3.1.

1 Investment Objective

This defines the broad investment charter. For example, the investment objective of a diversified
equity scheme might read as follows:

“To generate capital appreciation from a portfolio of predominantly equity related securities”

The investment objective of a diversified debt scheme could be:

“To generate income by investing predominantly in a wide range of debt and money market
securities”

A balanced scheme would have an investment objective like:

“To achieve growth by investing in equity and equity related investments, balanced with income
generation by investing in debt and money market instruments”

3.1.2 Investment Policy

This describes in greater detail, the kind of portfolio that will be maintained. For example:

“The portfolio will generally comprise equity and equity related instruments of around 30
companies, which may go upto 39 companies”; or

“Investment will be predominantly in mid-cap stocks”; or

“More than 50 percent will be invested in equity and equity related securities; the rest would be in
debt and money market securities”

“The scheme may use derivatives only to the extent of 35 percent of its net assets”

When a scheme’s name implies investment in a particular kind of security or sector, it should have a
policy that provides for investing at least 65 percent of its corpus in that security or sector, in normal
times. Thus, a debt scheme would need to invest at least 65 percent in debt securities; an equity
 scheme would need to invest that much in equities; a steel sector fund would need to invest at least
65 percent in shares of steel companies.

3.1.3 Investment Strategy

The stated investment objective of the scheme determines the asset class(es) in which it will invest.
For example, the investment objective to generate capital appreciation in the long term through
investment in equity, clearly identifies equity as the asset class in which the scheme will invest.

The investment strategy of the scheme outlines the approach to be followed in investing the funds
to achieve the objective. This includes factors such as the investment horizon that the fund manager
will consider when evaluating securities for inclusion in the portfolio, approach to be followed in
selecting securities such as research-based or market-driven, method of determining the
appropriate buying price for the securities, selling discipline to be followed, extent of flexibility to be
allowed in investing in different asset classes and so on.

AMCs have a practice, where every morning, the senior management (CEO, CIO, and Fund
Managers) discuss the need for any change in their investment strategy.

Investment strategy can be read in conjunction with types of mutual funds. Each type will have a corresponding
investment strategy.
MARKETING STRATEGIES

5.1 Distribution Channels

5.1.1 Traditional Distribution Channels

Individual

In the past, individual agents distributed units of Unit Trust of India and insurance policies of Life
Insurance Corporation (LIC). These individual agents facilitated investments in Government’s small
savings schemes and also sold fixed deposits and public issues of shares of companies, either
directly, or as a sub-broker of some large broker.

UTI, LIC or other issuers of the investment product (often referred to in the market as “product
manufacturers”) usually advertised through the mass media, while an all-India field force of agents
approached investors to get application forms signed and collected their cheques. Earlier, the agents
were familiar with the investors’ families and were often viewed as an extension of the family.

Over the last two decades or so, a number of changes have happened:

 Several new insurance and mutual fund companies have commenced operations.

 The universe of investment products available for investors has multiplied.

 Investors are better informed about many products and their features.

 Technologies such as the internet and data mining software opened the doors to newer ways of
targeting investors, sharing information with them, and putting through their transactions.

 Companies have started offering products in more and more locations, thus increasing the
pressure on the product manufacture-to-agent, single level distribution architecture.

A need was felt for newer formats of distribution that would leverage on the above to generate
much higher volumes in the market. Individual distributors, also referred to as Individual Financial
Advisors (IFA) continue to be a large force for distribution numerically, though the volume of sales
generated are significantly lower than other distribution channels such as Institutional Distributors.

Institutional Channels

The changing competitive context led to the emergence of institutional channels of distribution for a
wide spectrum of financial products. This comprised:

 Brokerage firms and other securities distribution companies, who widened their offering beyond
company fixed deposits and public issue of shares.

 Banks, who started viewing distribution of financial products as a key avenue to earn fee-based
income, while addressing the investment needs of their customers.

 Non-banking finance companies (NBFC) with multiple branches.

Some of these institutional distributors/channels operated within states; many went national. A
chain of offices manned by professional employees or affiliated sub-brokers became the face of
mutual fund distribution. Brand building, standardized processes and technology sharing became
drivers of business for these institutions – unlike the personal network, which generated volumes for
the individual agents. Investors also benefit from the investment research and other services that
these institutions provide to their clients.

Limitations of employee bandwidth and staff strength meant that ‘product manufacturers’ (i.e.
issuers of investment products) preferred to deal with a few institutions. The benefit was that they
could reach out to hundreds of locations, while having to negotiate deals with only a select few in
the head office of the institutional distributors. AMCs appointed Channel Managers on their rolls,
whose job was to get the best out of these institutional distribution channels.

The institutional channels started attracting agents as sub-brokers. Many individual agents opted to
associate with the institutional channels, so that they could give their customers the benefit of
newer technologies and services (which the agents found too costly to offer on their own).

Thus, the distribution setup got re-aligned towards a mix of:

 Independent Financial Advisors (IFAs), who are individuals. The bigger IFAs operate with support
staff who handles back-office work, while they themselves focus on sales and client relationships.
They also have sub-brokers working under them.

 Non-bank distributors, such as brokerages, securities distribution companies and non-banking

finance companies.

 Bank distributors
Ownership of all-India or regional network of locations meant that the institutional channels could
deal with product manufacturers as equals, and negotiate better terms than what the agents could
manage.

Down the line, the AMCs also started exploring other channels of distribution. Post offices and self-
help groups are examples of such alternate channels. Alternate Channel Managers on the rolls of
the company are responsible for such exploratory thrusts.

5.1.2 Newer Distribution Channels

Internet

The internet gave an opportunity to mutual funds to establish direct contact with investors.
Investors can now access the website of the mutual fund and deal directly with the fund. Direct
transactions afford scope to optimize on the commission costs involved in distribution. Other
electronic/internet based modes of conducting financial and non-financial transactions include those
offered by banks, financial institutions, distributors, registrar and transfer agent, electronic
platforms provided by stock exchanges such as NSE’s MFSS and BSE’s StAR platform.

Investors, on their part, have found a lot of convenience in doing transactions instantaneously
through the internet, rather than doing the cumbersome paper work and depending on the
distributor to do transactions.

A few professional distributors have rightly taken the path of value added advice and excellent
service level to hold on to their customers and develop new customer relationships. Many of them
offer transaction support through their own websites.

A large mass of investors in the market need advice. The future of intermediaries lies in catering to
their needs, personally and/or through a team and/or with support of technology.

Stock Exchanges

The institutional channels have had their limitations in reaching out deep into the hinterland of the
country. A disproportionate share of mutual fund collections has tended to come from corporate
and institutional investors and from urban centers, rather than retail individuals for whose benefit
the mutual fund industry exists. Stock exchanges, on the other hand, have managed to ride on the
equity cult in the country and the power of communication networks to establish a cost-effective all-
India network of brokers and trading terminals. This has been a successful initiative in the high-
volume low-margin model of doing business, which is more appropriate and beneficial for the
country.

SEBI has facilitated buying and selling of mutual fund units through the stock exchanges. Both NSE
and BSE have developed mutual fund transaction engines for the purpose. The low cost and deeper
reach of the stock exchange network has increased the participation level of retail investors in
mutual funds, and thereby taking the mutual fund industry into its next wave of growth.

While the transaction engines are a newer phenomenon, stock exchanges always had a role in the
following aspects of mutual funds, which were discussed in Chapter1:

 Close-ended schemes are required to be listed in a stock exchange

 ETFs are bought and sold in the stock exchange.

Distribution through Banks

Mutual funds have built relationships with PSU banks that have a wide reach in the non-urban
centres to distribute mutual fund products through them. Also private and foreign banks actively
participate in the distribution process of mutual fund products.

5.1.3 New Cadre of Distributors

SEBI, in September 2012, provided for a new cadre of distributors, such as postal agents, retired
government and semi-government officials (class III and above or equivalent), retired teachers and
retired bank officers with a service of at least 10 years, and other similar persons (such as Bank
correspondents) as may be notified by AMFI/ AMC from time to time. These new distributors are
allowed to sell units of simple and performing mutual fund schemes.

Simple and performing mutual fund schemes comprises diversified equity schemes, fixed maturity
plans (FMPs), Liquid and Money Market schemes, Retirement benefit schemes having tax benefits
and index schemes that have returns equal to or better than their scheme benchmark returns during
each of the last three years. Diversified equity schemes category shall be large-cap oriented and
well-diversified and shall not include thematic or sectoral funds, small, mid and micro-cap funds or
concentrated funds which intend to hold less than 30 stocks in their portfolio according to the offer
document.

The aforementioned mutual funds should have returns equal to or better than their scheme
benchmark returns during each of the last three years. Such funds are called ‘performing’ mutual
funds.

AMFI Committee on Operations and Compliance has formulated and prescribed best practice
guidelines to be followed by all AMCs with respect to the identification of diversified equity schemes
and disclosure of schemes that are eligible to be sold by the new cadre of distributors.

The list of schemes shall be compiled annually based on the performance of the scheme during each
of the last three financial years (April to March). The list shall be reviewed and modified every year
in April. AMCs are requested to disclose the list of eligible schemes on their website.

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The new cadre of distributors are eligible to sell only simple and performing mutual
fund schemes as mentioned above, the AMCs shall put in place a proper validation
process to ensure that the new cadre of distributors sell only the schemes they are
allowed to sell. This validation shall be performed even at sub broker level, if the
transaction has been procured by a new cadre of distributor who is acting as a sub
broker of the ARN holder. The same shall be implemented along with the
implementation of validation of EUIN-ARN mapping.

Transaction through a new cadre of distributors in schemes other than eligible

schemes shall be rejected with intimation to the investor. AMCs shall review and
monitor such rejections in respect of transaction done by new cadre of distributors
(including sub-brokers) and if they observe that there is frequent rejection of
transactions with respect to any new cadre distributor/sub broker, the same
should be reported to AMFI properly.