Icici Prudential Amc Essay Example

a certain level of risk tolerance based on their financial situation and personal preferences. By taking on more risk, investors have the potential to earn higher returns. However, for those who lack the time, inclination, or skills to actively manage their investment risk in individual securities, Mutual Funds provide a solution.

Trustees

Trustees are individuals who ensure that investors' interests in a mutual fund scheme are properly attended to. They are compensated with trustee fees, which are typically billed to the scheme.

Asset Management Company

Asset Management Companies (AMCs) handle the investment portfolios of mutual fund schemes. AMCs earn income through management fees charged to the schemes they manage. The management fee is determined as a percentage of the net assets under management.

An MAC has to hire workers and cover all the associated costs with its operations using the management fee it earns. The size of mutual fund companies is determined by their assets under management (AY-JAM). When a scheme is first launched, the assets under management will be the amount invested by investors.

Distributors

Distributors receive a commission for bringing investors into mutual fund schemes. This commission is considered an expense for the scheme, although there are cases where an MAC may decide to partially or fully cover the cost. Depending on their financial and physical resources, distributors can be categorized as those with their own or franchised network that reaches investors nationwide, regional players with some presence in their specific region, or small and limited players with narrow reach.

The Indian Mutual Fund Industry in India began in 1963 with the establishment of

Unit Trust of India (UTI) through the collaboration of the Government of India and Reserve Bank of India. The history of mutual funds in India can be classified into four main phases. The first phase, from 1964 to 1987, involved the establishment of UTI under the regulatory and administrative control of the Reserve Bank of India. In 1978, UTI was separated from the RBI and the Industrial Development Bank of India (IDBI) assumed regulatory and administrative control. The initial scheme introduced by UTI was Unit Scheme 1964.

In 1988, OUT had RSI 6,700 chores of assets under management. The second phase, from 1987 to 1993, saw the entry of non-UT public sector mutual funds. These funds were established by public sector banks and Life Insurance Corporation of India (LICE) and General Insurance Corporation of India (GIG). The first non-OUT Mutual Fund, SIB Mutual Fund, was established in June 1987. This was followed by Cancans Mutual Fund in December 1987, Punjab National Bank Mutual Fund in August 1989, Indian Bank Mutual Fund in November 1989, Bank of India Nun in 1990, and Bank of Broad Mutual Fund in October 1992. LICE established its mutual fund in June 1989, while GIG set up its mutual fund in December 1990. By the end of 1993, the mutual fund industry had assets under management of RSI.

In the period of 1993-2003, the Indian mutual fund industry experienced significant growth with the introduction of private sector funds. This allowed Indian investors to have a greater selection of fund families. Additionally, in 1993, the Mutual Fund Regulations were implemented, requiring all mutual funds (except for OUT) to be registered and governed. The first

private sector mutual fund to be registered was the Katharine Pioneer (now merged with Franklin Templeton) in July 1993.

The 1993 SIB (Mutual Fund) Regulations were replaced by the more extensive and revised Mutual Fund Regulations in 1996. The industry now operates under the SIB (Mutual Fund) Regulations 1996. The number of mutual fund houses continued to grow, with numerous foreign mutual funds establishing funds in India, and the industry also experienced multiple mergers and acquisitions. As of January 2003, there were 33 mutual funds with a total asset value of RSI 1,21,805 Crore. The Unit Trust of India had RSI.

44,541 chores of assets under management was significantly higher compared to other mutual funds. The Fourth Phase began in February 2003, when the Unit Trust of India Act 1963 was repealed and OUT was divided into two separate entities. One of these entities is the Specified Undertaking of the Unit Trust of India, which manages assets worth RSI. 29,835 chores as of January 2003. These assets mainly consist of the US 64 scheme, assured return, and some other schemes.

The Specified Undertaking of Unit Trust of India operates under the rules framed by the Government of India and is not subject to the Mutual Fund Regulations. Another fund called the OUT Mutual Fund, sponsored by SIB, PAN, BOB, and LICE, is registered with SIB and follows the Mutual Fund Regulations. The former OUT was divided in March 2000 and had over Rs. 76,000 crore of assets under management. A new OUT Mutual Fund was established to comply with the SIB Mutual Fund Regulations, and recent mergers have contributed to the growth of the mutual fund industry. As

of February 2012, there are 44 Mac's in India and ICC ranks third in terms of total Assets Under Management (AY-JAM).

The mutual fund market in India is underutilized.

Despite being available for more than two decades and having assets under management totaling RSI 664,824 Core (As of March 2012) (Source: Association of Mutual Funds, India), less than 10% of Indian households have invested in mutual funds. ICC Prudential Asset Management Company Limited is a joint venture between ICC Bank, the second largest commercial bank in India and a respected name in the country's financial services sector, and Prudential Pl, one of the leading players in the financial services sector in the United Kingdom. ICC Prudential Mutual Fund operates as a trust with Prudential Pl (through its subsidiary, Prudential Corporation Holdings Ltd) and ICC Bank Ltd as its sponsors. The mutual fund was officially registered with SIB on October 13, 1993.

ICC Bank Ltd. owns 51% of the Trustee and Prudential Pl., while its wholly owned subsidiary, Prudential Corporation Holdings Ltd., owns 49%. Since 1998, this company has become a leader in the Indian Mutual Fund industry, ranking as the third largest asset management company in India. Their contribution has been crucial to the growth of the Indian mutual fund industry.

Currently, the MAC oversees over 46 Mutual fund schemes and a variety of Portfolio Management Services Products. The total assets under management (Mum) amount to RSI. 68000 Chores. In order to accommodate a widespread investor base, the MAC has a branch network of approximately 168 branches and a distribution reach extending to more than 42,000 channel partners throughout India.

SOOT Listing of prudential MAC

Strengths

• Brand
  

ICC is a household brand. ICC bank has a customer base of more than 17 lake customers across India.

Weaknesses

• Little product differentiation across Macs - product differentiation based purely on fund performance.
• The brand ICC Prudential has found itself more associated tit Life insurance than with Mutual Funds.

Opportunities

• Product innovations like SIP-insure which is aimed at competing with insurance products.
• Large customer base of ICC bank to educate about products and cross-sell to.
• Increasing marketing and advertising over the last 3 years increasing awareness among retail investors.

Threats

• 43 other competing Macs in the country wing for investor money.
• Threat from insurance products like Lips which offer better brokerages to distributors and thereby taking away the attractiveness of Mutual funds.
• Volatility of markets since he recession make banking and insurance products appear safer to the investor.

The regulator SIB in order to safeguard investor interest provides little room for Macs to become a profitable venture. Distribution Channels in the Mutual fund industry Independent Financial Advisers (Bias) Historically, individual agents would distribute units of Unit Trust of India and insurance policies of Life Insurance Corporation.In addition, they would support investments in the Government's Small Savings Schemes. Furthermore, they would offer Fixed Deposits and Public Issues of shares of companies for sale, either directly or as a sub-broker for larger brokers.

UT', LICE or other investment product issuers, commonly known as "product

manufacturers," would promote their offerings through mass media advertising. Simultaneously, a nationwide team of agents would personally reach out to investors, asking them to sign application forms and collect payments. These agents were well acquainted with the investors and were often considered as part of their families. Today, the IFs are like friendly neighbors who excel in selling products but must also handle their expenses using the commissions they receive.

The provision of advisory services is currently free, but significant changes are expected in this field. In the coming years, there will be a high demand for Financial Planning services and Certified Financial Planners who possess specialized expertise. The Association of Mutual Funds in India (MAFIA) has around 100,000 registered agents, with approximately 80% of them also selling other financial products like life insurance, small savings, and general insurance alongside mutual funds. Many of these registered agents are inactive or dormant. Among those who remain active, several engage in part-time selling of mutual funds to supplement their families' income. Typically, most agents sell mutual funds from three or four different asset management companies (Macs).

Institutional Channels
Organized distributors have the infrastructure and flexibility to adapt to current needs. They are also recognizing the importance of establishing offices in urban and semi-urban locations. Due to limited staff, product manufacturers prefer dealing with a few institutions while reaching hundreds of locations. They negotiate with a select few in the head office of the distributing institution.
Institutional channels include brokerage firms and other securities distribution companies that have expanded their offerings beyond company fixed deposits and public issue of shares. Banks also see

the distribution of financial products as a means to earn fee-based income and meet the investment needs of their customers. The distribution of mutual funds by banks is becoming a significant factor.

For banks, their existing customer base serves as a captive prospective investor base for marketing mutual funds. There is no other distribution channel that can effectively reach Tier-II and Tier-Ill cities as well as rural India. The internet has provided an opportunity for mutual funds to directly connect with investors. This allows for direct transactions, which optimizes commission costs associated with distribution. Investors have also found convenience in conducting transactions instantly through the internet, rather than dealing with paperwork and relying on a distributor. Some professional distributors have focused on providing value-added advice and excellent service to retain their customers and establish new customer relationships.

Many of them provide transaction support on their own websites. There is a significant number of investors in the market who require guidance. The future of intermediaries depends on meeting their needs, whether individually or with a team and/or technology.

Roles and Challenges in the IF Channel - Distribution Channels of Mutual Funds

In recent years, the IF channel has experienced remarkable growth in market share and professionalism. It plays an essential role in facilitating the distribution of mutual funds, particularly in the final stage.

Despite facing tough competition from banks, national distributors, and regional distributors in creating retail distribution strategies, there is no denying that Bias has historically relied on commission payments from product providers to cover their services. However, there has been a recent shift towards fee-based advice which is considered fairer for clients. Nevertheless, the adoption

of fee-based advice has been slow due to inadequate capitalization in the advice sector and consumer reluctance to pay for a service they previously received for free. This transition has primarily targeted high net worth individuals.

Traditionally, financial advisors receive a commission from the product provider as payment for their advice. There are two types of commission earned by distributors: upfront commission/entry load and trail commission. The application forms for the scheme include a disclosure stating that the upfront commission will be paid by the investor to the distributor, based on various factors including the service provided. In addition to the initial commission, advisors may also receive an annual trail commission from the product provider. This trail commission is calculated as a percentage of the net assets attributable to the Units sold by the distributor and is typically paid on a quarterly basis by the MAC.

The distributors profit from the increase in net assets that result from valuation gains in the market. Regulatory changes were implemented by the Securities and Exchange Board of India (SIB) in August 2009, which eliminated entry loads on MFC investments. Prior to this regulation, fund houses used to charge investors an entry load or upfront commission of approximately 2.5% on the invested amount.

MFC houses used to compensate distributors for their services in promoting and selling MFC products to investors. This compensation was funded through entry loads, with the commission amount deducted from the investors' principal amount. However, many investors were not aware that their initial investment would be reduced by approximately 2.5%, with only the remaining 97.5% actually being invested in the scheme.

Those who were aware of it would require their

distributors to reimburse a portion of these commissions, typically 1% to 1.5%, in cash. Furthermore, the problem of Portfolio churning had emerged, as some distributors were suggesting investors frequently churn funds solely to earn higher commissions. Under the entry-load regime, fund houses provided distributors with substantial incentives. Consequently, distributors would recommend schemes even if they did not align with an investor's risk profile.

It was SIB's aim to curb this practice and ensure transparency and customer-friendliness in MFC investments. They introduced the no-load regime, which placed the responsibility of collecting fees from investors solely on the distributor. Today, when purchasing an MFC product through a distributor, both parties must agree on the commission to be paid for the distributor's services.

Impact on the IF Channel

Another positive outcome is that fund houses have ceased unnecessary new fund offers (Info), which was a major cause of churn. Investors now question the rationale behind investing in a specific scheme. However, the no-load regime has resulted in many small-time distributors closing their shops, as persuading investors to pay for services rendered in MFC investments is challenging. Industry estimates indicate that around 70% of Bias has abandoned MFC distribution.