experienced fund investor; 2) Investor has proven inability to select

high-performing funds;

3) Investor has a lack of knowledge of

and/or appropriate education in fund

investing;

4) Investor has inadequate time to do the

necessary “homework” prior to

transacting; and

5) Investor has certain knowledge of

advisor who is a successful investor to

manage his/her fund investments.

Compiled from – John Aslam (2008)9

32

In short, investors engage advisor for variety of reason like convenience, inertia, non

confidence, indecisiveness, inability, lack of knowledge, advisors’ advertising and

marketing, advisors past performance, lack of time, etc. Many of these reasons are

relatable with Indian retail investors. Victoria Leonard and Michael Bogdan (2007)11

also found two prominent reasons behind using advisors one is investment and

planning services offered by them and other is advisor’s expertise.

To explain the role of Mutual Fund distribution intermediaries in India, researcher has

to go through the fine print of the guidelines given by insurance as well as mutual

fund regulators. Association of Mutual funds in India (AMFI) made a comprehensive

guidelines and the code of conduct so that all those engaged in the business of selling

and marketing of mutual fund schemes follow professional, healthy and best practices

for the sustained benefit of all concerned – investors, intermediaries and the Mutual

Fund Industry as a whole.

AGNI endorses that investors are diverse in terms of their needs; they can broadly be

classified in three categories:-

(i) Those who want product information, advice on financial planning and

investment strategies.

(ii) Those who require only a basic level of service and execution support i.e.

delivering and collecting application forms and cheques, and other basic

paperwork and post sale activities.

(iii) Those prefer to do it all themselves, including choice of investments as

well as the process/paperwork related to investments.

To cater these investors AGNI has listed two types of services an intermediary

should offer to their investors (See Table 2.5).

The cardinal principle of AGNI is “ensuring that the clients’ interest is

protected”.

As per our definition mutual funds includes Unit Linked insurance products, it will be

essential to study the regulation in relation to it. IRDA has stated these guidelines

under two acts i.e. Insurance Regulatory and Development Authority (Licensing of

Insurance Agents) Regulations, 2000), IRDA (Insurance brokers) Regulations 2002.

IRDA (Insurance Brokers) Regulations, 2002 laid down the comprehensive guidelines

pertaining to client’s relationship, sales practices furnishing of information

explanation of insurance contract renewal of policies claim by client, documentation.

33

Again the act categorically states that “Every insurance broker shall follow

recognized standards of professional conduct and discharge his functions in the

interest of the policyholders.”

Table 2.5 – List of the Investor services included in AGNI

Basic

Services

- Assisting them in filling application forms,

- Submission of application forms along with cheques at the

respective office/s,

- Delivering redemption proceeds and

- Answering scheme related queries investor/s may have.

Value added

Services

- Product information and advice on financial planning and

investment strategies.

- Understanding client’s need - Recommends asset allocation/specific investment/s that are in

tandem with the investor’s needs.

- Investors may also receive information on taxation, estate

planning and portfolio rebalancing

- Make them aware about the changes/developments in market

conditions

- the emphasis is on building an ongoing relationship with the

investor/s.

Both the regulators are explicitly stating that intermediaries should “recommend

schemes appropriate for the client’s situation and needs”. Intermediaries should avoid

commission driven malpractices such as: recommending inappropriate products solely

because the intermediary is getting higher commissions there from, encouraging over

transacting and churning of mutual fund investments to earn higher commissions,

even if they mean higher transaction costs and tax for investors.

Apart from this intermediaries should provide full and latest information of schemes,

highlight risk factors of each scheme, forwarding forms and cheques within the time

frame prescribed in the offer document and SEBI Mutual Fund Regulations.

Data released by IIMS Dataworks indicates that the low take up of retail mutual fund

investment in India has as much and more to do with low awareness levels among

smaller retail investors.

Das Bhagaban, Ms. Sangeeta Mohanty and Nikhil Chandra Shil (2008)12

, Manoharan,

et al (2006)13

observed that majority of the retail investors are getting the information

from distribution intermediaries. Even in the developed markets like USA,

distribution intermediaries are considered as best source of information by more than

half the investors Gordon J. Alexander, et al (1998)14

. As per by IIMS Dataworks

report15

on “Market Scoping for Mutual Funds in India”, 32.4 percent of the Mutual

Fund investors’ source for their mutual fund awareness is agents and banks.

34

Considering that distribution intermediaries are regarded as prominent source of

information, they should ideally be responsible for investor education.

Summarizing the role of distribution intermediaries

After discussing what role mutual fund intermediaries are playing worldwide and

what role is expected by regulators in India. Now researcher would define the “the

role of mutual fund distribution intermediaries” which will be focused in the study.

Researcher will split the role of mutual fund distribution intermediaries into four

components. As the scope of each component is large, researcher has set boundaries

for each component as follows: -

1) Role of intermediaries in Educating Investors / Customers - Investor education

is very broad term, researcher limits it to whether basics of investing (risk,

return, liquidity, taxation) have been explained by the intermediary or not.

Apart from this, researcher will study investors’ overall perception towards

education by intermediaries.

2) Role towards Building Relationships & Creating Loyalty – Researcher will

study perceived relationship strength and the level of loyalty towards

intermediaries. Researcher will study various relationship marketing factors

and will explore the basis of relationship development.

3) Role as a Service Provider – Apart from understanding the need hierarchy of

investors’, researcher will also study the nature of services i.e. basic /

transactional, advisory and information offered to the investor by the

intermediaries.

4) Role as Value Creator – Value is core element of any service. Value is also

one of the three pillars of relationship marketing. Researcher would explore

how these intermediaries are adding the value? What are the value additions

these intermediaries are making?

2.6 Understanding retail investors

Researcher found numerous research pertaining to behavior of mutual fund investors

like Dorn Daniel, Huberman G (2005)16

; Kenneth A. Kim and John R. Nofsinger,

(2003)17

; Bailey, Warren B., Kumar, Alok and Ng, David, (2010)18

; Veld Chris, Veld-

Merkoulova V.Yulia (2007)19

. Lot many researchers studied expenses and cost

associated with mutual fund investments viz Miller, Ross M. (2005)20

; Barber, Brad

M., Odean, (2003)21

; Haslem, John A., Baker, H. Kent and Smith, David M., (2007)22

;

Houge, Todd and Wellman, Jay W. (2006)23

. Bulk of research has taken place about

35

mutual fund manager’s portfolio decisions and performance like Mark Grinblatt,

Sheridan Titman, (1993)24

; Kosowski, Robert (2006)25

;Blake, David (1996) 26

;

Lewellen, W., et al (1977)27

; Sirri Eric, Tufano Peter (1998)28

, Bluethgen, Ralph,

Gintschel, Andreas, Hackethal, Andreas and Mueller, Armin, (2008)29

. It shows that,

study undertaken is novel one would throw light on relationship marketing between

retail investors and distribution intermediaries. Before moving towards reviewing

literature pertaining to relationship marketing, let us understand MF retail investors

with specific focus on India.

Sebastian MÄuller and Martin Weber (2008)30

observed that less-knowledgeable fund

customers mainly choose traditional distribution channels, implying that they seek

assistance from a financial advisor who has an incentive to recommend actively

managed funds. In contrast, more-knowledgeable fund customers believe to have

some fund selection ability, select their funds more often on their own and rely more

on internet channels thereby avoiding sales commissions. It was suggested that the

value of financial advice should be investigated in greater depth as well. As this study

was conducted in more sophisticated markets, findings are shocking.

T.R. Rajeswari, Prof. V.E. Rama Moorthy (2001)31

reveals that the most preferred

investment vehicle amongst retail investors is Bank Deposits while MFs ranking

fourth in the order among eight choices. The survey further reveals that the scheme

selection decision is made by respondents on their own, and the other sources

influencing their selection decision are News papers and Magazines, Brokers and

Agents, Television, Friends suggestions and Direct Mail in that order. Further 44

percent of the respondents reported that they use internet facility to know more about

MFs while 56 percent reported that they do not have access to Internet. Further, 37.43

percent of the respondents prefer to get the routine/special information like daily

NAV, dividend, bonus, change in asset mix etc., through automated response system

while 53.71 percent prefer personal communication and 8.86 percent have no

preference.

Similar sort of study has taken in 2006 in Mumbai city by Ms. Kavitha Ranganathan

(2006)32

. She found that Preferred Mode of Communication in Mutual Fund Investing

among Individual Investors. The survey reveals that, 29 percent of the respondents of

Mumbai city use Internet facility to know more about MFs. Another 29 percent of

respondents prefer to get routine or special information like NAV, dividend, bonus,

change in asset mix by personally visiting the office. While 30 percent of the

36

respondents prefer to telephone the office and 12 percent in the survey have no

preferences. The results of the study show that almost equal importance is given to all

modes of communication.

Das Bhagaban, et al (2008)33

observed that majority of the people (35 percent) are

investing with the objective of capital growth, followed by Tax saving (28 percent)

and only 17 percent are investing for the Retirement plan. 52 percent of the investors

ranked LIC as number one, 33 percent ranked ICICI as number two and 15 percent

ranked HDFC as number three in Indian insurance industry. 40 percent of the

investors are in view that Newspaper and magazines is the main source of

information, whereas only 6 percent get information directly from company. Male

investors are more as compared to females in Indian retail market. There are many

sources from which investors get the information regarding availability of various

investment avenues. The most popular information source among retail investors is

found to be the newspaper (40 percent). Again 32 percent of the investors identify

agents, 15 percent identify friends, and 7 percent identify distribution houses as their

main source of information, whereas only 6 percent get information directly from the

company.

More appropriate description of MF retail investor is made during household

investor’s survey 200434

as conducted by Society for Capital Market Research &

Development. A subtle point brought out by survey is that retail investors are not

sufficiently familiar with mutual funds. In relative terms, there is much more

unfamiliarity with mutual funds than with the share market among the retail investors.

Unfamiliarity with an investment type affects the investor’s confidence level.

2.7 Emerging forms of distribution MF & insurance intermediaries globally

Globally, asset management companies are making unprecedented entry into capital

markets and becoming integrated financial services companies. This made them, to

revisit their strategies and distribution is not exception to it. As we have seen earlier,

in many countries multi pronged distribution approach is used. This section will

discuss various emerging distribution channels developed pertaining to insurance and

asset management industry.

Telemarketing Channel – Telemarketing is the process of selling, promoting, a

product or service over the phone. This channel posses several advantages like human

interaction facilitates two way communication, immediate feedback, large coverage

and cost effective. This channel has emerged in the countries where tele-density is

37

higher and telephone usage is also higher. It has emerged in Thailand, Indonesia, and

Vietnam. In Philippines, insurance companies bundled the life insurance products

with mobile sales. Such kind of bundling tactics will not be possible in case of asset

management industry. But surely telemarketing is useful for asset management

companies to reach deeper in the market place.

Virtual Channels – Electronic kiosks, internet, mobile in increasingly used by

financial services companies to increase brand awareness. Now these mediums can

also be deployed as distribution channels. Lot of non life insurance products such as

travel insurance, motor insurance, health insurance are sold through kiosks. These

kiosks can be installed in convenient location such as malls, hospitals, airports, etc.

As, Australia and South Korea both have high populations of internet users, internet

as distribution channel has developed significantly. Internet channel is significant in

attracting youths. Still many investors prefer to discuss product and its suitability

with financial advisor or agent. Companies are also employing online financial

advisor on 24/7 basis.

Worksite Marketing – Worksite or workplace marketing is the distribution financial

products at the workplace, paid for by employees, but facilitated and endorsed by the

employer. Worksite marketing is effective in well developed and well regulated

markets. Worksite market is prevalent amongst insurers in Malaysia, Thailand, and

Australia. Countries such as Singapore, Hong Kong and Taiwan are likely to be

markets where this channel will experience growth in near future.

Other forms of distribution channels –

a) Mall-assurance – Financial services are increasingly exploring the possibilities

of selling financial products in supermarkets and retail chains. In South Korea,

ING sales insurance via Tesco while in Philippines, Generali Insurance sales

through SM group retail chains.

b) Selling through Shops – Companies are setting up shops to sell variety of

financial services. Life plaza Holdings has 143 insurance shops across Japan

and has 40000 visitors per year.

c) Direct Response TV (DRTV) – Korean insurance companies are selling

insurance through DRTV since 2003. They label it as “homesurance”. CIGNA

has used DRTV channels in New Zealand and Taiwan.

d) Social Media – In UK, companies are using social media network to sell less

complex products.

38

Schwab and Fidelity are two biggest examples of NTF (no transaction fee)

supermarkets. Conrad S. Ciccotello, Jason T. Greene, Lori S. Walsh (2005)35

documented in detail the evolution of another forms of Mutual fund distribution i.e.

NTF supermarkets. Rather an NTF supermarket acts as both financial institution and

marketplace acting as an intermediary between investors and the mutual fund

company. NTF supermarket does not get any compensation directly from the investor

for buying or selling the fund. Instead, the Mutual fund Company pays the NTF

supermarket for “listing” the funds in this unified marketplace, as well as for servicing

customer accounts.

NTF supermarkets offer brand recognition which is beneficial to small, specialized

MF companies to market and distribute their highly differentiable products. These

NTF supermarkets allow Mutual Fund companies’ to maintain the product focus

while reducing shopping costs for investors. Conrad S. Ciccotello, et al (2005)36

also

observed that these supermarkets also have implications for industry structure as

investors increasingly rely on supermarket brand while determining the fund to

purchase.

From the above discussion, it was observed that markets around the world are

embracing newer and newer channels in financial services domain. The table 2.6

summarizes status of various distribution channels across various nations.

Table 2.6 - Status of emerging distribution channels globally

Country

Telemarketing Virtual Worksite

Marketing

Mall

assurance

Direct

Response Television

Australia M M G

China E E E

Hong Kong M G E

India G E E E E

Indonesia E E E

Japan M M M

Malaysia E E E

New Zealand M G G E

Philippines E E E G

Singapore G G E

South Korea M M E G G

Taiwan G M E E

Thailand E E E

Vietnam E E E

M – Matured, G – Growing, E - Emerging

Compiled from: - A report titled, “More than one approach - Alternate distribution

models in Asia Pacific” 37

, Prepared by Deloitte Touché Tohmatsu, 2010

39

2.8 Summary

Thus, this chapter has underlined that distribution intermediation in both Mutual funds

and insurance is dynamic and classifying them is difficult. For the purpose of this

study, researcher classified mutual fund distribution intermediaries; will follow the

same classification while conducting this research. Researcher also found that retail

investors are referred with various terms ended discussion with working definition of

retail investors.

An entire section is devoted for discussing the probable role of distribution

intermediaries. Researcher defined role for the purpose of this study as it was

observed that “role of distribution intermediaries” is very broad concept. The

penultimate section reviewed some literature pertaining to Indian retail investors. In

the last section researcher glanced through various emerging set of distribution

intermediaries prevailing in global markets. With this researcher would conclude this

chapter to move forward to study relationship marketing at length in the next chapter.

40

References:

1. Lovelock, C. H. (1983). Classifying services to gain strategic marketing insights. Journal of

Marketing, Volume 4, pp. 9-20

2. Walter, Ingo. (1999). The Asset Management Industry in Europe: Competitive Structure and

Performance under EMU. In Jean Dermine & Pierre Hillion (Eds.) European Capital

Markets with a Single Currency. Oxford: Oxford University Press

3. Aslam, John. (2010). Mutual Funds: Conflicted Distribution and the New Total Expense Ratio

Construct. The Journal of index investing, Winter 2010, pp. 65-74

4. Lakshmikutty Sreedevi & Sridharan, Baskar. (2003). Insurance Distribution in India: A

Perspective. Retrieved from http://unpan1.un.org/intradoc/groups/public/documents/apcity/unpan023814.pdf

5. Dumm, Randy & Hoyt, Robert. (2002) “Insurance Distribution Channels: Markets in

Transition”, Proceedings of 38th

Annual Seminar of the International Insurance Society,

Singapore

6. Daniel Bergstresser, John Chalmers, Peter Tufano (2004), “The Benefits of Brokers: A

Preliminary Analysis of the Mutual Fund Industry”, Working paper retrieved on December

14, 2009, from

http://www.haas.berkeley.edu/groups/finance/Brokerpercent20benefitspercent20Aprilperce

nt204percent202004.pdf

7. Karunagaran (2006) “Bancassurance: A feasible strategy for banks in India?”, RBI occasional Papers, Volume 27, No. 3, pp 125 -162

8. Syed, Shahabuddin (2008) “Evolving distribution strategies – reaching out to retail investors”,

Financial Planning Journal,

9. Stefan Bender (2006) “Frankfurt Retail FX Overview, Implications & Discussion” ECB

Foreign Exchange Contact Group,

10. John Aslam (2008), “Why do mutual fund investor employ financial advisors?”, Journal of

Investing, Winter 2008

11. Victoria Leonard and Michael Bogdan10 (2007), “Why Do Mutual Fund Investors Use

Professional Financial Advisers?,” ICI Research fundamentals, Vol. 16, No. 1, pp

12. Das, Bhagaban; Mohanty, Sangeeta and Shil, N.C., (2008) “Mutual Fund vs. Life Insurance:

Behavioral Analysis of Retail Investors”, International Journal of Business and

Management, Vol. 3, No. 10, pp 89-103 13. Manoharan, Kannadhasan,(2006), “Risk Appetite and Attitudes of Retail Investors’ with

Special Reference to Capital Market” Management Accountant, Vol. 41, No. 6, pp. 448-454

14. Gordon J. Alexander, Jonathan D. Jones, Peter J. Nigro (1998) “Mutual fund shareholders:

characteristics, investor knowledge, and sources of information” , Financial Services

Review Vol.7, pp 301–316

15. IIMS Dataworks (2007), “Market Scoping for Mutual Funds in India 2007”, Noida :

Author

16. Dorn Daniel, Huberman G (2005),Talk and Action: What Individual Investors Say and

What They Do, Review of Finance (2005), Vol. 9, pp 437-481, retrieved from

http://www.econ-pol.unisi.it/labsi/papers2006/Huberman.pdf

17. Kenneth A. Kim and John R. Nofsinger, (2003), “The Behavior and Performance of Individual Investors in Japan” Seminar proceedings, held at SUNY-Buffalo, Hong Kong

Polytechnic University

18. Bailey, Warren B., Kumar, Alok and Ng, David, (2010) “Behavioral Biases of Mutual Fund

Investors” , Journal of Financial Economics (JFE), retrieved on September, 19, 2010, from

SSRN: http://ssrn.com/abstract=1108163

19. Veld Chris, Veld-Merkoulova V.Yulia (2007), “the risk perceptions of individual

investors”, retrieved on July 16, 2010, from

https://dspace.stir.ac.uk/bitstream/1893/335/1/the-risk-perceptions-of-individual-investors-

revision-may30.pdf

20. Miller, Ross M. (2005), “Measuring the True Cost of Active Management by Mutual

Funds”, Retrieved on June, 19, 2008, from SSRN: http://ssrn.com/abstract=746926

21. Barber, Brad M., Odean, (2003), “Out of Sight, Out of Mind: The Effects of Expenses on Mutual Fund Flows”, Retrieved on June, 19, 2008, from SSRN:

http://ssrn.com/abstract=496315

41

22. Haslem, John A., Baker, H. Kent and Smith, David M., (2008) “Performance and

Characteristics of Actively Managed Retail Mutual Funds with Diverse Expense Ratios.”

Financial Services Review, Vol. 17, No. 1, pp. 49-68,

23. Houge, Todd and Wellman, Jay W., (2006), “The Use and Abuse of Mutual Fund

Expenses”, Retrieved on January 31, 2009, from SSRN: http://ssrn.com/abstract=880463

24. Mark Grinblatt, Sheridan Titman, (1993), “Performance Measurement without Benchmarks: An Examination of Mutual Fund Returns”, Journal of Business, 1993, vol. 66, No. 1, pp

47-68

25. Kosowski, Robert (2006), “Do Mutual Funds Perform When it Matters Most to Investors?

US Mutual Fund Performance and Risk in Recessions and Expansions” Retrieved on

August 1, 2009, from SSRN: http://ssrn.com/abstract=926971

26. Blake, David (1996), “Efficiency, risk aversion and portfolio insurance: An analysis of

financial portfolios held by investors in United Kingdom”, The Economic Journal , Vol.

106, No. 438,

27. Lewellen W G, Lease Ronald, Schlarbaum (1977), “Patterns of investment strategy and

behavior among individual investor”, The Journal of business, Vol. 50, No 3, July 1977, pp

296-333

28. Sirri Eric, Tufano Peter (1998), Costly search and mutual fund flows, Journal of finance, Vol. 53, No.5, Oct 1998

29. Bluethgen, Ralph, Gintschel, Andreas, Hackethal, Andreas and Mueller, Armin, (2008),

“Financial Advice and Individual Investors' Portfolios”, Retrieved on March 9, 2009, from

SSRN: http://ssrn.com/abstract=968197

30. Sebastian MÄuller and Martin Weber (2008) “Financial Literacy and Mutual Fund

Investments: Who Buys Actively Managed Funds?” retrieved on 25 January 2011 from

http//ssrn.com/abstract=10993305

31. T.R. Rajeswari, Prof. V.E. Rama Moorthy (2001), “An Empirical Study on Factors

Influencing the Mutual Fund/Scheme Selection by Retail Investors”, Capital Market

Conference 2001 (December 20-21, 2001) organized by IICM.

32. Kavitha Ranganathan (2006), “A study of fund selection behaviour of individual investors towards mutual funds - With Reference To Mumbai City”, Indian Institute of Capital

Markets, 9th Capital Markets Conference Paper, Retrieved from SSRN:

http://ssrn.com/abstract=876874

33. ibid

34. Society for Capital Market Research & Development (2004), “Household investor’s survey

2004”, New Delhi: Author

35. Conrad S. Ciccotello, Jason T. Greene, Lori S. Walsh, 2007, "Supermarket distribution and

brand recognition of open-end mutual funds", Financial Services Review, Vol. 16, pp 309-

326

36. ibid

37. Deloitte Touché Tohmatsu (2010), “More than one approach - Alternate distribution

models in Asia Pacific”, United Kingdom : Author 38. Association of Mutual Funds in India (2002), AMFI guidelines and norms for

intermediaries (AGNI), Mumbai:Author

39. Insurance Regulatory and Development Authority (Licensing of Insurance Agents)

Regulations, 2000), as available on IRDA website

40. IRDA (Insurance brokers) Regulations 2002, as available on IRDA website

41. Website of Investment Company Institute USA, www.ici.org

42

CHAPTER III

RESEARCH

METHODOLOGY

43

3.1 Overview

This research was conducted in order to determine the role of mutual fund distribution

intermediaries pertaining to retail investors in Pune city.

The descriptive method of research was used for this study as researcher gathered

information about the current condition. Descriptive research is a type of research that

is mainly concerned with describing the nature or condition and the degree in detail of

the current situation. This method is used to describe the nature of a situation, as it

exists at the time of the study and to explore the reason(s) behind a particular

phenomenon. The endeavour of descriptive research is to obtain an accurate profile

of the people, events or situations. Descriptive type of research’s emphasis is on

describing rather than on judging or interpreting. The aim of descriptive research is to

verify formulated hypotheses that refer to the present situation in order to explain it.

The descriptive approach is quick and moreover, this method allows flexibility, thus,

when important new issues and questions arise during the duration of the study,

further investigation may be conducted.

In this study, the descriptive research method was employed so as to identify the role

of mutual fund distribution intermediaries towards retail investors. The researcher

chose to use this research method considering the objective to obtain first hand data

from the respondents. Apart from flexibility of the descriptive method, it can employ

either qualitative or quantitative data or both, giving the researcher greater options in

selecting the instrument for data-gathering.

This study has two classes of respondents one is mutual fund / ULIP investors and

other is distribution intermediaries selling Mutual funds and ULIPs. Selected

participants answered a survey questionnaire. Data gathered from this research

instrument were then computed for interpretation. Along with primary data, the

researcher also made use of secondary resources in the form of published documents,

journals, books and literatures that were relevant to the study.

As this study required the participation of human respondents i.e. investors and

distribution intermediaries, certain ethical issues were addressed. The consideration of

these ethical issues was necessary for the purpose of ensuring the privacy as well as

the safety of the participants. Among the significant ethical issues that were

considered in the research process include consent and confidentiality. In order to

secure the consent of the selected participants, the researcher relayed all important

details of the study, including its aim and purpose. By explaining these important

44

details, the respondents were able to understand the importance of their role in the

completion of the research.

The main purpose of the research is to determine the mutual fund distribution

intermediaries towards retail investors in educating, relationship building, loyalty

creation, providing after sales service.

3.2 Objectives of research study

The following are the objectives of the study: -

a) To explore the different mutual fund distribution intermediaries in relation to

retail investors.

b) To study the role of intermediaries in educating customers in relation to retail

investors for Mutual Funds.

c) To study the role of intermediaries building relationships in relation to retail

investors for Mutual Funds.

d) To study the role of intermediaries creating loyalty in relation to retail

investors for Mutual Funds.

e) To study the role of intermediaries providing after sales service in relation to

retail investors for Mutual Funds.

3.3 Research Design

Basically research design is a plan for collection, measurement and analysis of data.

As this study was primarily focused on role of mutual fund distribution intermediaries

towards retail investors in Pune city, one might therefore think that mutual fund

investors would be adequate for this purpose. However the responses of distribution

intermediaries are also vital and may furnish newer aspects to this study. As discussed

earlier descriptive method of research was used for this study. Research design is

covered under three parts viz sampling design (method of selecting respondent),

observational design (how data is collected) and statistical design (how the data

gathered is analysed).

3.3.1 Sampling Design

a) Population - All the investors who are investing in mutual funds & ULIPs

staying in Pune city and all the individuals and organizations involved in

selling Mutual funds and Unit Linked Insurance products in Pune city.

b) Sampling Method - As sampling frame of MF/ULIP investors is not

readily available; employing random sampling method is not practical. Again,

prime objective behind this study is to compare the role played by various

45

types of intermediaries towards retail investors. Controlling the investors by

the channel type they use is important.

Our further purpose of our study is to study relationship marketing between

buyer and seller. Relationship development needs some time at least a year or

more. Again our study is focusing on retail investors whose working definition

is Those investors who exhibits following characteristics -

1. Their investments are in small amounts (in terms of volumes and

value) on behalf of themselves.

2. Total investments made in Mutual funds are less than Rs. 5 Lakhs.

3. Objective behind investing is personal or family.

While choosing an investor as a respondent has to satisfy some criterion.

Researcher has fixed following four criterions.

- Age of the respondent should be more than 20 years.

- Respondent should be investing in mutual funds / ULIP for more than one

year.

- Investors total investment is MF / ULIPs should be less than Rs 5 Lakhs

- Objective behind investing must be personal or family.

As researcher is comparing the roles amongst various types of distribution

intermediaries, representation of investors using each type becomes important. For

this, Quota Sampling method seems to be appropriate in a given context. Quotas

are fixed on the basis of distribution channel used by investor while investing

mutual fund / ULIPs. Our sample would include 150 investors using each type of

distribution channel i.e. Individual Financial Agents or Brokers, Corporate

Agents, Banks.

Table 3.2 – Fixation of Quotas for Investor sample

Type of distribution channels used

by investor

Quota

(Number of

Investors)

Individual Financial Agents or

Brokers

150

Corporate Agents 150

Banks 150

TOTAL 450

As researcher is employing criterion based selection, our sampling method is

Purposive - Quota sampling. These criterions are essential not only for studying

46

relationship marketing between distribution intermediaries and retail investors but

also enable researcher to compare various types of distribution intermediaries.

In case of Distribution intermediaries’ survey, researcher was not able to estimate

the number of population elements. One of the purposes of this study is to study

relationship marketing between buyer (investor) and seller (distribution

intermediary). Relationship building needs some time at least three year from

businessman’s perspective. Our criterion for selection of distribution

intermediaries is –

“Those businesses (individuals and organizations) having three years and

above experience in selling of mutual funds or ULIP or both.”

Comparison being one of the purposes, adequate representation of each type of

distribution intermediaries in sample is necessary. To ensure this researcher fixed

quotas for each type of distribution intermediaries. Researcher would further

allocate quotas in such way that distribution intermediaries sample size as

discussed before will be maintained (see table 3.3).

Table 3. 3 – Fixation of Quotas for distribution intermediaries’ sample

Type of distribution channels Quota

(Number of

distribution

intermediaries)

Individual Financial Agents or

Brokers

70

Corporate Agents 40

Banks 20

TOTAL 130

In a nutshell, our entire sampling design will be as follows (see the table 3.4)

Table 3.4 – Summary of Sampling Design for the study

Sample I

Retail Investors

Sample II

Distribution

intermediaries

Population All the investors

who are

investing in

mutual funds &

ULIPs staying in

Pune city

All the Pune based

individuals and

organizations

involved in selling

mutual funds &

ULIPs.

Sampling frame

availability

Not available Available but not

appropriate.

Sample Size 450 130

Sampling Method Purposive - Quota Purposive - Quota

47

e) Limitations of Sample-

As the selected samples are not random samples, they cannot be termed as

representative. The selected samples generally go by the names ‘non-random

sample’, ‘purposive sample’. It is obvious that the sampling procedure for

selecting the samples is mainly of ‘ad-hoc’ nature. The sampling procedure

adopted out of necessity and inevitability. There is no sound basis for estimating

statistical confidence intervals around the sample statistics of interest.

The second limitation arises from the non-availability of complete and reliable

information about the number of mutual fund investors. Though an attempt has

been made to estimate but it is not accurate figure; it is just estimation.

3.3.2 Observational Design

According to Donald R. Cooper, Pamela S. Schindler (19991 Data is defined as the

facts presented to the researcher from the study’s environment. Data is of two types

i.e. primary and secondary. Primary data are collected by conducting surveys and

structured interviews in the selected sample to answer research questions while

secondary data represents studies made by others for their own purposes such as

relevant reports of prior research studies, if any, published documents by other

authors, articles on Internet, periodicals, books and news articles. Observational

design covers various aspects of sources of data, data collection methods, instruments.

a) Sources of Primary Data

Primary data for this study was necessary from two sources, viz. investors and

distribution intermediaries. As our data collection method is survey through

questionnaire, two questionnaires were therefore, designed to elicit the

required information from the respondents. These two questionnaires one for

investors and other for intermediaries are reproduced in Appendix – A and

Appendix – B respectively.

b) Sources of secondary Data

Efforts were made to collect various data, statistics pertaining to the study.

Books on Indian Economy, Services Marketing, Financial Services, Financial

Services Marketing, Mutual Funds, Insurance, Relationship Marketing, etc.

were accessed from various libraries and were studied in depth and used in the

presentation.

48

Available research studies, surveys, articles related to study area from various

authors, journals, organizations, institutions, internet, regulators, etc were also

used.

Lot of published Ph.D. thesis available on UGC (shodhganga) and

PROQUEST database was studied. Unpublished Ph.D. Thesis available in

Pune University and Research Centers was also accessed.

Data published by and available from Government publications, Central

Statistical Organization, Planning Commission, Securities Exchange Board of

India, Insurance Regulatory development Authority, Association of Mutual

Fund Intermediaries, Finance Ministry, Reserve Bank of India, Centre for

Monitoring Indian Economy (CMIE), National Stock Exchange, Bombay

Stock Exchange, Census Reports, Securities Exchange Commission, World

Bank, etc. was obtained, and used for study and analyses.

Besides this number of newspaper clippings, web based articles; magazines

relevant to study were also used.

c) Research Instruments

Research Instrument for Investor’s Survey

Questionnaire designed for investors’ survey contains various sections. Each

section covers specific objectives. This information has been tabulated as

below: -

3.3.3 Statistical Design

After the data have been collected, the researcher turned to the task of analyzing it.

The analysis of data requires various closely related operations like establishment of

categories, the application of these categories to raw data through coding, tabulation

and drawing statistical inferences. The clumsy data should necessarily be condensed

into few manageable group and tables for further analysis. Researcher classified the

raw data into some purposeful and usable categories after codified operation is done

after editing data. Wherever found appropriate, data was presented graphically or

tabular form. Researcher took help of statistical package for the social science (SPSS)

to test the hypothesis.

49

3.4 Scope of the study

The scope identifies the boundaries of the study in term of subjects, objectives, area,

time frame, to which any study is focused.

The present study is an attempt to throw light on the role of mutual fund distribution

intermediaries and its relevance to retail investors in Pune City. The geographical

scope of the study is limited to Pune city only.

This study could be carried out from various angles such as mutual fund companies,

regulators, investors, distribution intermediaries. But researcher is carrying this study

from investors’ perspective only.

This study is an attempt to study the emerging set of intermediaries in Mutual Fund

distribution. Study will describe role of distribution intermediaries in educating

investors, building relationships, creating loyalty, providing after sales service in

relation to retail investors for Mutual Funds.

3.5 Limitations of the study

This study is made under several constraints. Hence, the findings of the study are

interpreted with caution.

The study is mainly based on non random sampling method hence there is an inherent

limitation in generalizing findings of the study.

The information provided by the retail investors may not as accurate as desired due to

the financial illiteracy, unawareness and poor knowledge about entire financial

services as such.

Moreover, sampling and non sampling errors are also unavoidable while drawing

inferences.

It was also very difficult to obtain necessary information from the investors and

distribution intermediaries because they are reluctant to disclose all the information

especially related with sensitive factors like size of investment portfolio, annual

income, business turnover, etc.

Due to the dynamic changes taking place in Indian financial services particularly in

the Mutual Fund and insurance industry, data obtained is always influenced by

environmental factors which are beyond the control to the researcher.

However, the analysis made is as scientific as possible giving attention to all these

limitations. Though this work suffers from these limitations, but the care has been

taken to minimize these errors.

50

References: -

1) Donald R. Cooper, Pamela S. Schindler, (1999), “Business Research

Methods” , New Delhi : Tata McGraw Hill

2) www.amfiindia.com

3) Insurance Regulatory Development Authority (2009), IRDA Annual Report

2007 – 08, Hyderabad:Author

4) Securities exchange Board of India (2008), “SEBI Annual Report 2007 -08”,

Mumbai:Author

5) Securities exchange Board of India (2008),SEBI’s Statistical Handbook 2008,

Mumbai:Author

6) www.praccreditation.org/secure/documents/coachHO16.PDF

7) Government of India (2006), India Census Report 2001, Retrieved on August

18, 2008, from

http://www.censusindia.gov.in/Census_Data_2001/National_Summary/More_

Link/note.aspx

8) William Zikmund,(2003), “Business Research Methods”, New Delhi Cengage

Learning

51

CHAPTER IV

PRESENTATION &

ANALYSIS OF DATA

52

4.1 SAMPLE DESCRIPTION

Researcher has collected data from two samples i.e. retail investors and distribution

intermediaries. Table 4.1 describes retail investors’ sample on various demographic as well as

investment related factors.

TABLE 4.1 - RETAIL INVESTOR’S SAMPLE DESCRIPTION

Demographic / Investment related Factors Number of investors

Percentage

Age

a) 20 – 30 192 45.61

b) 31 - 40 153 36.34

c) 41 – 50 54 12.83

d) 51 & above 22 5.23

Gender a) Male 346 82.19

b) Female 75 17.81

Occupation

a) Service 291 69.12

b) Business 104 24.70

c) Retired 7 1.66

d) Housewife 19 4.51

Education

a) Undergraduate 127 30.17

b) Graduate 158 37.53

c) Post Graduate 122 28.98

d) PhD / Doctorate 8 1.90

Not Responded 6 1.43

Annual Income

a) 1.20 Lakh to 2.40

Lakh

235 55.82

b) 2.41 Lakh to 4.00

Lakh

108 25.65

c) 4.00 Lakh to 6.00

Lakhs

45 10.69

d) Above 6.00 Lakh 26 6.18

Not Responded 4 0.95

Size of Total

Investment Portfolio up till

now

a) Less than 1.00 Lakh 191 45.37

b) 1.00 Lakh to 3.00

Lakh

159 37.77

c) 3.01 Lakh to 5.0

Lakhs

26 6.18

d) Above 5.0 Lakh 30 7.13

Not Responded 15 3.56

Distribution Channel

used while investing

MF / ULIP

a)Individual Agents 139 33.02

b) Corporate Agents 142 33.73

c) Bank 140 33.25

TOTAL 421 100.00

Source: - Investor’s Survey.

53

Table No. 4.1, gives distribution of investors based on various demographic factors

such as age, gender, occupation, education, annual income, size of total investment

portfolio and distribution channel used. Investor sample is male dominant. This is

expected as major investing decisions are taken by male members of family in our

country. Apart from gender, on all remaining factors investor sample is balanced.

Researcher has summarized composition of distribution intermediaries sample in

Table 4.2.

Researcher maintained intermediary’s sample as per the quotas (based on organization

set up) decided. Researcher observed that majority of the intermediaries (67 percent)

is dealing in both mutual funds and ULIPs. This further ascertains the fact that MF

distribution channels and ULIP distribution channels are overlapping. Intermediary

sample is also balanced in terms of business experience and business turnover

achieved from selling MFs and ULIPs.

Table 4.2 - DISTRIBUTION INTERMEDIARIES’ SAMPLE DESCRIPTION

Demographic Factor Number of investors

Percentage

Organization set up

a) Individual Agents (IFA) 66 55.00

b) Corporate Agents 40 33.33

c) Banks 14 11.67

Number of years in

financial services

a) 3 - 5 Years 55 45.83

b) 5 – 10 Years 41 34.17

c) More than 10 Years 24 20.00

Offering Mutual fund / ULIP or both

a) Only Mutual Funds 31 25.83

b) Only ULIPs 8 6.67

c) Both MF / ULIP 81 67.50

Annual Business

Turnover from MF & ULIP

a) 0 - 5 12 10.00

b) 5 - 10 8 6.67

c) 10 - 20 25 20.83

d) 20 - 40 24 20.00

e) 40 -60 10 8.33

f) 60 -100 13 10.83

g) 100 - 150 12 10.00

h) 150 - 300 4 3.33

i) 300 - 500 3 2.50

j) 500 - 1000 3 2.50

k) 1000 and above 3 2.50

Source: - Intermediary’s Survey

54

4.2 PROFILING RETAIL INVESTORS

In this section researcher would analyze array of investor characteristics related to MF /ULIP

investments such as investing experience, MF / ULIP portfolio size, preferred mode of

investment, investment horizon, NAV tracking, switching frequency, and investment

objectives.

Table 4.3 - Distribution of investors based on their investments in MFs & ULIPs

Investor's invest in Number of investors

Only Mutual Funds (MF) 97

(23.04)

Only Unit Linked Insurance Policies (ULIPs) 229

(54.39)

Combination of both (MF & ULIP) 95

(22.57)

TOTAL 421

(100)

(Figures in brackets indicates percentage of total investors surveyed)

Source: - Investor’s Survey

Above information shown in Table 4.3 can be further condensed as follows,

Table 4.4 - Distribution of investors based on their investments in MFs & ULIPs

Investor's invest in Number of

investors

Mutual Funds (MF) investors 192

(45.60)

Unit Linked Insurance Policies (ULIPs) investors 324

(76.95)

(Figures in brackets indicates percentage of total investors surveyed)

Source: - Investor’s Survey

As per table 4.4, researcher can deduce that popularity of ULIPs is more as compare

to Mutual funds as more than 3/4th

of investors surveyed are investing in ULIPs while

less than half are investing in Mutual Funds. This is quite interesting being Indian

Mutual Fund industry have long history of over 4 decades while ULIPs are just a

decade old.

For further understanding, researcher analyzed data obtained from secondary sources.

This data is further compared with ULIP assets. This comparison is shown in tabular

(Table 4.5) as well as in graphical way (Graph 4.1).

55

Table 4.5 – Retail MF assets Vs ULIP Assets

Year ULIP Assets

(in Rs. Crores)

Retail MF Assets

(in Rs. Crores)

2003 265.91 44889.10

2004 1688.31 55846.40*

2005 7527.45 59840.00*

2006 25888.13 92744.80*

2007 67049.80 130516.80*

2008 133077.48 186552.63

2009 172762.76 154693.11

2010 331618.62 244179.05

Source: - Secondary data collected from AMFI, SEBI, IRDA

Reports

*Indicates that retail MF assets presumed to be 40 percent

(historical average) of total MF assets as detailed folio data were

not available for these years.

Graph 4.1 - Retail MF assets Vs ULIP Assets

Above Figure show that ULIP assets overtook retail MF assets in year 2009 i.e. within

seven years from its introduction by life insurance industry. This trend buttresses

researcher’s observation made by using table 4.4.

56

Table 4.6

Distribution of investors based on their experience in investing in MFs & ULIPs

Investing Experience Number of investors

Percentage

a) 1 – 3 years 213 50.59

b) 3 – 5 years 117 27.79

c) 5 – 10 years 33 7.84

d) More than 10 years 58 13.78

TOTAL 421 100

Source: - Investor’s Survey

From the table 4.6, researcher can infer that little over half the investors surveyed are

investing in MF & ULIPs between 1 -3 years, while another 1/4th investors do have

experience between 3 to 5 years. This confirms that MF & ULIP investing culture

have developed in the last decade only. It was also observed that ULIP is recent

phenomenon while even growth in MF assets is exponential during this period.

An investor can invest in Mutual Funds and ULIPs through various modes. One mode

which is known as systematic investment plans (SIPs) is quite common apart from

investing in lump sum / single premium modes. Researcher sought responses of retail

investors and data collected is summarized in Table 4.7 below.

Table 4.7 - Investor’s preferred mode of investing in Mutual Funds & ULIP

Preferred Mode of investing Number of

investors Percentage

Invest lump sum amount

112 26.60

Invest monthly through SIP

(systematic investment plan) 230 54.63

Combination of both 79 18.76

TOTAL 421 100

Source: - Investor’s Survey

(73 percent) are using systematic investment plan (SIP) to invest in Mutual Fund /

ULIP. As investors invest their money monthly through SIP mode, they need ongoing

transactional services. This will further increase the chances of multiple contacts with

distribution intermediaries; enhancing the possibility and need of building long term

relationship with intermediaries.

57

Table 4.8 - Distribution of investor based on size of MF & ULIP Portfolio

Size of MF / ULIP Portfolio Number of investors

Percentage

Less than Rs 50000 128 30.62

Rs 50000 to Rs 100000 151 36.12

1.01 Lakh to 1.99 Lakhs 70 16.75

2.0 to 5.00 Lakh 69 16.51

Total 418 100.00

Source: - Investor’s Survey

As per table 4.8, Majority of the investors’ MF & ULIP portfolio size is less than Rs.

10000/-. Modal portfolio size is between Rs 50000/- to Rs. 100000/-. Median

portfolio size is Rs. 75000/-. This shows majority of the retail investors are small in

terms of their portfolio size.

Researcher further analyzed responses collected about investors’ time horizon with

which they usually invest in MF and ULIPs. Investment horizon is again linked with

objective with which an individual is investing. Further, tables 4.9 & 4.10 analyze

responses collected pertaining to investor’s objective and investing horizon.

Table 4.9- Investors’ Investment Horizon while investing in MF & ULIPs

Investment Horizon Number of

investors Percentage

Short Term – Less than one year 27 6.41

Short to medium term – 1 to 3 years 171 40.61

Medium Term – 3 to 4 years 72 17.10

Long Term – More than 4 years 146 34.67

No Response / Not Known 5 1.21

TOTAL 421 100

Source: - Investor’s Survey

As per table 4.9, almost half of investors’ investment horizon is 3 or less than 3 years.

As both mutual funds and especially ULIPs are theoretically considered as long term

products, this trend is not as per the theory. Considering ULIPs minimum lock period

was three years (recently it was increased to 5 years by IRDA), responses got from

investors are surprising.

Table 4.10 shows that majority of the investors (55 percent) are investing to build

corpus to meet specific their future requirement. This can be described as goal based

investing. 1/4th investors surveyed responded that their objective is wealth creation.

These responses read along with responses shown in Table 5.9 will throw an insight

58

about investor. Retail investors are not able to comprehend the relationship between

investment horizon and investment objective. Considering this is basic tenet of

investing, researcher can add further that investors are largely unsophisticated and

unaware about investing in MF / ULIPs. This also shows distribution intermediaries’

failure towards developing basic know how amongst investors.

Table 4.10 – Investors’ MF / ULIP Investment Objectives

Investment Objectives

Number

of investors

Percentage of

Respondents

Regular income to meet commitments and expenses 37 8.79

Building corpus to meet specific future requirement 231 54.87

Preserving wealth, after accounting for inflation and taxes 58 13.78

Wealth Creation 107 25.42

Source: - Investor’s Survey

Both Mutual Funds and ULIPs are such financial products where investor has to

actively participate in terms of tracking Net asset values (NAV) of the schemes.

Again investor has to switch from one option to another option depending on

changing conditions in financial markets and overall economic environment per se.

Researcher analyzed investors’ NAV tracking frequency and switching frequency.

The responses collected are summed up in tables 4.11 and 4.12 below.

Table 4.11 - Distribution of Investor based on frequency of NAV tracking

NAV Tracking

frequency

Number of

Respondents

Percentage of

Respondents

Once in a year 107 25.42

Two times in a year 97 23.04

Quarterly 3 0.71

Monthly 150 35.63

Fortnightly 14 3.33

Weekly 19 4.51

Daily 10 2.38

I never Track 21 4.99

TOTAL 421 100

Source: - Investor’s Survey

59

Table 4.12 - Distribution of investors based on level of switching

Switching (changing schemes & asset

allocation) frequency

Number of

investors

Don’t Know 90

(21.38)

Never 214

(50.83)

Sometimes 72

(17.10)

Often 31

(7.36)

Not Responded 14

(3.33)

(Figures in brackets indicates percentage) Source: - Investor’s Survey

Graph 4.2 - Investors’ NAV Tracking

Behavior

Graph 4.3 - Investors’ Switching

behavior

It is evident that majority of the investors are not tracking NAV regularly. Nearly 3/4th

investors do not use switching options. This observation further underlines

researcher’s interpretation about poor awareness about basic facets of MF & ULIP

investment amongst retail investors. In a nutshell, researcher would summarize this

section as,

Majority of investors surveyed are inclined towards ULIPs. Rather, ULIPs has

overtaken Mutual funds in terms of assets under its management.

MF / ULIP investing is new phenomenon as majority of them are investing from less

than three years. Low MF / ULIP portfolio size supplements it.

Investors are not active in terms of tracking NAVs and using switch options.

Importantly their awareness level towards basics of MF / ULIP investing is poor.

60

4.3 PROFILING DISTRIBUTION INTERMEDIARIES

In this section, researcher would analyze business of MF / ULIP distribution

intermediaries on three components. Researcher would compare three types of

distribution intermediary i.e IFA (Individual agents), Corporate Agents, banks on the

basis of products offered, technology used and customer groups targeted.

Globally, financial services distribution channels are increasingly integrated. On this

backdrop, Researcher is interested to know level of integration happening in Indian

context. That is why researcher collected responses from intermediaries about which

financial products / services other than mutual funds and unit linked insurance plans

they offer or sell. It was found that majority of the intermediaries are involved in

multiple financial products & services. (Refer Table 4.13)

To explore further, researcher cross tabulated number of services offered to an

investor with organization set up of distribution intermediary (Refer Table 4.14). It

was found that for IFA’s modal number of services is four while in case of corporate

agents modal values for number of services are zero services & eight services. Banks

modal number of services is also four. From this, researcher can infer that Banks and

Individual agents are offering multiple services to create investor convenience. As far

as corporate agents are concerned it was found that two types of distribution

businesses exists i.e. one which is purely specialized in selling Mutual Funds and

ULIPs while other offers larger basket of investor services to create one stop solution

for financial retail investor’s needs.

Table 4.13 – Various Financial Products offered by MF & ULIP intermediaries

Financial Services Number of

intermediaries Percentage

Life Insurance 93 77.50

General Insurance 52 43.33

Fixed deposits 65 54.17

Tax planning 72 60.00

Post Office schemes 19 15.83

Securities Trading 37 30.83

Commodity Trading 17 14.17

Bonds 53 44.17

Retirement Planning 69 57.50

Source: - Intermediary’s Survey

61

As shown in table 4.13 it was found that MF & ULIP distribution intermediaries are

offering various financial services. Amongst various financial services life insurance

and tax planning services are highly offered. It was also observed that more than half

the intermediaries are involved in offering retirement planning and fixed deposits

products.

Table 4.14 - Distribution of MF & ULIP intermediaries based on number of financial

products offered

No of financial services offered

other than MF / ULIP

IFA Corporate

Agent

Bank Total

Nil 3

(4.55)

8

(20.00)

1

(7.14)

12

(10.00)

One 5

(7.58)

6

(15.00)

0

(0.00)

11

(9.57)

Two 9

(13.64) 0

(0.00) 0

(0.00) 9

(7.50)

Three 6

(9.09)

2

(5.00)

1

(7.14)

9

(7.50)

Four 19

(28.79)

5

(12.50)

4

(28.57)

28

(23.33)

Five 10

(15.15)

3

(7.50)

5

(35.71)

18

(15.00)

Six 9

(13.64)

5

(12.50)

2

(14.29)

16

(13.33)

Seven 4

(6.06)

8

(20.00)

1

(7.14)

13

(10.83)

Eight 1

(1.52)

3

(7.50)

0

(0.00)

4

(3.33)

Mean number

of services offered 3.89 3.92 4.50 3.97

Source: - Intermediary’s Survey

Researcher can deduce from above responses that financial services distribution

channels are integrated in terms of number of products / services they offer, though

level or extent of integration differs with the organization set of intermediary. It was

found that banks offer more number of services as they offer 4.5 services on an

average which is higher than Individual and corporate agents.

Researcher sought intermediaries’ ratings (as collecting segmented business turnover

was difficult and sensitizing) towards various customer groups / segments based on

amount of business each segment generates.

62

As shown in Table 4.15, all intermediary groups based on their organization set up

placed retail investors segment as number one. Further exploration (Refer Table 4.16)

revealed that mean differences between ratings given to HNI (High Net worth

Individuals) segment and retail segments are very minute in case of corporate agents

and banks unlike with individual agents. This means that IFAs are largely generating

their MF & ULIP business from retail investors while banks are generating business

all three investors groups almost equally. Corporate agents are emphasizing more on

both retail and HNI segments. Corporate agents business also comes from institution /

corporate investors as compare to IFAs.

Table 4.15 – Ranking of customer groups based on the business generated

Sr.

No Customer Groups

Type of Intermediary

overall

IFA Corporate

Agent Bank

A Institutional / corporate Investors 3 3 3 3

B High net worth individuals (HNI) 2 2 2 2

C Retail / individual investors 1 1 1 1

(Figures in shown in table indicates ranks) Source: - Intermediary’s Survey

Table 4.16 – Emphasis on customer groups based on the business generated

Sr.

No Customer Groups

Type of Intermediary

overall

IFA Corporate

Agent Bank

A Institutional / corporate investors

1.62

(Low) 3.15

(Medium) 3.42

(High) 2.43

(Low)

B High net worth individuals (HNI)

2.83

(Medium) 3.92

(High) 3.71

(High) 3.31

(Medium)

C Retail / individual investors 4.29

(High) 4.3

(High) 4

(High) 4.26

(High)

Numbers in the table shown are average ratings where 1 means very Low while 5 means

very high

Source: - Intermediary’s Survey

Researcher further wanted to know what level of technology these intermediaries are

using. Currently lots of software are available which facilitates MF & ULIP services

distribution. Researcher asked intermediaries about its usage. Responses are tabulated

in Table 4.17

63

Table 4.17 - Usage of software / tool to facilitate financial distribution amongst

intermediary

About 60 percent intermediaries surveyed are using some sort of software. Usage is

same as far as IFAs and corporate agents while all banks are using some sort of

software. Above discussion revealed that distribution intermediaries’ business profile

changes with its organization set up with which they are operating. Researcher

summarized business of each type of distribution intermediary in this way: -

i) IFAs business mainly comes from retail and High net worth individuals. IFAs offer

multiple financial services with the help of moderate level of technology.

ii) Further it was seen that, corporate agents are either operating as specialized

intermediary or one stop solution for multiple financial services. Though corporate agents

are using moderate level of technology, they are equally generating business from all the

three segments i.e. retail, corporate and HNIs.

iii) All banks are using software to facilitate financial distribution business. Banks

are equally generating business from all three customer groups. Majority of the

banks are offering multiple financial services. Banks are acting as a one stop

solution provider to various investor segments.

4.4 INVESTOR’S & INTERMEDIARY WILLINGNESS TOWARDS BUILDING

RELATIONSHIP WITH EACH OTHER

Before studying relationship marketing between investor and intermediary, researcher

has established readiness level of both parties towards developing long term

relationship with each other. It was observed that most of the investors are ready to

develop long term relationship with their intermediaries. Majority of investors view

this relationship highly important. They also show strong belief against changing

intermediaries (Refer Table 4.18).

Use of any software / tools to facilitate your financial

services distribution business

IFA Corporate

Agent Bank Total

Yes 38

(57.58)

21

(52.50)

14

(100.00)

73

(60.83)

No 28

(42.42) 19

(47.50) 0

(0.00) 47

(39.17)

Total 66

(100)

40

(100)

14

(100)

120

(100)

Figures in brackets are percentage within columns

64

Table 4.18 Investors Perception towards building relationship with intermediary

Statements Strongly

disagree

disagree Undecided Agree Strongly

agree

I believe the good relationship with

MF / ULIP agent increases the chances of success while investing.

7

(1.66)

19

(4.51)

74

(17.58)

197

(46.79)

124

(29.45)

I am ready to develop long term

relationship with MF / ULIP agent. 4

(0.95) 18

(4.28) 65

(15.44) 199

(47.27) 135

(32.07)

One should not change his / her advisor frequently.

5

(1.19)

16

(3.80)

58

(13.78)

183

(43.47)

159

(37.77)

(Figures in brackets indicates percentage) Source: - Investor’s survey Data in this table shown graphically through Graph 5.4

Graph 5.5 – Investors’ Perception towards relationship building

Researcher has also collected responses from intermediaries pertaining to their

willingness to develop long term relationship with retail customers (Refer table 4.19).

Table 4.19 Intermediary’s Readiness / efforts towards relationship building

Statements Strongly

disagree

disagree Undecided Agree Strongly

agree

We try to develop long term relationship with our customers.

1

(0.83)

0

(0.00)

6

(0.00)

45

(37.5)

68

(56.67)

(Figures in brackets indicates percentage) Source: - Intermediary’s survey

Researcher found that both the parties i.e. investors and intermediaries are ready

towards relational engagement. It was found that more than 94 percent intermediaries

are ready to develop long term relationship with their customers. More than 3/4th

of

65

investors surveyed agreed that they are ready to develop long term relationship with

their distribution intermediary.

In such situation relationship marketing is natural outcome; how relationship is

developed between investor and intermediary becomes important. This role in terms

of relationship marketing is analyzed in subsequent section.

4.5 ROLES PLAYED BY INTERMEDIARY TOWARDS INVESTOR

This section would analyze responses of intermediaries and investors towards various

roles. That is why; this section is further divided into various sub sections each one is

devoted to each role.

4.5.1 ROLE IN TERMS “EDUCATING INVESTOR”

Researcher analyzed responses towards investors’ willingness and intermediary’s

efforts towards educating investors. It was found that investors are willing (85

percent) while intermediaries (81 percent) are putting efforts towards the same. (Refer

Table 4.20 and 4.21)

Table 4.20 Investor’s Readiness towards getting education from intermediary

Statements Strongly

disagree

disagree Undecided Agree Strongly

agree

MF intermediary should make us

aware about basics of MF / ULIP investments.

5

(1.19)

11

(2.61)

45

(10.69)

247

(58.67)

113

(26.84)

(Figures in brackets indicates percentage) Source: - Investor’s survey

Table 4.21 Intermediary’s efforts towards education investors

Statements Strongly

disagree

disagree Undecided Agree Strongly

agree

We always try to make customers aware about basics of investments.

0

(0.00) 1

(0.83) 21

(17.50) 42

(35.00) 56

(46.67)

(Figures in brackets indicates percentage) Source: - Intermediary’s survey

To probe further, researcher has sought responses from investors on five statements

relating to their perception towards increased understanding, basic aspects of

investing.

1) I feel that “my advisor” has increased my understanding level towards Mutual fund /

ULIP investing. (overall perception)

2) “My advisor” described the rules / processes for encashment of investments in case of

contingency (Liquidity aspect of investing)

3) “My advisor” explained the risks involved in particular MF / ULIP scheme. (Risks

involved in investing)

66

4) “My advisor” explained me likely returns from the investment. (Likely returns

involving in investing)

5) “My advisor” explained me the taxation issues pertaining to MF / ULIP investment.

(Tax Treatment for MF / ULIP investing)

Table 4.22 - Investor’s responses towards intermediary’s Investor Education

Statements pertaining to

Education aspects

Strongly

disagree

disagree Undecided Agree Strongly

agree

Explanation of Liquidity aspect

in investing is given

12

(5.34)

74

(17.56)

89

(21.14)

179

(42.52)

67

(15.91)

Explanation of Risks involved in

investing is given

17

(4.04)

94

(22.33)

49

(11.64)

190

(45.13)

71

(16.86)

Explanation of Likely returns

involving in investing is given

11

(2.61)

40

(9.50)

49

(11.64)

189

(44.89)

132

(31.35)

Explanation of Tax Treatment

for MF / ULIP investing is given

23 (5.46)

66 (15.68)

36 (8.55)

163 (38.72)

133 (31.59)

overall investor perception

towards increased understanding

15

(3.56)

83

(19.71)

97

(23.04)

174

(41.33)

52

(12.35)

(Figures in brackets indicates percentage),

Source: - Investor’s survey

Graph 4.6 - Investor’s Perception towards intermediary’s Investor Education

As shown in Table 4.22, more than 45 percent of the investors surveyed felt that as

such there is no enhancement in their understanding towards MF / ULIP investment

because of intermediaries. Almost 40 percent of the investors said that their

intermediary has not elucidated liquidity and risk aspects of MF / ULIP investments.

67

In terms of explaining returns, majority of investors (80 percent) found that they are

explaining it but this explanation without stating risks involved will be awful,

especially from investor perspective. Again more than 2/3rd

investors responded

affirmatively towards “intermediary explaining tax treatment”.

4.5.2 ROLE IN TERMS OF “PROVIDING AFTER SALES SERVICES”

A distribution intermediary is expected to offer various services to the investor. These

services can be clustered as basic or transactional services, information services, and advisory

services. Researcher at the outset asked investors their preference towards these three types of

services.

Table 4.23 - Investor Preferences towards various intermediary Services

Type of

Services

Very Low Low Medium High Very High

Basic or

transaction services

11

(2.61)

18

(4.28)

124

(29.45)

196

(46.56)

72

(17.10)

Advisory

services

2

(0.48)

12

(2.85)

110

(26.13)

170

(40.38)

127

(30.17)

Information services

5

(1.19) 12

(2.85) 82

(19.48) 193

(45.84) 129

(30.64)

(Figures in brackets indicates percentage) Source: -Investor’s survey Data in this table shown graphically through Graph 5.25

As shown in Table 4.23, Investor’s preferences for all three types of services are

almost analogous. Based on median, researcher can infer that investors see basic /

transactional services equally important. Further researcher has calculated mean

ratings for each type of services to elucidate the situation. As shown in Table 4.24, it

was observed that investors’ preferences towards intermediary services based on

mean rating scales are as follows: -

i) Information Services

ii) Advisory Services

iii) Basic or transactional Services.

Table 4.24 - Investor Ranking given to various Services

Type of Services

Median Ratings Average Ratings on the

scale of

(1 -5)

Rank

Basic or transactional services 4 3.71 3

Advisory services 4 3.97 2

Information services 4 4.02 1

Source: -Investor’s survey

68

However, investors emphasized more on information services as compared to

advisory services. Again difference between importances attached to them is minute.

Researcher can infer that investors give identical importance to both information and

advisory services.

As investors rate Information services most important, it would be interesting to see

intermediaries’ efforts in terms of offering information services to investors. These

responses are shown in Table 4.25

Table 4.25 - Intermediary’s efforts towards offering information services

Statements related to

information services

Strongly

disagree

disagree Undecided Agree Strongly

agree

I/We try to distribute /

circulate information to our

customers.

0

(0.00)

3

(2.5)

16

(13.33)

56

(46.67)

45

(37.5)

I/We act as a good source of

information for our customers.

0

(0.00)

0

(0.00)

10

(8.33)

63

(52.5)

47

(39.17)

I/We act as a continuous

source of information to our customers.

0

(0.00)

2

(1.67)

16

(13.33)

53

(44.17)

49

(40.83)

(Figures in brackets indicates percentage)

Source: - Intermediary’s survey

It was found that more than 80 percent of intermediaries surveyed are affirmative in

terms of providing information continuously while more than 90 percent

intermediaries surveyed agreed that they act as good source of information.

To establish whether intermediary really performing what they are saying, researcher

has sought investors’ responses by asking them them to rate five statements on 5 point

Likert scale. These statements are: -

1. “My advisor” regularly communicates the Net Asset Value of the schemes in

which I have invested.

2. “My advisor” updates me about the performance of the schemes in which I had

invested.

3. “My advisor” updates me about the new products.

4. “My advisor” informs me about the changes in the companies in which I had

invested.

5. “My advisor” informs me about the changes in government, regulatory policies

pertaining to my investments.

These responses are analyzed and shown in Table 4.26 below: -

69

Table 4.26 – Various Information Services offered to investors

Statement pertaining to information

services Strongly

Disagree disagree Undecided Agree Strongly

Agree

Regular Communication of Net

Asset Value – S11

32

(7.60) 78

(18.53) 67

(15.91) 167

(39.67) 77

(18.29)

Performance of the schemes – S12 27

(6.41) 78

(18.53) 67

(15.91) 157

(37.29) 92

(21.85)

“Information on new products.-

S13

13

(3.09) 51

(12.11) 67

(15.91) 210

(49.88) 80

(19.00)

Changes in those MF / insurance

companies in which I have

invested. – S14

21

(4.99) 96

(22.80) 58

(13.77) 174

(41.33) 72

(17.10)

Changes in government, regulatory

policies pertaining to MF / ULIP

investments. – S15

29

(6.88) 95

(22.56) 98

(23.27) 127

(30.16) 72

(17.10)

(Figures in brackets indicates percentage)

Source: - Investor’s survey

As shown in table 4.26, it was found that 60 percent of the investors surveyed

responded agreed about their intermediary offers information services like NAV

updates, performance updates, changes in MF Company, changes in any regulations /

policies. This shows the disparity between what intermediaries claim and what they

actually offer to investors. In case of information about new products, 70 percent

investors responded positively. “New product updates” are significant to intermediary

in terms of business generation perspective. This may be the reason behind this

sudden rise.

On this backdrop, researcher asked investor to rate his intermediary as good source of

information. It was found that (Refer table 4.27) 64 percent investors perceive that

their intermediary is good source of information. This shows that investors’ overall

perception along with observation made under Table 4.26 is matching and

corroborating each other. This shows that investors overall assessment of their

intermediary is based on what they actually obtain from their intermediary.

Table 4.27 - Investors’ overall perception towards intermediary as a good source of

information.

Statement Strongly

Disagree

disagree Undecided Agree Strongly

Agree

70

He is good source of

information 14

(3.33) 67

(15.91)

71

(16.86)

174

(41.33)

95

(22.57)

(Figures in brackets indicates percentage)

Source: - Investor’s survey

Graph 4.7 - Investors’ overall perception for intermediary as a good source of

information.

Now researcher will progress towards another type of service i.e. advisory services.

To establish whether investors are getting advisory services from their intermediaries

or not, researcher asked investors to respond to various statements pertaining to

advisory services. These statements are: -

1. “My advisor” advise me whether to buy / sell / hold investments.

2. “My advisor” advise me whether to switch from one scheme to another.

3. “My advisor” advise me on tax planning.

4. “My advisor” helps me in balancing the portfolio.

Responses collected for these statements are summarized in Table 4.28.

Table 4.28 - Various Advisory Services offered to investors

Statements related to

various Advisory

Services

Strongly

Disagree

disagree Undecided Agree Strongly

Agree

Advising to buy / sell /

hold investments.

28

(6.65)

83

(19.71)

70

(16.62)

157

(37.29)

83

(19.71)

Switch Advise 38

(9.03) 91

(21.61) 78

(18.53) 152

(36.10) 62

(14.73)

Tax Planning 31

(7.40)

69

(16.39)

52

(12.35)

180

(42.75)

89

(21.14)

Portfolio Balancing 31

(7.40) 81

(19.24) 74

(17.58) 160

(38.00) 75

(17.81)

Figures in brackets indicates percentage)

Source: - Investor’s survey

71

It was found that 43 percent investors are not getting advice on whether to buy / sell /

hold investments. It was found that 49 percent investors are not getting switch advice

from their intermediaries. Further 45 percent of total investors are not getting

portfolio balancing advice from their intermediaries. This percentage gets decreased

to 36 percent in case of tax planning advice.

Further researcher tabulated investors’ responses towards overall perception about

advisory services offered by intermediaries under Table 4.29.

Table 4.29 - Investors’ overall perception towards intermediary

in terms of regular investment advice

Statement Strongly

Disagree

disagree Undecided Agree Strongly

Agree

I get regular investment

advice from him. 17

(4.04) 67

(15.91) 84

(19.95) 168

(39.90) 85

(20.19)

(Figures in brackets indicates percentage)

Source: - Investor’s survey

It was found that 60 percent of the investors perceive that they are getting regular

investment advice from their intermediary. This perception is more or less matching

with the percentages found in previous table i.e. Table 4.28.

Now researcher will shift towards basic or transaction services. To establish whether

investors are getting transactional services from their intermediaries or not, researcher

asked investors to respond for various statements pertaining to basic services. These

statements are: -

1. “My advisor” helps me while filling the forms.

2. “My advisor” submits the forms / documents.

3. “My advisor” helps me while selling Mutual fund / ULIP units.

4. “My advisor” collects or delivers sales proceeds (cheque) to me.

5. “My advisor” helps me in changing payment modes.

6. “My advisor” helps me in updating / changing personal information with insurer /

MF Company.

Responses collected for these statements are summarized in Table 4.30.

72

Table 4.30 - Basic Services offered to investors

Statements related to various Basic services

Strongly Disagree

disagree Undecided Agree Strongly Agree

Filing Forms (S1) 3

(0.71) 11

(2.61) 29

(6.89) 236

(56.06) 142

(33.73)

Submitting Forms (S2) 3

(0.71)

3

(0.71)

38

(9.03)

229

(54.39)

148

(35.15)

Redemption of MF / ULIP Units

(S3)

6

(1.43)

43

(10.21)

97

(23.04)

187

(44.42)

88

(20.90)

Delivering sales proceeds cheque

(S4)

5

(1.19)

58

(13.78)

96

(22.80)

181

(42.99)

81

(19.24)

Changing payment modes. (S5) 6

(1.43)

51

(12.11)

114

(27.08)

159

(37.77)

91

(21.62)

Updating / changing personal information with insurer / MF

company. (S6)

9

(2.14) 66

(15.68) 98

(23.28) 157

(37.29) 91

(21.62)

(Figures in brackets indicates percentage) Source: - Investor’s survey

It was observed that percentage of investors getting various basic service elements are

largely varying. A closer look will show that presales transaction services like filling

forms, submitting forms are highly offered as almost 90 percent investors are getting

those. But when it comes to after sales transactional services like redeeming units,

delivering sales proceeds, changing payment modes and changing or modifying

personal information, are concerned; percentage of investors getting these services

drops to almost 60 percent.

Researcher further took responses to establish “transactional quality” (Refer Table

4.31). It was found that almost 80 percent of the investors perceive that their

intermediary is efficient in documentation and maintains the transparency in every

aspect of transaction. Overall transaction quality seems to be very high. This means

even though investors are not getting all transactional services but their perception

towards it is very good.

Graph 4.8 – Basic Services Offered to investors

73

Table 4.31 - Investors Perception towards various transactional quality factors

Statements Strongly

disagree

Disagree Undecided Agree Strongly

Agree

He charges me the lowest possible fees / commission.-

R19

16

(3.80) 59

(14.01) 80

(19.00) 174

(41.33) 92

(21.85)

He is very efficient in

documentation.-R20

1

(0.24)

12

(2.85)

73

(17.34)

224

(53.21)

111

(26.37)

He maintains high level of transparency in every

aspect of the transaction –

R21

2

(0.48) 18

(4.28) 56

(13.30) 212

(50.36) 133

(31.59)

(Figures in brackets indicates percentage)

Source: - Investor’s survey

This subsection can be summarized in this way, “it was found that there is a gap

between what intermediaries are claiming what they are delivering to investors.

Intermediaries are highly offering pre sales services (90 percent of the investors are

getting). Again investors also perceive it as of high quality. In terms of information

and advisory services, only 60 percent investors are getting. As researcher has only

asked about whether they are getting it or not, still there are many dimensions like

satisfaction, quality has not been explored. Considering these services are primitive

and essential; observations and findings are not heartening”

4.5.3 ROLE IN TERMS OF BUILDING RELATIONSHIP & CREATING

LOYALTY

Now researcher would move towards understanding the role of intermediary towards

building relationship with investors. For building relationship, an essential element is

length of relationship i.e from how many years both the parties (investors and

intermediary) know each other. More is this length; greater is the propensity of

relationship building. Researcher tabulated this information in the table below: -

Table 4.32 - Distribution of investors based on number of years they know

intermediary

Knowing distribution intermediary since Number of

investors Percentage

a) 0 – 1 year 23 5.48

b) 1 – 3 years 201 42.38

c) 3 – 5 years 115 27.38

d) 5 – 10 years 52 12.38

e) 10 years & above 52 12.38

Total 420 100.00

Source: - Investor’s survey

74

Graph 4.9 – Investors’ Familiarity towrads intermediary based on the basis of number

of years he / she knows him

Trend observed in Table 4.6 is similar with the findings shown in table 5.6 i.e.

investor’s experience of investing in Mutual Funds & ULIPs. Investor relationship

with intermediary has largely started when they have started investing MF / ULIPs.

Researcher calculated various statistical indicators: -

1) Mean length of relationship is 4.43 years.

2) Median length of relationship is 4 years.

Considering mean period of relationship for investors’ sample is more than four years.

Period of four years is sufficient in terms of building relationship between buyer and

seller in any business. Again more than 94 percent of the investors know their

intermediary from more than one year.

As emotions being one of the key elements of any relationship, researcher endeavored

further in it by asking investors to respond to four statements on 5 point Likert scale.

These statements are pertaining to four factors i.e. commitment, importance, and

affection towards an intermediary.

Table 4.33 - Investors’ involvement with their intermediary

Statements Strongly disagree

Disagree Undecided Agree Strongly Agree

is one that I am very committed to (R1)

12

(2.85) 55

(13.06) 92

(21.85) 200

(47.51) 62

(14.73)

Is very important to me (R2) 10

(2.38)

38

(9.03)

100

(23.75)

181

(42.99)

92

(21.85)

is one that I really care about

(R3)

16

(3.80)

41

(9.74)

102

(24.23)

163

(38.72)

99

(23.52)

is one toward which I can

develop a warm feeling (R4)

9

(2.14)

47

(11.16)

107

(25.42)

176

(41.81)

82

(19.48)

(Figures in brackets indicates percentage) Source: - Investor’s survey

75

It was found that almost 62 percent investors are committed while 15 percent

investors are not committed while rests are indecisive. It was also found that for

remaining statements around 13 to 14 percent investors gave negative responses.

While almost 1/4th

are indecisive. Researcher can sum up that little more than 60

percent investors are highly involved with their intermediaries. Almost similar

percentage of investors is showing commitment, affection towards their intermediary.

Considering these elements are reciprocal, understanding intermediary’s response is

also vital. Commitments of intermediaries towards investors are also measured by

asking two opposite statements. These responses are shown in Table 4.34. It was

found that 80 percent intermediaries agree that they are committed to their investors.

Whether they are selective in terms of commitment, only 20 percent said yes. This

mean majority of intermediaries show greater level of commitment towards investors.

Researcher will now move towards various relationship factors. Researcher took

various factors like honesty, trust, satisfaction, service quality, convenience, integrity,

personalization, responsiveness, reliability, competency, etc. Responses sought in

these factors are presented in Table 4.35.

Graph 4.10 – Investors’ involvement with his / her intermediary

Table 4.34 – Intermediaries’ commitment towards investors Statements Number of intermediaries

Strongly

Disagree

disagree Undecided Agree Strongly

Agree

We are committed to each customer.

1

(0.83)

3

(2.50)

19

(15.83)

52

(43.33)

45

(37.50)

We are committed to very few

key customers. 38

(31.67)

44

(36.67)

15

(12.50)

17

(14.17)

6

(5.00)

(Figures in brackets indicates percentage) Source: - Intermediary’s survey

76

Table 4.35 - Investor responses towards various relationship factors Sr. No.

Statements Strongly

disagree Disagree Undecided Agree

Strongly

Agree

R 6 He (advisor) is very

honest / truthful.

5 (1.19)

15 (3.56)

74 (17.58)

235 (55.82)

92 (21.85)

R 7 He can be trusted

completely

8 (1.90)

28 (6.65)

79 (18.76)

188 (44.66)

118 (28.03)

R 8 He can be trusted

sometimes*

24 (5.70)

78 (18.53)

63 (14.96)

180 (42.76)

76 (18.05)

R 9

He has high integrity 5

(1.19) 33

(7.84) 114

(27.08) 185

(43.94) 84

(19.95)

R 10 He can be counted on to

what is right

1 (0.24)

31 (7.36)

102 (24.23)

194 (46.08)

93 (22.09)

R 11 I am satisfied with total

services offered by him

3 (0.71)

41 (9.74)

91 (21.62)

178 (42.28)

108 (25.65)

R 12 While dealing with him, I

feel convenience

1 (0.24)

16 (3.80)

73 (17.34)

191 (45.37)

140 (33.25)

R 13 He provides quality

services

4 (0.95)

41 (9.74)

85 (20.19)

172 (40.86)

119 (28.27)

R 15 He is aware about my

investment needs.

7 (1.66)

45 (10.69)

108 (25.65)

177 (42.04)

84 (19.95)

R 16 I get personalized

services from him

10 (2.38)

55 (13.06)

99 (23.52)

147 (34.92)

110 (26.13)

R 22

He is responsive R22 4

(0.95) 21

(4.99) 63

(14.96) 223

(52.97) 110

(26.13)

R 23

He is reliable R23 3

(0.71) 31

(7.36) 59

(14.01) 195

(46.32) 133

(31.59)

R 24

He is competent R24 2

(0.48) 29

(6.89) 61

(14.49) 182

(43.23) 147

(34.92)

(Figures in brackets indicates percentage)

Source: - Investor’s survey *As statements is negative, scale is reversed for mean

calculations

It was observed that despite low level services, some investors gave positive

responses to all the relationship factors. As it was seen that more than 72 percent

investors trust their intermediary. Almost similar percentage of investors agreed that

their intermediary is convenient, responsive and reliable. Almost 64 percent investors

agreed that their intermediary shows high integrity.

77

Researcher further asked investors to rate strength of their relationship with

intermediary on numerical semantic scale (where 1 means extremely poor while 5

means extremely good). It was found that perceived relationship strength is similar

across (Refer table 4.36) all investor groups formed on type of intermediary they use

i.e. individuals, corporate and banks. This shows that there is some sort of investor –

intermediary relationship is formed across all the channels but the basis on which

these relationships are built may differ.

Table 4.36 - Perceived Relationship strength

MEDIAN Mean

Investor who are using IFA or brokers 4 4.03

Investor who are using Corporate Agents 4 3.97

Investor who are using banks 4 4.00

Overall 4 4.00

(Numbers in the table is ratings taken on numerical semantic scale where 1 means

extremely poor while 5 means extremely good)

Source: - Investor’s survey

Table 4.37 - Investor’s Perception towards dedication, constraint and dependence

Statements Strongly

Disagree disagree Undecided Agree

Strongly

agree

“My advisor” does not exhibit

opportunistic behavior

28

(6.65)

72

(17.10)

90

(21.38)

158

(37.53)

73

(17.34)

I feel that changing MF / ULIP

advisor will increase my cost.

24

(5.70)

57

(13.54)

122

(28.98)

149

(35.39)

69

(16.39)

Changing MF /ULIP advisor is

risky as I am dependent on my

advisor while investing in MF.

13

(3.09)

38

(9.03)

90

(21.38)

199

(47.27)

81

(19.24)

(Figures in brackets indicates percentage) Source:- Investor’s survey

Any buyer - seller relationship can be developed due to various reasons like

- Service provider (intermediary in this study) is genuine and really makes efforts

towards customers’ benefit; (DEDICATION)

- Customer is dependent on service provider; (DEPENDENCY)

- Customer faces any constraint e.g. switching cost, risk. (CONSTRAINT)

- Extent to which buyer relies on service provider or seller (CONVICTION)

Responses for the first three elements are tabulated under Table 4.37 and also shown

graphically below

78

It was found that 54 percent investors felt that their intermediary is genuine and does

not exhibit any opportunistic behavior. Almost half the investor felt constraint in

switching intermediary while 2/3rd

has felt dependency towards intermediary.

Table 4.38 - INTERMEDIARY’S INFLUENCE IN INVESTOR’S DECISION MAKING

Degree with which investor rely on

distribution intermediary while investing

IFA Corporate

Agents

Banks Total

I give money (Cheque) to advisor and he

decides where to invest.

45

(32.37)

23

(16.12)

33

(23.57)

101

(23.99)

I along with advisor decide where to invest

and then money is invested accordingly.

75

(53.95)

91

(64.09)

80

(57.14)

246

(58.43)

I do research and select particular scheme

and direct advisor accordingly.

19

(13.48)

28

(19.79)

27

(19.29)

74

(17.58)

Total 139

(100)

142

(100)

140

(100)

421

(100)

(Figures in brackets indicates percentage) Source:

- Investor’s survey

Dependency factor is stronger as researcher took responses from investors pertaining

to their usual mode of MF & ULIP decision making (see Table 4.38). Information was

sought from the investors about their usual practice while investing in Mutual funds

and ULIPs. The results are astonishing as about 1/4th

investors completely rely on

their intermediaries. Only 18 percent investors do their own research and use

intermediaries for further modalities. Larger pie of investor sample i.e. 58 percent

endorse that they discuss with advisory and finalize where to invest. This shows that

investors heavily rely on their intermediaries as far as MF / ULIP investment

decisions are concerned. This means almost 82 percent investors show conviction as

they rely on their intermediaries.

Further investor’s responses were taken for perceived intermediary influence on MF /

ULIP decision making. Researcher asked investors to rate intermediary’s influence on

Graph 4.11 - Responses for “I feel that

changing MF / ULIP advisor will increase

my cost.”

Graph 4.12 – Responses for “Changing MF

/ULIP advisor is risky as I am dependent on

my advisor while investing in MF”

79

their investment decision on 5 point numerical semantic scale. Researcher has

calculated median for these responses and tabulated them in table 4.39. It was found

that in terms of influence on investment decisions are concerned, entire intermediaries

despite of their organization set up are having same influence as median values are

same across all the channels.

Table 4.39 - Intermediary’s influence in investment decision

MEDIAN

Investor who are using IFA or brokers 4

Investor who are using Corporate Agents 4

Investor who are using banks 4

Overall 4

Source: - Investor’s survey

Overall, it can be summed up that, while investing in Mutual funds and ULIPs,

investors heavily rely on their intermediary and also get influenced by them. This

situation can be described with the concept of “consumer inertia.” MF / ULIP

investors may have created inertia in their minds which has translated into submissive

behavior. There is general tendency seen amongst investors towards not changing

their intermediary as 81 percent investors felt against changing intermediary

frequently. (Refer Table 4.40)

Table 4.40 Investors Perception towards changing intermediary Statements Strongly

disagree

disagree Undecided Agree Strongly

agree

One should not change his / her advisor

frequently. 5

(1.19)

16

(3.80)

58

(13.78)

183

(43.47)

159

(37.77)

(Figures in brackets indicates percentage) Source: - Investor’s survey

This perception is backed up by investors’ actual switching behavior. As shown in

Table 4.41, about 73 percent investors have never changed their intermediary while

15 percent investors changed once. Such kind of behavior only supports dependency

feeling amongst investors.

Table 4.41 - LEVEL OF SWITCHING DISTRIBUTION INTERMEDIARY

Investors’ frequency to Switch

distribution intermediary

Number of

investors Percentage

a) Never 308 73.15

b) Once 65 15.44

c) Twice 18 4.28

d) 3 – 4 times 16 3.80

e) more than 4 times 14 3.33

Total 421 100.00

Source: - Investor’s survey

80

One of the outcomes of relationship building is increased level customer loyalty.

Loyalty is measured at various altitudes. In this study researcher has measured loyalty

towards intermediaries on three levels –

1) Continuing with current intermediary. (Retention)

2) Will recommend current intermediary to others. (Positive Word of mouth)

3) More number of product and services bought from current intermediary. (Higher

share of wallet)

Table 4.42 - Investor’s Loyalty towards distribution intermediaries

Statement Strongly

disagree

disagree Undecided Agree Strongly

agree

I would continue with my

MF / ULIP financial service

advisor

4

(0.95)

36

(8.55)

59

(14.01)

210

(49.88)

112

(26.60)

I would like to recommend

my MF / ULIP advisor to

my relatives, friends

10

(2.37)

23

(5.46)

44

(10.45)

127

(30.16)

118

(28.02)

(Figures in brackets indicates percentage)

Source:- Investor’s survey

As shown in Table 4.42, almost 76 percent investor would like to continue with their

present intermediary. Again 58 percent investors are ready to recommend

intermediary to their friends and relatives. On a whole, researcher can infer that even

though 54 percent investors felt their intermediary is genuine, still 76 percent

investors would like to continue with their existing intermediary and will also

recommend him or her to others.

Table 4.43 - Cross selling seen amongst investors

Yes No Total

Advisor tried to sell financial product

other than MF / ULIP to me.

106

(37.72)

175

(62.28) 281

Purchased financial product other than

MF / ULIP from my advisor

49

(17.44)

232

(82.56) 281

(Figures in brackets indicates percentage)

Source: - Investor’s survey

For the purpose of establishing level III loyalty, researcher took responses of those

investors who are using IFA channel and corporate channel assuming bank customers

are already availing banking services. Table 4.43 shows that nearly 38 percent

investors agreed that their intermediaries tried to sell other financial services. Again,

only 17 percent actually bought financial products (other than MF / ULIP).

81

As far as crossing selling efforts are concerned, 58 percent intermediaries agreed that

they tried to sell. Majority of intermediaries is also agreed that their cross selling

efforts are largely successful and also agreed that they get references from retail

investors. (Refer Table 4.44)

Table 4.44 – Intermediaries’ Responses towards cross selling and getting references Statements Number of intermediaries

Strongly

Disagree

disagree Undecided Agree Strongly

Agree

Our customers call us even for other

financial services which we do not

sell.

1

(0.83)

6

(5.00)

15

(12.50)

53

(44.17)

45

(37.50)

We try to sell other financial

services to the existing MF / ULIP

customer. (This is known as cross

selling)

8

(6.67)

19

(15.83)

23

(19.17)

40

(33.33)

30

(25.00)

Our cross selling efforts are

successful.

9

(7.50)

16

(13.3)

26

(21.67)

43

(35.83)

26

(21.67)

We often get references from our

customers.

2

(1.67)

2

(1.67)

12

(10.00)

65

(54.17)

39

(32.50)

(Figures in brackets indicates percentage) Source: - Intermediary’s survey

Overall researcher can summarize intermediary’s role towards relationship building &

loyalty creation in this way …….

Some kind of relationship is observed amongst majority investors as they showcased

positive emotions, trust, towards their intermediary. This relationship is not the

outcome of core service and value rather it has developed due to investors’

dependency and constraint. This made them inert, passive towards MF / ULIP

investment and intermediary as such. Largely intermediaries are successful in terms

of retaining their investors. In terms of creating higher order loyalties like positive

word of mouth and increased wallet share, intermediaries are not much successful

(Refer Table 4.45). These loyalty developments are not dedication based as little over

half the investors surveyed termed their intermediary as “genuine”.

Table 4.45 – Level of Investor’s Loyalty towards distribution intermediaries Type of customer Loyalty Percentage of Investors

Continuing with current intermediary. (Retention) 76.48

Will recommend current intermediary to others. (Positive

Word of mouth) 58.19

Purchased other products and services from intermediary

(Increased share of wallet) 17.44

82

To understand whether intermediaries’ acts or actions are business oriented,

information oriented or relational oriented. Researcher asked intermediaries whether

their interaction with customers is purely business oriented. Overall, nearly half

intermediary said it is purely business oriented. Further cross tabulation (Refer Table

4.46) shows that greater part of corporate (70 percent) and bank (86 percent)

intermediaries perceive their interaction with investors is purely business oriented.

One third of individual agents surveyed responded that their interaction is purely

business oriented.

Researcher further asked intermediaries about nature of interaction with retail

investors. Majority agreed (75 percent) that it is informational and relational. (See

Table 4.47)

Further research collected intermediaries’ response towards what kind of

communication they maintain towards their investors. First it was found that 60

percent of the intermediaries responded that their communication is same for every

customer. (Refer Table 4.48)

Table 4.46 – Whether intermediary’s interaction is purely business oriented?

Statements

Number of intermediaries

Total Strongly

Disagree

disagree Undecided Agree Strongly

Agree

Ou

r in

tera

ctio

n

wit

h

cust

om

er

is

pu

rely

bu

sin

ess

ori

ente

d.

IFAs 14

(21.21)

17

(25.76)

13

(19.70)

16

(24.24)

6

(9.09)

66

(100)

Corporate

Agent

3

(7.5)

3

(7.50)

6

(15.00)

23

(57.50)

5

(12.50)

40

(100)

Bank 0

(0.00)

0

(0.00)

2

(14.29)

11

(78.57)

1

(7.14)

14

(100)

Total 17

(14.17)

20

(16.67)

21

(17.50)

50

(41.67)

12

(10.00)

120

(100)

(Figures in brackets indicates percentage) Source: - Intermediary’s survey

Table 4.47 – Nature of interaction between intermediaries and investors Statements Number of intermediaries

Strongly

Disagree

disagree Undecided Agree Strongly

Agree

Our interaction with customer is

information as well as business

oriented.

1

(0.83)

4

(3.33)

23

(19.17)

61

(50.83)

31

(25.83)

Our interaction with customer is

relational.

1

(0.83)

9

(7.50)

21

(17.50)

61

(50.83)

28

(23.33)

(Figures in brackets indicates percentage) Source: - Intermediary’s survey

83

Table 4.48 – Nature of intermediary’s communication

Statements Number of intermediaries

Strongly Disagree

disagree Undecided Agree Strongly Agree

Our communication is same for

every retail customer. 6

(5.00)

22

(18.33)

19

(15.83)

51

(42.50)

22

(18.33)

(Figures in brackets indicates percentage) Source: - Intermediary’s survey

Those intermediaries disagreed to “their communication is same for every retail

customer”, researcher further asked them two statements pertaining to understand

what approach they use while design communication. As shown in Table 4.49, it was

found that intermediaries use more segmented approach (79 percent) while designing

their customer communication as against one to one approach (72 percent).

To ascertain “Whether intermediary’s customer communication is interactive?”

researcher asked intermediaries to respond for two opposing statements. It was found

that more than 80 percent intermediaries agreed that their customer communication is

not one sided rather it is interactive. (Refer Table 4.50)

Table 4.49 – Approach used by intermediary’s while designing customer

communication Statements Number of intermediaries

Strongly

Disagree

disagree Undecided Agree Strongly

Agree

We design our communication

according to the needs of various

customer groups.

0

(0.00)

1

(2.13)

9

(19.15)

27

(57.45)

10

(21.28)

We design our communication

according to the needs of each

customer.

0

(0.00)

3

(6.38)

10

(21.28)

17

(36.17)

17

(36.17)

(Figures in brackets indicates percentage) Source: - Intermediary’s survey

Table 4.50 – Whether intermediary’s customer communication is interactive?

Statements Number of intermediaries

Strongly

Disagree

disagree Undecided Agree Strongly

Agree

Our communication is one sided. 28

(23.33)

46

(38.33)

24

(20.00)

15

(12.50)

7

(5.83)

Our communication with

customers is interactive.

1

(0.83)

7

(5.83)

16

(13.33)

70

(58.33)

26

(21.67)

(Figures in brackets indicates percentage) Source: - Intermediary’s survey

Researcher asked intermediaries about how they establish contact with their

customers. It was found that majority of the intermediaries are using technology based

84

contact like mobile, email, etc. Intermediaries are using both ways for maintaining

contact with their customers. But at the same time their credence in personal contact

or touch is strong. (See Table 4.51) Between technology based contact and personal

contact, intermediaries relies more on personal contact. Due to this, even customer

goes beyond the boundaries of existing relationship and even seek advice in non

financial, personal matters.

Table 4.51 – Intermediaries’ ways to maintain customer contact Statements Number of intermediaries

Strongly

Disagree

disagree Undecided Agree Strongly

Agree

We often interact with our

customers via internet, mobile, and

other technologies.

0

(0.00)

4

(3.33)

14

(11.67)

53

(44.17)

49

(40.83)

We try to maintain constant

dialogue with our customers.

2

(1.67)

2

(1.67)

21

(17.50)

63

(52.50)

32

(26.67)

We often, personally meet to our

customers.

2

(1.67)

3

(2.50)

23

(19.17)

57

(47.50)

35

(29.17)

We establish customer contact

mainly through technology.

1

(0.83)

18

(15.00)

20

(16.67)

58

(48.33)

23

(19.17)

Customers sometimes call us to

take advice even on their non financial / personal / family

matters.

4

(3.33)

11

(9.17)

34

(28.33)

48

(40.00)

23

(19.17)

(Figures in brackets indicates percentage) Source: - Intermediary’s survey

One of the connected aspects to maintaining of customer contact is various

communication tools used by an intermediary. There are various communication tools

available. Some of them are old like post, telephone. Further intermediaries can

depend on sales person for the same. It was seen that magazines, bulletins and

brochures can be also used but designing the same is not easy. New age

communication interactive tools like SMS, Emails, and websites are also used. The

usage of these media by intermediary will tell us about overall use of technology

while communicating with investors / customers. The responses taken in this regards

are shown in Table 4.52 & Table 4.53

It was found that Mobile, email and telephone are most preferred communication

tools across the intermediaries (see Table 4.52). As far as tools like internet / websites

and publications are concerned, its use is low. Further variations amongst usage of

these tools are observed with changing organization set up. Amongst individual

agents, usage of technology based communication tools like email; telephone and

mobile are higher as compare to publications and websites. In case of corporate agents

and banks, all the communication tools barring post are equally emphasized.

85

Table 4.52 - Communication Media used by intermediaries Ways / Tools for Communication

with investors

Type of distribution intermediary Total

IFA Corporate Agent

Bank

A) E - mail 50

(75.76)

39

(97.5)

14

(100.00)

103

(85.83)

B) Telephone 55

(83.33)

39

(97.50)

13

(92.86)

107

(89.17)

C) SMS / Mobile

52

(78.79)

38

(95.00)

11

(78.57)

101

(84.17)

D) Sales Persons 19

(28.79)

32

(85.00)

11

(78.57)

62

(51.67)

E) Internet, websites 31

(46.97)

35

(87.50)

13

(92.86)

79

(65.83)

F) Publications like

magazines, bulletins, brochures.

9

(13.64)

31

(77.50)

11

(78.57)

51

(42.50)

G) Post 24

(36.36) 31

(77.50) 4

(28.57) 59

(49.17)

(Figures in brackets indicates percentage), Source:- Intermediary’s survey

This aspect was further studied by cross tabulating the responses (Refer Table 4.53) on

the basis of number of communication tool used by various groups of intermediaries. In

terms of number of communication channels used, corporate agents & banks are using

multiple channels. Almost 3/4th of corporate agents and banks surveyed are using 5 or

more communication tools. In case of individual agents number of communication tools

dropped as almost 75 percent of them are using four or less than number of

communication tools. Overall, it was found that mean number of communication tools

used by intermediaries is more than four as mean value = 4.68.

Table 4.53 – Multiplicity of Communication tools used by intermediaries Number of ways / Tools for

Communication with investors

Type of distribution intermediary

Total IFA Corp Bank

Nil (Not responded) 4

(6.06)

1

(2.50)

0

(0.00)

5

(4.17)

One 3

(4.55)

0

(0.00)

0

(0.00)

3

(2.50)

Two 7

(10.61)

0

(0.00)

1

(7.14)

8

(6.67)

Three 11

(16.67)

4

(10.00)

0

(0.00)

15

(12.50)

Four 22

(33.33)

1

(2.50)

2

(14.29)

25

(20.83)

Five 12

(18.18)

2

(5.00)

2

(14.29)

16

(13.33)

Six 7

(10.61)

5

(12.50)

6

(42.86)

18

(15.00)

Seven 0

(0.00)

27

(67.50)

3

(21.43)

30

(25.00)

Total 66

(100)

40

(100)

14

(100)

120

(100)

86

Further, researcher asked intermediaries about their business focus. More than 2/3rd

intermediaries believed that their business focus is on retaining customers, interacting

with customers, developing relationships with customers. Product focus of

intermediaries is lower as compare to their focus towards retention, interaction,

relationship building. (Refer Table 4.54).

Importantly, 89 per cent intermediaries endorsed that “Relationship marketing plays

vital role between them & their customers.”

Table 4.54 – Intermediaries’ Business Focus

Statements Number of intermediaries

Strongly Disagree

disagree Undecided Agree Strongly Agree

Our business focus is on the products

& services offered by us. 6

(5.00)

10

(8.33)

19

(15.83)

56

(46.67)

29

(24.17)

Our business is focused on retaining the existing customers.

1

(0.83)

7

(5.83)

14

(11.67)

57

(47.50)

41

(34.17)

Our business focus is on quality

interactive (two way) communications with the customers.

0

(0.00) 1

(0.83) 12

(10.00) 64

(53.33) 43

(35.83)

Our business focus is on developing customer relationships for mutual

benefit.

1

(0.83)

2

(1.67)

13

(10.83)

52

(43.33)

52

(43.33)

Relationship marketing plays vital role between us & our customers.

2

(1.67) 2

(1.67) 9

(7.50) 48

(40.00) 59

(49.17)

Figures in brackets indicates percentage),

Source: - Intermediary’s survey

After appreciating intermediaries’ current business focus, researcher would

comprehend their future focus to grow their businesses. For this purpose, researcher

asked multiple statements on likert scale to verify, confirm and even counter different

views on how they are going to develop business in near future. These statements

were pertaining to marketing mix elements, integration of these marketing mix

elements and relationship marketing. (Refer Table 4.55)

It was found that majority of 90 percent intermediaries believes that growth engine of

their business is in “customer relationship management”. About 67 percent

Intermediaries’ emphasis on product; only 41 percent emphasized price elements to

increase their businesses. Only 46 percent intermediaries found increased partnership

will increase their existing business. More than 3/4th Intermediaries surveyed still

believe in bettering communication and training the people. About 77 percent

intermediaries endorsed thee view that investing in technology will increase their

87

business. Importantly, 86 percent of intermediaries emphasized on integrating these

elements. In short, their business philosophy as follows: -

Managing customer relationships, integrating business elements and

bettering communication are intermediaries’ top priorities to grow their

existing business.

Table 4.55 – How Intermediaries want to grow their business?

Statements Number of intermediaries

Strongly

Disagree

disagree Undecided Agree Strongly

Agree

We would seek partnerships in near

future for our business growth. 11

(9.17)

11

(9.17)

42

(35.00)

44

(36.67)

12

(10.00)

Our business will grow if we will

invest in acquiring more products and

services.

4

(3.33)

12

(10.00)

24

(20.00)

57

(47.50)

23

(19.17)

Our business will grow if we will invest in bettering communication with

the customer.

1

(0.83)

2

(1.67)

22

(18.33)

61

(50.83)

34

(28.33)

Our business will grow if we will

reduce the price. 14

(11.67)

29

(24.17)

27

(22.50)

30

(25.00)

20

(16.67)

Our business will grow if we will

invest in training the sales force /

people

2

(1.67) 3

(2.50) 22

(18.33) 55

(45.83) 38

(31.67)

Our business will grow if we will invest in various technologies like

laptops, software, spreadsheets, etc

which will facilitate my selling.

1

(0.83) 6

(5.00) 21

(17.50) 59

(49.17) 33

(27.50)

Our business growth is largely

dependent on how we develop &

integrate business processes so that service quality will enhance.

1

(0.83)

1

(0.83)

14

(11.67)

51

(42.50)

53

(44.17)

To grow our business, we will invest in

those assets, tools which facilitates “customer relationship management”

1

(0.83)

1

(0.83)

10

(8.33)

48

(40.00)

60

(50.00)

(Figures in brackets indicates percentage)

Source: - Intermediary’s survey

Therefore, it was found that even intermediaries endorses the view - “Relationship

Marketing plays central role between retail investors and intermediaries.”

88

Due to technological advancement, Customer relationship management (CRM)

software is available as a tool for almost all businesses. Researcher asked

intermediaries whether they are using any CRM software or not. (Refer Table 4.56)

Table 4.56 - Do you use any Customer relationship management (CRM) software /

application?

It was found that overall 1/3rd

of the intermediaries surveyed are using CRM software.

This use is higher amongst banks as 78 percent of those surveyed are using CR

software. This percentage drops to 35 percent in case of corporate agents while in

case of individual agents it further lowers down to almost 23 percent. Researcher

further asked CRM software users to rate its contribution towards generating business

and majority of users rated it above fair (Refer Table 4.57). More than 2/3rd

CRM

users rated CRM software’s business contribution is “good / excellent”.

Table 4.57 - Contribution of CRM in generating business from retail investors

Contribution of CRM in

generating business

Number of

intermediaries

Percentage

A) Very poor 0 0.00

B) Poor 1 2.63

C) Fair 11 28.95

D) Good 16 42.11

E) Excellent 10 26.32

Total 38* 100.00

*Two intermediaries not responded

Source:- Intermediary’s survey

Considering increased number of organization is conferring separate departmental

status to CRM, that is why, researcher asked intermediaries do they have separate

CRM department? It was found that 22 percent corporate agents and more than 70

percent banks are having separate CRM department (Refer Table 4.58). This shows

that non individual intermediaries especially banks see CRM an important functional

area of their business.

IFA Corporate Agent

Bank Total

Use CRM software 15

(22.72) 14

(35.00) 11

(78.57) 40

(33.33)

Do not use CRM software 51

(77.28)

26

(65.00)

3

(21.42)

80

(66.67)

Total 66

(100)

40

(100)

14

(100)

120

(100)

Figures in brackets are percentage within columns Source:- Intermediary’s survey

89

Table 4.58 - Do you have separate CRM department in your organization?

Researcher can summarize technology elements in relationship marketing as: -

“Intermediaries are using technology for implementing relationship

marketing. Even some intermediaries have conferred status of department

to CRM. This technology element varies with organization set up of

intermediary as corporate and banks are using technology while

individual agents are emphasizing less on technology and focusing on

personal contact.”

Classifying emerging distribution channels are difficult being they are dynamic and

many times transient. Still, researcher observed some channels like telemarketing,

virtual, worksite marketing are showing resilience while some are still very new.

Researcher has attempted to classify them in following manner: - (Refer figure 4.1)

Figure 4.1 - Emerging forms of distribution channels

Source: - Researcher’s illustration

In terms of other forms of innovations in distribution is concerned, researcher further

classified them in the context of Indian markets (Refer Figure 4.2). Researcher

observed that organized form of financial services retailing is catching up in India.

IFA Corporate

Agent

Bank Total

Separate CRM Department 1

(1.51)

9

(22.50)

10

(71.42)

20

(16.67)

No CRM Department 65

(98.49)

31

(77.50)

4

(28.58)

100

(33.33)

Total 66

(100)

40

(100)

14

(100)

120

(100)

Figures in brackets are percentage within columns

Source:- Intermediary’s survey

90

Lot of companies like HSBC Direct, Reliance Direct, India bulls, etc has created

shops to sell variety of financial services including investment products like MFs and

ULIPs. There are lots of companies who are planning to introduce various channels

like mall assurance, direct response television, social media especially to ULIPs in

India.

Figure 4.2 - Other forms of innovative distribution channels

Source: - Researcher’s illustration

Researcher further studied various popular sources like business newspapers,

magazines, internet to understand how mutual fund and insurance industry is working

towards using these channels.

a) Telemarketing Channel - Telemarketing is the process of selling, promoting, a

product or service over the phone. It is grown significantly in Thailand, Indonesia,

and Vietnam. In India, all life insurance companies are using this channel. As use of

this channel is increasing, that is why insurance regulator came up with guidelines for

them recently.

b) Virtual Channels - Electronic kiosks, internet, mobile are increasingly used by

financial services companies to distribute financial services.

c) Worksite Marketing – Worksite or workplace marketing is the distribution financial

products at the workplace, paid for by employees, but facilitated and endorsed by the

employer.

91

CHAPTER V

FINDINGS, OBSERVATIONS,

SUGGESTIONS, CONCLUSION

92

5.1 FINDINGS & OBSERVATIONS FROM THE STUDY: -

5.1.1OVERALL FINDINGS ABOUT INVESTORS

1. Household investing is male dominant in our country and this is reflected in our study as

our investor sample consist 82 percent males.

2. It was found that investing in Mutual Funds and ULIP is largely a new trend as 3/4th of the

investor surveyed is investing in Mutual Funds / ULIPs from last five years. Overall

investing experience of the sample is 4 years based on median while mean experience

comes at 4.77 years. This shows that most of the investors had started investing in MF &

ULIPs in last decade.

3. Investors’ portfolio size in Mutual Funds & ULIPs is very small as average portfolio size

of investor sample comes at Rs. 1.17 Lakhs.

4. Researcher has observed that popularity of ULIPs is more in comparison to Mutual funds

as more than 3/4th investors in investor sample are investing in ULIPs while less than half

are investing in Mutual Funds. This observation is quite interesting being Mutual Funds

have long history of well over 4 decades while ULIPs are just a decade old. It was also

found that ULIP assets overtook retail MF assets in year 2009 i.e. almost within seven

years from its introduction from life insurance industry.

5. Almost half investors’ investment horizon is 3 or less than 3 years. As both mutual funds

and ULIPs are considered as long term products, this trend is not heartening from

investor’s welfare perspective. Further, major investment objectives behind MF / ULIP

investment are building corpus for specific further requirement and wealth creation. This

means MF / ULIP investments are largely goal based and also considered as wealth

creation option. Investor’s objectives are not echoed in their investment horizon.

6. It was found that majority of the investors are not regularly tracking Net Asset Value of

schemes in which they have invested. Nearly 3/4th

investors are not using switching

facility. Rather switching facility is one of the important features of the MF / ULIP

product. This shows that majority of the investors were not able to understand the product

itself.

Researcher would sum up above findings in this way: -

Majority of investors surveyed are inclined towards ULIPs. Rather, ULIPs has

overtaken Mutual funds in terms of assets under its management.

MF / ULIP investing is new phenomenon as majority of them are investing from less

than five years. Investors have small MF / ULIP portfolio size underlines this further.

Investors are not active in terms of tracking Fund NAVs and using switch options.

Majority of the investors were able to comprehend the relationship between

investment horizon and investment objective.

93

5.1.2 OVERALL FINDINGS RELATED TO INTERMEDIARY

1. It was found that majority of the intermediaries are involved in multiple financial products

and services.

2. It was also found that individual agents and corporate agents are offering multiple number of

MF/ULIP brands. Bank being largely captive or tied channel, they offer limited number of

brands to their customers.

3. Researcher found that extent with which multiple services are offered varies with organization

set up. Banks and Individual agents are offering multiple services to create one stop shop

experience as modal number of services they offer is four. In case of corporate agents, two

groups were observed i.e. one which is purely specialized in Mutual Funds and ULIPs

distribution while other group offers larger basket of financial services.

4. Researcher can deduce that financial services distribution channels in India are integrated in

terms of array of financial services they offer; though level or extent of integration varies with

the organization set of intermediary.

5. It was found that individual agents are largely generating their business from retail investors

while banks are focusing on all three investor groups (retail, High Net worth Individuals -

HNI and Corporate / Institutional) equally. Corporate agents are generating more business

from both retail and HNI segments though they also generate some part business from

institution / corporate investors as compare to Individual agents.

6. About 60 percent of intermediaries are using some sort of technology to manage their

business. Technology usage is same in case of individual as well as corporate agents. As far

as banks are concerned this use is ubiquitous as all the banks are using some sort of

technology.

Overall researcher would summarize this section as follows: -

All three types of distribution intermediaries vary in terms of way they do financial

services distribution as such. This variation is seen in terms of number of products

and services, customer groups they target and use of technology. Rather these three

elements are the components of business definition; that is why researcher can say

that business definition of distribution intermediaries varies with its organization set

up.

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5.1.3 FINDINGS PERTAINING TO VARIOUS ROLES PLAYED BY INTERMEDIARY

TOWARDS RETAIL INVESTORS

ROLE I –INVESTOR EDUCATION

1. Researcher found that 85 percentage of investors surveyed are willing to get investing

education from their intermediary. Again majority of intermediaries are concurred that

they are also putting efforts to educate investors.

2. Almost 40 percent of the investors said that their intermediary has not explained liquidity

and risk aspects of MF / ULIP investments. In terms of explaining returns, 80 percent of

investors said that their intermediary has explained it. This return explanation without

stating risks involved will be terrible especially from investor’s perspective. Again, more

than 2/3rd

of investors surveyed responded affirmatively towards explaining tax element

pertaining to MF / ULIP investments.

3. Overall the entire three intermediary groups vary in terms of their role towards educating

investors. It was found that there is significant variation between individual agents and

banks. Difference is also significant between individual agents and corporate agents.

Researcher further observed that though there is difference between corporate agents and

banks role played in investor education but this variation is not significant.

4. It was found that more than 46 percent of investors felt that there is no increase in their

understanding level towards MF / ULIP investing because of his / her intermediaries.

5. Channel wise comparison shows that more than 51 percent of bank customers felt that

there is no increase in their understanding level towards MF / ULIP investing. This

perception is slightly lower in case of corporate agents’ customer as this percentage drops

to 46. Again 41 percent customers of individual agents felt no increase in their

understanding level towards MF / ULIP investing.

6. Lot of investors voluntarily responded that their intermediary is not explaining the product

completely. (Especially in case of ULIPs, intermediaries are not disclosing expenses,

charges, etc)

ROLE II – PROVIDING AFTER SALES SERVICES

1. It was found that retail investor’s preferences for all three types of services are almost

similar. Though the differences attached to these services are not large, it was found that

investors’ preferences towards intermediary services are as follows: - i) Information, ii)

Advisory and then iii) Basic or Transactional services. Though investors emphasized more

on information services over advisory services, difference between importances attached to

it is very small. Researcher can infer that investors give same importance to both

information and advisory services. Importantly, investors perceive basic or transactional

services equally important.

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2. On overall basis it was found that both banks and individual agents are better than

corporate agents in terms of providing services to retail investors. It was found that there is

a significant difference between individual agents and corporate agents in terms of

providing services. In terms of overall role towards offering services are concerned, it was

found that difference between corporate and bank is insignificant. Even difference between

individual agents and bank is insignificant in terms of providing after sales services.

Findings related to role of intermediaries in offering Information services

4.1 It was found that more than 80 percent of intermediaries surveyed are

affirmative in terms of providing information continuously while more than 90

percent intermediaries surveyed agreed that they act as good source of

information.

4.2 It was found that 40 percent of the investors surveyed disagreed to statements

about their intermediary offering various information services like NAV

updates, performance updates, changes in MF Company, changes in any

regulations / policies. Interestingly, in case of information about new products,

70 percent investors responded positively. “New product updates” are significant

to intermediary in terms of business generation perspective. This showcases

intermediaries’ business oriented approach towards providing information

services to their customers. Such kind of selective behavior raises doubts about

intermediaries only.

4.3 It was found that 64 percent investors perceive that their intermediary is good

source of information.

4.4 Researcher found overall disparity between what intermediaries claim about

information services and what they actually offer to investors.

4.5 Further inter comparison amongst various types of intermediaries confirm that

individual agents performs better than its counterparts in terms of offering

information services. Overall between bank and corporate agents, banks are

better in terms of offering information services to investors.

5 Findings related to role of intermediaries in offering advisory services

5.1 It was found that 43 percent investors are not getting advice on whether to buy /

sell / hold investments. It was found that 49 percent investors are not getting

switch advice from their intermediaries. Further 45 percent of total investors are

not getting portfolio balancing advice from their intermediaries. Almost 36

percent investors responded that they are not getting tax planning advice from

their intermediary.

5.2 It was found that 60 percent of the investors perceive that they are getting regular

investment advice from their intermediary.

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5.3 Overall for all advisory services performance of individual agents is better than

banks while bank’s performance is better than corporate agents.

6 Findings related to role of intermediaries in offering basic or transactional services

6.1 It was observed that percentage of investors getting various basic service

elements largely fluctuates as some services are offered to 90 percent investors

while some transaction services offered to less than 60 percent investors.

6.2 It was further observed that presales transaction services like filling forms,

submitting forms are highly offered as almost 90 percent investors are getting

those. But when it comes to after sales transactional services like redeeming

units, delivering sales proceeds, changing payment modes and changing or

modifying personal information, are concerned; percentage of investors getting

these services drops to almost 60 percent.

6.3 It was found that almost 80 percent of the investors perceive that their

intermediary is efficient in documentation and maintains the transparency in

every aspect of transaction. This means even though investors are not getting all

transactional services but their overall perception towards it is very good.

6.4 Comparison amongst various types of intermediaries shows that all types of

intermediaries perform similarly in terms of pre sales transactional services. In

addition to it, researcher found that individual agents perform better than its

counterpart i.e. corporate agents and banks in terms of offering post sales

transactional services. Between bank and corporate agents, banks are better in

terms of offering post sales transactional services.

Apart from above findings researcher came across with following comments

repetitively. These comments were voluntary from an open ended question. Only

those remarks which are repetitive taken as it is: -

More information has to be given by an intermediary.

Should sent newspaper clipping

Advisor should not give wrong information.

They are not disclosing all the information. It is difficult to rely on them.

Accurate information should be given.

He should give more information

Broker should give appropriate information.

True and true information only given.

Broker should invite us for investment meet. These meets are information giving.

He always mail me about new products

Market downturn and upturn they should tell us what to do.

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When to redeem should be advised

Insurance advisor should compare products with other companies. Should sell

multiple companies products.

Even some investors showed concern about their intermediary offers partial

information and does not reveal all the facets of the product. These statements further

support intermediaries’ selective approach in offering information to the investors.

He should explain entire products along with negative points associated with it.

He should not hide loop holes in the product.

He should explain details about charges.

I got bad experience in case of hidden charges

Everything about product has to be explained

Should explain all the details otherwise lot of issues emerged out later

Some investors also showed concerned towards advisory services and shared their

expectation from their intermediary.

During market downturn and upturn they should tell us what to do.

When to redeem units should be advised

Insurance advisor should compare products with other companies and should sell

multiple companies products.

Even some sophisticated investors understood this scenario and developed some sort

of opinions which are on the similar lines to below mentioned statements: -

Now days you should not trust not single person.

Getting trustworthy broker in today’s time is tough

Researching / studying on own is important, you cannot rely on broker that he will

tell information.

If one will do research there is no need of broker as such.

I do research and have faith over online. Offline agents are bad.

I do research and do all transactional aspects from broker. Brokers are only capable

to do these things.

ROLE III – RELATIONSHIP BUILDING & CREATING LOYALTY

1. It was found that 79 percent investors (buyers) and 94 percent intermediaries (sellers) are

ready to develop long term relationship with each other. Overall researcher can infer that

buyer – seller exchange in MF & ULIP has largely moved to relationship marketing

paradigm.

2. Researcher observed that about 60 percent of investors are highly involved with their

intermediaries as they show commitment towards intermediary. Again 1/4th

investors surveyed

are indecisive in terms of their commitment towards intermediary.

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3. It was found that 80 percent intermediaries agreed that they are committed to their

customers. 1/5th of those committed intermediaries are selective in terms of their commitment.

Overall, it was found that majority (2/3rd

) intermediaries are committed to each customer.

4. It was found that “investors’ perceived relationship strength” is same across all types of

intermediaries i.e. IFA, Corporate agents, and banks.

5. It was observed that despite low level services some investors gave positive responses to all

the relationship factors. It was seen that more than 72 percent investors trust their

intermediary. Almost similar percentage of investors agreed that their intermediary is

responsive and reliable. Almost 64 percent investors agreed that their intermediary shows

high integrity.

6. It was found that 54 percent investors felt that their intermediary is genuine and does not

exhibit any opportunistic behavior such as recommending product that will not suited to your

need but it will increase his / her commission. In this regard investors came up with

following voluntary remarks: -

Advisors are interested in their commission. They will not bother our 100 rupees for

their one rupees commission.

They should think about client’s interest not own.

Researching / studying on own is important, you cannot rely on broker that he will

tell information.

7. Almost half the investors felt risk in switching intermediary. Again, it was found that 2/3rd

investors has developed dependency towards intermediary.

8. There is general tendency seen amongst investors towards not changing their intermediary

as 81 percent investors felt against changing intermediary frequently. This perception is

supported up by investors’ actual switching behavior as about 73 percent investors had never

changed their intermediary while 15 percent investors changed intermediary once. Such kind

of behavior only supports dependency feeling amongst investors.

9. One out of every four investors surveyed responded that “I give cheque and my advisor

decides where to invest”. Only 18 percent investors do their own research and use

intermediaries for further modalities. Larger pie of investor sample i.e. 58 percent endorse

that they discuss with intermediary and finalize where to invest. It was found that in terms of

intermediaries influence on investment decisions are concerned, investor agreed that they are

highly influenced by them.

10. Almost 41 percent investors surveyed felt dependence and constraint towards their

intermediary. Only 15 percent investors perceived their intermediary is genuine and

developed conviction towards them. About 44 percent investors developed conviction which

is attributable to dependency factor. Dependency factor is overriding in developing

relationship between investor and intermediary.

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11. It was found that 41 percent investors’ relationship with intermediary is based on

dependence & constraint. Only 13 percent investors’ relationship is dedication based while

another more than 40 percent investors has developed dedication out of their dependence.

12. Almost 76 percent of investors surveyed would like to continue with their present

intermediary. Again 58 percent investors are ready to recommend intermediary to their

friends and relatives. It was found that only 17 percent of the investors surveyed bought

financial products (other than MF / ULIP).

13. In terms of trust element, it was seen that individual agents are better than banks. Trust

towards corporate agents is lowest as only 66 percent investors have credence towards them.

14. In terms of perceived value, it was seen that individual agents are better than both banks &

corporate agents. Only 58 & 55 percent of both banks’ and corporate agents’ customers

respectively agreed that they get value from their intermediary.

15. In terms of loyalty development is concerned individual agents lead the pack. But the

difference observed between individual agents and banks towards loyalty development is not

significant. Even the same difference between corporate agents and banks is not significant.

16. Largely intermediaries are successful in terms of retaining their investors. In terms of

creating higher order loyalties like positive word of mouth and increased wallet share,

intermediaries are not much successful.

17. Overall relationship between investor and intermediary as such is not based on “core

services plus value” but rather it has developed due to investors’ dependency and constraint

towards intermediary while investing in Mutual Funds & ULIPs. On the backdrop of overall

poor service delivery and perceived value, still majority of investor do not want to change

intermediary. This shows there is some sort of passive or submissive behavior has developed

amongst investors towards intermediary and MF / ULIP investing as such.

18. Findings pertaining to relationship marketing – emerged out from intermediaries’ survey.

18.1 Overall, nearly half intermediary responded that their customer interaction is purely

business oriented. It was found that greater part of corporate (70 percent) and bank

(86 percent) intermediaries perceive their interaction with investors as purely

business oriented. One third of individual agents surveyed responded that their

interaction is purely business oriented.

18.2 Researcher further asked intermediaries about nature of interaction with retail

investors. Majority of intermediaries agreed (75 percent) that it is informational and

relational.

18.3 It was found that more than 80 percent intermediaries agreed that their customer

communication is not one sided rather it is interactive.

18.4 Intermediaries are using both ways (i.e. personal contact, technology based contact)

for maintaining contact with their customers. But at the same time their credence in

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personal contact or touch is strong. Between technology based contact and personal

contact, intermediaries relies more on personal contact. Due to this even customer

goes beyond the boundaries of existing relationship and seek advice in non

financial, personal matters.

18.5 It was found that Mobile, email and telephone are most preferred communication

tools across the intermediaries. As far as tools like internet / websites and

publications are concerned, its use is low.

18.6 Further variations amongst usage of communication tools are observed amongst

various types of intermediaries. Amongst individual agents, usage of technology

based communication tools like email; telephone and mobile are higher as compare

to publications and websites.

18.7 In case of corporate agents and banks, all types of communication tools barring

post are equally emphasized.

18.8 In terms of number of communication channels used, corporate agents & banks are

using multiple channels. Almost 3/4th of corporate agents and banks surveyed are

using 5 or more communication tools. In case of individual agents number of

communication tools dropped as almost 75 percent of them are using four or less

than number of communication tools. Overall it was found that mean number of

communication tools used by intermediaries is more than four as mean value =

4.68.

18.9 More than 2/3rd

intermediaries believed that their business focus is on retaining

customers, interacting with customers, developing relationships with customers.

Product focus of intermediaries is lower as compare to their focus towards

retention, interaction, relationship building.

18.10 Importantly, 89 per cent intermediaries endorsed that “Relationship marketing

plays vital role between them & their customers.”

18.11 It was found that 90 percent intermediaries believe that growth engine of their

business is in “customer relationship management”. About 67 percent

Intermediaries’ emphasis on product; only 41 percent emphasized price elements to

increase their businesses. Only 46 percent intermediaries found increased

partnership will increase their existing business. More than 3/4th Intermediaries

surveyed still believe in bettering communication and training the people. About 77

percent intermediaries endorsed the view that investing in technology will increase

their business. Importantly, 86 percent of intermediaries emphasized on integrating

these elements.

18.12 Managing customer relationships, integrating business elements and bettering

communication are intermediaries’ top priorities to grow their existing business.

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18.13 It was found that overall 1/3rd

of the intermediaries surveyed are using CRM

software. This use is higher amongst banks as 78 percent of those surveyed are

using CRM software. This percentage drops to 35 percent in case of corporate

agents while in case of individual it further lowers down to almost 23 percent.

18.14 More than 2/3rd

of those intermediaries using CRM rated CRM software’s business

contribution is “good / excellent”.

18.15 It was found that 22 percent corporate agents and more than 70 percent banks are

having separate CRM department. This shows that non individual intermediaries

especially banks see CRM an important functional area of their business.

“Intermediaries are using technology for implementing relationship marketing. Even

some intermediaries have conferred status of department to CRM. This technology

element varies with organization set up of intermediary as corporate and banks are

using technology while individual agents are emphasizing lesser on technology and

focusing on personal contact.”

5.2 SUGGESTIONS: -

It was found that most of the investors were not able to comprehend in which product

they are invested. Many investors do not able to comprehend about risk – return –

liquidity triplet. Even they do not know how products like Mutual Funds and ULIPs

operate. Investor still finds transactional services important and does not aware about

intermediaries’ responsibility towards advisory aspects and expects high level of

convenience while buying MF / ULIPs.

Researcher has suggested some initiatives towards investor education here: -

1) Embed basics of investing and financial planning right from the higher secondary

school curriculum.

2) There are only 174 NGOs / organizations taking the benefits of Investor Education

and Protection Fund (IEPF) in India (Refer Appendix M). Again a city like Pune does

not have a single organization registered under IEPF scheme. Researcher would

suggest that there has to be district wise presence of IEPF attached organizations so

that should reach to every part of the country.

3) Instead of having multiple agencies and regulators donning the role of investor

educator (Present regulators are creating awareness not the knowledge) researcher

would like to suggest a central government agency which will plan, implement and

coordinate investor education initiatives throughout the country.

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4) Government agency can also ponder over the idea of levying “investor education

cess” on taxpayers. This suggestion is made with a caveat that its effective and

transparent utilization has to be ensured.

5) Government agencies can even consider incentivizing employers to educate their

employees about financial services, investments as such.

During survey some investors (especially bank and corporate agent’s customer)

seriously raised doubts about distribution intermediary’s expertise and competency. In

this regard, researcher would suggest following initiatives: -

1) Minimum common standards for selling financial services are a need of hour. On this

issue Dr. Swaroop committee has given recommendations but implementation of

those are still not happened. Researcher further suggests that regulators / Government

agencies should design a qualification for financial advisors on the lines of Chartered

Accountant, Company Secretary, and Cost & Work Accountant. Even a globally

recognized course like certified financial planner (CFP) developed by FPSB may be

precursor to it.

2) There has to be ongoing training of distribution intermediaries. A credit system has to

be designed so that distribution intermediaries will keep themselves updated. Those

intermediaries failed to collect requisite credit points will be detained to be financial

advisors.

3) Corporate agents and banks should focus on internal marketing as quality of financial

advisory services sold is determined in largely by the skills and work attitudes of the

personnel producing the services. So service firms like corporate agents and banks

use internal marketing to attract, keep, and motivate quality personnel, they improve

their capability to offer quality services.

Indian distribution intermediaries are not regulated to Global standards. Most of them

are only bothered about their own commissions and incentives. Fixing the

accountability and curbing mis-selling is needed.

1) A customer profiling should be put in place, as should a documentation of the

process that led to product selection.

2) The declaration should be counter-signed by the investors, acknowledging the

disclosures made by the distribution intermediary.

3) There should be a system of a paper or electronic trail to document the adviser’s

professional life and the business he writes.

4) MF / ULIP companies should call investor and verify about whether advisor has

properly explained the details of the product.

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5.3 CONCLUSIONS: -

Today, there are about 3 million financial advisers plus banking staff selling

nonbanking financial products. They serve about 188 million retail investors holding

various financial assets. Of these, 8 million investors participate in debt and equity

markets, either directly or indirectly through complex and risk-bearing products like

mutual funds and Unit-linked insurance products (ULIPs). These numbers will only

grow as the next 200 million Indian investors are slated to join as the new pension

products especially New Pension Scheme, are embarked to become mass product for

everyone .

It is apparent in India that due to lack of fear of punitive action or responsibility

nudges the bulk of the financial services distribution intermediaries to use incentives

on financial products as the driving force to sell products. If this were not so,

distribution intermediaries would not have stopped selling Mutual Funds after entry

ban. One more indicator is the higher lapsation rates of insurance policies. Data for

2009 - 10 shows that lapsation rates range between 4 per cent and a shocking 81 per

cent. The distribution intermediaries have a huge role to play in this respect. The

reason is mis-selling. Even during the investors’ survey, some respondent voluntarily

shared that they have to buy ULIP so that their housing loan will be sanctioned by a

bank / lending institution.

The experience with Mutual Funds and NPS shows that it is too early to remove

commissions completely from Indian financial markets. Our financial markets are still

under developed as most of the investors are not able to comprehend financial

products and financial advice. In this scenario, expecting retail investor will pay to

intermediaries is not pragmatic. The financial literacy or financial competence is

largely absent. Unless and until our population has the knowledge, understanding,

skills and competence to deal with everyday financial matters and make informed

choices in selecting products that meet their needs, removing financial incentives are

difficult. Once investors will become informed, they will able to understand the

financial advice. Then we can expect Indian investors will remunerate distribution

intermediaries. So, commissions or incentives are needed in the current context but

the use of them in a manner that nudges distribution intermediaries into doing the

right thing is very important. In this regard, we sense that investor Education and

stricter control over distribution intermediaries may act as a solution.

104

There is a mismatch found between what the adviser verbally tells the customer and

what the final product has the ability to achieve. Researcher has presented two

responses as a sample here: -

- “Whatever is told has to be delivered”

- “They should be accountable for our losses. They should pay back in case of any

losses.”

These two statements in conjunction are pointing towards stringent processes and

accountability. Unless there is a paper mechanism that affixes a name to advice and

a product that has been sold, the practice of mis - selling will continue which will

erode confidence in Mutual Funds and ULIPs. That is why researcher has suggested

that the entire sales process should be documented. Make distribution intermediaries

accountable for their advice. Further, distribution channels are integrating we propose

to set common minimum standards for financial product sellers instead of having

numerous product wise standards.

Only making stringent rules will not be useful, unless investors in country properly

educated and empowered. That is why; researcher has suggested many initiatives in

this connection. There are already some mechanisms like Investor Education and

Protection Fund (IEPF) which researcher found inadequate. Swaroop Committee has

already recommended a nodal agency i.e. “Financial Well-Being Board of India

(FINWEB)” which will administer Investor education initiatives across the entire

financial services. Researcher would only like to reiterate its implementation. We also

suggest that basics of investing should be included in school curriculum. Government

agencies can think upon idea of levying “investor education cess” on tax payers. But

key aspect is using these funds effectively for the slated purpose.

Implementing the suggestions pertaining to investor education and stricter control

over intermediaries is difficult as we are having multiple regulators. In the context of

financial convergence, many countries work on the principle of “single regulator”. If

our country will move towards single financial services regulator mechanism,

implementing these suggestions will be uncomplicated.

Investor education and stricter regulations are two sides of the coin. Both in

isolation will not work. Investor education will ensure implementation of stricter

regulations while stricter regulation will help in educating investors.

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BIBLIOGRAPHY

106

APPENDICES

107

APPENDIX A - QUESTIONNAIRE FOR RETAIL INVESTORS

1) I usually invest in (Tick √ any one)

a) Only Mutual Funds (MF) c) Combination of both (MF & ULIP)

b) Only Unit Linked Insurance Policies (ULIPs)

2) Which distribution channel you had used for recent Mutual fund / ULIP investment. (Please

tick any one)

a) Individual Mutual Fund agents / Individual financial advisor / Brokers

b) Institutional Agents (Group of people working together as a company or partnership firm), Mutual fund

branch offices, Corporate Agents (National or regional level operating through branches), Distribution

houses like (Birla, Indiainfoline, Reliance money, HSBC Investmart, Bajaj Capital, Kotak, Karvy, etc.)

c) Banks, Post offices

3) Please write the name of the intermediary (agent) through which you make recent MF / ULIP

investments.

___________________________________________________________________________ Note: - Now onwards, for the purpose of this survey, we will call this MF/ULIP intermediary as “my advisor”

4) I am investing in Mutual Funds / ULIP since (Tick any one)

a) Since one year c) 3 – 5 years e) More than 10 years

b) 1 – 3 years d) 5 – 10 years

5) Please indicate the Size of your mutual fund & ULIP Investment Portfolio up till now. (Please tick

any one)

A) Less than Rs 50000 C) 1.01 Lakh to 1.99 Lakhs

B) Rs 50000 to Rs 100000 D) 2.0 to 5.00 Lakh

6) My most preferred mode while investing in Mutual Funds / ULIP. (Tick any one)

a) Invest lump sum amount b) Invest monthly through SIP (systematic investment plan)

c) Combination of both

7) My usual time frame while investing in Mutual funds / ULIP. (Tick any one)

a) Short Term – Less than one year b) Short to medium term – 1 to 3 years

c) Medium Term – 3 to 4 years d) Long Term – More than 4 years

8) How actively you track NAV of ULIP / Mutual Funds (Please tick any one)

a) Once in a year d) Fortnightly

b) Two times in a year e) Weekly

c) Monthly f) Daily

g) Any other (Please write) _____________________________

9) How frequently you switch from one scheme / option to another? (Please tick any one)

A) Don’t Know B) Never C) Sometimes D) Often

10) My major investment objective while investing in mutual funds (MF) / ULIP

a) Regular income to meet commitments and expenses

b) Building corpus to meet specific future requirement

c) Preserving wealth, after accounting for inflation and taxes

d) Wealth Creation

e) Any other (Please write) ________________________________________

11) Please rank the following services as per the importance you give. (1 Very Low importance

while 5 means very high importance)

Type of Services Very

Low

Low Medium High Very

High

A Basic or transaction services - Facilitating the transaction,

filling and submission of forms, collecting redemption proceeds,

etc. 1 2 3 4 5

B Advisory services - Financial planning, investment strategy,

taxation planning, advice for selecting scheme as per my need,

portfolio balancing, churning strategy, etc. 1 2 3 4 5

C Information services – Updating the NAV, new NFO, new MF

/ ULIP products, any information regarding investments

especially MF / ULIP, etc. 1 2 3 4 5

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12) Please indicate your level of (dis)agreement about each statement by encircling the

appropriate numbers in the following table.

Sr.

No.

Statements Strongly

disagree

disagree Undecided Agree Strongly

agree

1 MF intermediary should make us aware about

basics of MF / ULIP investments. 1 2 3 4 5

2 I believe the good relationship with MF /

ULIP agent increases the chances of success

while investing.

1 2 3 4 5

3 I am ready to develop long term relationship

with MF / ULIP agent. 1 2 3 4 5

4 One should not change his / her advisor

frequently. 1 2 3 4 5

13) Which brands come in your mind when you think about ULIP / Mutual Funds investments?

1. ___________________________

2. ___________________________

3. ___________________________

4. ___________________________

14) Please encircle the appropriate number to show your level of overall satisfaction towards

Mutual Fund / ULIP investments.

15) Please fill the following details by ticking appropriate option in each row.

A Age a) 20 – 30

b) 31 - 40

c) 41 – 50

d) 51 & above

B Gender a) Male b) Female

C Occupation a) Service

b) Business

c) Retired

d) Housewife

D Education a) Undergraduate

b) Graduate

c) Post Graduate

d) PhD / Doctorate

E Annual Income a) 1.20 Lakh to 2.40 Lakh

b) 2.41 Lakh to 4.00 Lakh

c) 4.00 Lakh to 6.00 Lakhs

d) Above 6.00 Lakh

F Size of Total Investment

Portfolio up till now

a) Less than 1.00 Lakh

b) 1.00 Lakh to 3.00 Lakh

c) 3.01 Lakh to 5.0 Lakhs

d) Above 5.0 Lakh

Section A Now we would like to know about the intermediary from which you do mutual fund investing.

Again we will ask some questions pertaining to various services offered by him. Please give

your responses for the questions asked below. A 1 - Please encircle the appropriate number to show your level of (dis)agreement with each

statement.

Sr.

No.

Statements Strongly

disagree disagree Undecided Agree

Strongly

agree

E 1 I feel that “my advisor” has increased my

understanding level towards Mutual fund /

ULIP investing.

1 2 3 4 5

E 2 “My advisor” described the rules / processes

for encashment of investments in case of

contingency.

1 2 3 4 5

E 3 Before investing, “My advisor” explained the

risks involved in particular MF / ULIP

scheme.

1 2 3 4 5

E 4 Before investing, “My advisor” explained me likely returns from the investment.

1 2 3 4 5

E 5 “My advisor” explained me the taxation issues pertaining to MF / ULIP investment.

1 2 3 4 5

Highly dissatisfied 1 2 3 4 5 highly Satisfied

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A 2 – Please encircle the appropriate number to show your level of (dis)agreement with each

statement pertaining to services provided by your advisor till now.

Sr.

No.

Statements Strongly

Disagree

1

Disagree

2

Undecided

3

Agree

4

Strongly

Agree

5

S 1 “My advisor” helps me while filling the

forms. 1 2 3 4 5

S 2 “My advisor” submits the forms / documents. 1 2 3 4 5

S 3 “My advisor” helps me while selling Mutual

fund / ULIP units. 1 2 3 4 5

S 4 “My advisor” collects or delivers sales

proceeds cheque to me. 1 2 3 4 5

S 5 “My advisor” helps me in changing payment

modes. 1 2 3 4 5

S 6 “My advisor” helps me in updating /

changing personal information with insurer /

MF company.

1 2 3 4 5

S 7 “My advisor” advise me whether to buy /

sell / hold investments. 1 2 3 4 5

S 8 “My advisor” advise me whether to switch

from one scheme to another. 1 2 3 4 5

S 9 “My advisor” advise me on tax planning. 1 2 3 4 5

S 10 “My advisor” helps me in balancing the

portfolio. 1 2 3 4 5

S 11 “My advisor” regularly communicates the Net

Asset Value of the schemes in which I have

invested.

1 2 3 4 5

S 12 “My advisor” updates me about the

performance of the schemes in which I had

invested.

1 2 3 4 5

S 13 “My advisor” updates me about the new

products. 1 2 3 4 5

S 14 “My advisor” informs me about the changes

in the companies in which I had invested. 1 2 3 4 5

S 15 “My advisor” informs me about the changes

in government, regulatory policies pertaining to my investments.

1 2 3 4 5

Section B This section will ask you various questions pertaining to your relationship with your advisor.

Please give appropriate responses to each question. B 1 - Please tick the most appropriate option the way you invest in particular MF / ULIP scheme.

(Please tick the appropriate options)

a) I give money (Cheque) to advisor and he decides where to invest.

b) I along with advisor decide where to invest and then money is invested accordingly.

c) I do research and select particular scheme and direct advisor accordingly.

B 2 - Please encircle the appropriate option that best describes the influence of “your advisor”

while investing in Mutual Funds / ULIP.

No influence 1 2 3 4 5 Very High influence

B 3 – Till now how many times you have changed your MF / ULIP advisor. (Tick any one)

a) Never d) 3 – 4 times

b) Once e) more than 4 times c) Twice

B 4 -You know “your advisor” since, (Tick any one)

a) 0 – 1 year b) 1 – 3 years c) 3 – 5 years d) 5 – 10 years e) 10 years

& above

B 5 - Has “your advisor” tried to sell any other financial product apart from MF / ULIP?

Yes No

B 6 - Had you purchased any other financial product apart from MF / ULIP from “your

advisor”?

Yes No

110

B 7 - My relationship with “my MF / ULIP advisor” (Please encircle the appropriate number to

show your level of (dis)agreement with each statement)

Sr.

No.

Statements Strongly

disagree

disagree Undecided Agree Strongly

agree

R 1 is one that I am very committed to 1 2 3 4 5

R 2 Is very important to me 1 2 3 4 5

R 3 is one that I really care about 1 2 3 4 5

R 4 is one toward which I can develop a

warm feeling 1 2 3 4 5

R 5 Has a great deal of personal meaning to

me 1 2 3 4 5

B 8 - Overall I would rate my relationship with my MF / ULIP advisor as: (Please encircle the

appropriate number level of agreement with each statement)

Extremely poor 1 2 3 4 5 extremely good

B 9 - Please encircle the appropriate number for every statement, showing your level of

(dis)agreement with each statements pertaining to the experiences with your advisor,

Sr.

No.

Statements Strongly

disagree

disagree Undecided Agree Strongly

agree

R 6 He (advisor) is very honest / truthful. 1 2 3 4 5

R 7 He can be trusted completely 1 2 3 4 5

R 8 He can be trusted sometimes 1 2 3 4 5

R 9 He has high integrity 1 2 3 4 5

R 10 He can be counted on to what is right 1 2 3 4 5

R 11 I am satisfied with total services offered by him 1 2 3 4 5

R 12 While dealing with him, I feel convenience 1 2 3 4 5

R 13 He provides quality services 1 2 3 4 5

R 14 He gives more benefits in comparison what I pay 1 2 3 4 5

R 15 He is aware about my investment needs. 1 2 3 4 5

R 16 I get personalized services from him 1 2 3 4 5

R 17 I get regular investment advice from him. 1 2 3 4 5

R 18 He is good source of information 1 2 3 4 5

R 19 He charges me the lowest possible fees /

commission. 1 2 3 4 5

R 20 He is very efficient in documentation. 1 2 3 4 5

R 21 He maintains high level of transparency in every

aspect of the transaction 1 2 3 4 5

R 22 He is responsive 1 2 3 4 5

R 23 He is reliable 1 2 3 4 5

R 24 He is competent 1 2 3 4 5

B 10 - Please encircle the appropriate number for every statement, showing your level of

agreement with each statements pertaining to loyalty towards your advisor,

Sr.

No.

Statements Strongly

disagree

disagree Undecided Agree Strongly

agree

L 1 “My advisor” does not exhibit opportunistic behavior such

as recommending the MF / ULIP scheme which is not

matching to my financial objectives but increasing his or

her commission / brokerage / fees.

1 2 3 4 5

L 2 I feel that changing MF / ULIP advisor will increase my

cost. 1 2 3 4 5

L 3 Changing MF /ULIP advisor is risky as I am dependent on

my advisor while investing in MF. 1 2 3 4 5

L 4 I would continue with MF / ULIP financial service

provider 1 2 3 4 5

L 5 I would like to recommend your MF / ULIP advisor to my

relatives, friends 1 2 3 4 5

111

Appendix – B

Questionnaire for Distribution Intermediaries Name of the Company / Individual:

Address:

Name of the person with designation:

AMFI Reg. Number (if applicable):

Q. 1

A) Ownership structure: INDIVIDUAL CORPORATE BANK

B) Number of years in financial services distribution:

0 – 3 Years 3 – 5 years 5 – 10 years more than 10 years

C) Annual Business Turnover from mutual fund / ULIP (in lakhs):

0 – 5 5 – 10 10 – 20 20 – 40 40 – 60 60 – 100 100 – 150

150 - 300 300 – 500 500 - 1000 1000 & more

D) You are offering (please tick any one option)

a) Only Mutual Funds b) Only ULIP c) Both Mutual funds and ULIP

Q. 2 - A) Please tick the financial products & services offered by you (other than Mutual Funds /

ULIP):

Life Insurance General Insurance Fixed deposits Tax planning

Post Office Schemes Securities trading

Retirement Planning Any other (please write) _____________________________________________

Q. 2 –B)

Number of Mutual Fund/ULIP brands offered.

Total number of employees working in the organization.

Number of employees working for selling mutual fund / ULIP products.

Q. 3) Please write top three MF companies and ULIP companies on the basis of funds mobilized

from retail investors by you in the last one year.

Mutual Fund brands / AMC ULIP Brands

1) ____________________________

2) ____________________________

3) _________________________________

1) ___________________________

2) ___________________________

3) ___________________________

Q. 4) Please rate the following customer groups on the basis of amount of business your firm

gets annually by encircling appropriate number. (1 – Very Low, 3 – Medium, 5 – Very

High)

Sr.

No Customer Groups

Very

Low Low Medium High

Very

High

A Institutional / corporate customers 1 2 3 4 5

B High net worth individuals 1 2 3 4 5

C Retail / individual investors 1 2 3 4 5

112

Q. 5) Please indicate your level of agreement about each statement pertaining to your MF /

ULIP retail customers by encircling the appropriate numbers in the following table.

Sr.

No.

Statements

Str

on

gly

Dis

ag

ree

1

Dis

ag

ree

2

Un

dec

ided

3

Ag

ree

4

Str

on

gly

Ag

ree

5

1 I/We try to develop long term relationship with our customers. 1 2 3 4 5

2 I/We always try to make customers aware about basics of investments.

1 2 3 4 5

3 I/We try to distribute / circulate information to our customers. 1 2 3 4 5

4 I/We act as a good source of information for our customers. 1 2 3 4 5

5 I/We act as a continuous source of information to our customers.

1 2 3 4 5

6 My/Our customers emphasis advisory services over

information services. 1 2 3 4 5

7 My/Our customers call us even for other financial services which we do not sell.

1 2 3 4 5

8 I/We try to sell other financial services to the existing MF /

ULIP customer. (This is known as cross selling) 1 2 3 4 5

9 My/Our cross selling efforts are successful. 1 2 3 4 5

10 I/We often get references from our customers. 1 2 3 4 5

11 My/Our interaction with customer is purely business oriented. 1 2 3 4 5

12 My/Our interaction with customer is information as well as

business oriented. 1 2 3 4 5

13 My/Our interaction with customer is relational. 1 2 3 4 5

14 My/Our communication is same for every retail customer. 1 2 3 4 5

15 I/We design our communication according to the needs of

various customer groups. 1 2 3 4 5

16 I/We design our communication according to the needs of each customer.

1 2 3 4 5

17 My/Our communication is one sided. 1 2 3 4 5

18 My/Our communication with customers is interactive. 1 2 3 4 5

19 I/We often interact with our customers via internet, mobile, and other technologies.

1 2 3 4 5

20 I/We try to maintain constant dialogue with our customers. 1 2 3 4 5

21 I/We often, personally meet to our customers. 1 2 3 4 5

22 I/We establish customer contact mainly through technology. 1 2 3 4 5

23 Customers sometimes call us / me to take advice even on their

non financial / personal / family matters. 1 2 3 4 5

24 I/We are committed to each customer. 1 2 3 4 5

25 I/We are committed to very few key customers. 1 2 3 4 5

26 My/Our business focus is on the products & services offered by us.

1 2 3 4 5

27 My/Our business is focused on retaining the existing

customers. 1 2 3 4 5

28 My/Our business focus is on quality interactive (two way) communications with the customers.

1 2 3 4 5

29 My/Our business focus is on developing customer

relationships for mutual benefit. 1 2 3 4 5

30 Relationship marketing plays vital role between me /us & my /our customers.

1 2 3 4 5

113

Q. 6) Please indicate your level of agreement about each statement pertaining to your future

business plans and activities by encircling the appropriate numbers in the following table.

Sr.

No.

Statements

Str

on

gly

Dis

ag

ree

1

Dis

ag

ree

2

Un

dec

ided

3

Ag

ree

4

Str

on

gly

Ag

ree

5

1 I /We would seek partnerships in near future for

our business growth. 1 2 3 4 5

2a My/Our business will grow if we will invest in

acquiring more products and services. 1 2 3 4 5

2b My/Our business will grow if we will invest in

bettering communication with the customer. 1 2 3 4 5

2c My/Our business will grow if we will reduce the

price. 1 2 3 4 5

3a My/Our business will grow if we will invest in

training the sales force / people. 1 2 3 4 5

3b

My/Our business will grow if we will invest in

various technologies like laptops, software,

spreadsheets, etc which will facilitate my selling. 1 2 3 4 5

4

My/Our business growth is largely dependent on

how we develop & integrate business processes

so that service quality will enhance.

1 2 3 4 5

5

To grow my / our business, we will invest in

those assets, tools which facilitates “customer

relationship management”

1 2 3 4 5

Q.7) Please tick various media through which you maintain dialogue with your retail customers.

A) E - mail D) Sales Persons

B) Telephone E) Internet, websites

C) SMS / mobile F) Publications like magazines,

bulletins, brochures.

G) Post Any other (please write)

Q.8) Do you use any software / tools to facilitate your financial services distribution business?

Yes No

Q.9) Do you have separate CRM department in your organization? Yes No

Q.10) Do you use any Customer relationship management (CRM) software / application?

Yes No

If yes how you will rate contribution of CRM in generating business from retail

investors?

A) Very poor D) Good

B) Poor E) Excellent

C) Fair

Q.11) If you mutual fund advisor,

Do you offer any online platforms for Mutual Fund trading to your clients? Yes

No

If no, are you planning to offer online Mutual Fund trading platforms in near future?

Yes No