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
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
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
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.
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.
94
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.
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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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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