The Indian asset management industry has seen significant growth in assets under management in recent years. However, profits have declined slightly as traditional managers face pressure on revenue margins from fee competition and shifts in product mix. While growth is expected to continue driven by rising household savings and financial inclusion initiatives, penetration remains low compared to other financial assets. Key opportunities for growth include expanding into smaller cities, developing new product categories like alternatives and passive investments, and leveraging digital technology. Continued support from government policies and regulators will also help drive the industry forward.

1. Growth in the
Indian asset
management industry—
Is there a new normal?
Confederation of Indian Industry

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3. Contents
Asia Pacific asset management – Is the growth sustainable? 3
Growth in the Indian asset manage-ment industry – Is there a new normal? 11
Product classes – Is the market ready for alternatives and passives? 23
Technology and Digitization – How will it impact the asset management industry? 29
Financial inclusion the mutual fund way 33

5. 1Growth in the Indian asset management industry—Is there a new normal?
Foreword
The last two years have been very positive for the asset management industry in India, with the
industry’s assets under management (AuM) scaling new peaks regularly. We believe that there is
a long-term growth story for the Mutual Fund industry led by Retail investors particularly through
the Systematic Investment Plan (SIP) route. The macroeconomic enablers like stable government,
declining inflation, fiscal discipline and reform initiatives by the Government and Regulators, indicate
that a GDP growth rate between 6.5 to 8 percent may be sustained over the next decade.
However, there is a huge potential market which needs to be tapped by the Mutual Fund Industry,
which stands at only 11 percent of the GDP. The industry still needs to reach out to investors in
smaller towns where MF penetration is much lower. Key challenges to the growth of MFs are low
consumer awareness and trust, limited distribution network restricted to the top few centres, and a
lack of innovative products. However, we expect the industry to register strong growth based on the
following themes:
ƒƒ Continued growth in financial savings and thereby improvement in MF penetration
ƒƒ Financial inclusion drive and investor education programs leading to growth in beyond the top 15
cities (B-15)
ƒƒ Innovative and non-traditional products and segments like AIF, Retirement products, offshore
products, leading to expansion of the industry
ƒƒ Improvement in customer service and access enabled by technology and investor friendly
regulations
We have partnered with McKinsey Company over the last few years to help us better understand
the key areas that can help the industry grow further. Unlike earlier, when we had an Industry Report
by McKinsey unveiled at the Summit, this year, we have sought additional participation from Industry
stakeholders to offer their views on various themes and the way forward.
While McKinsey have given their perspective on the Asia Pacific asset management industry to
derive directional cues on where the overall industry is heading, they have also presented a paper on
the Indian asset management industry exploring how the penetration of mutual fund products could
be increased in line with some of the other financial asset classes in India.
Apart from these two papers, we have a paper on Product classes—is the market ready for
alternatives and passives, contributed by Mr. Aditya Agarwal, Managing Director, Morningstar
India. This paper analyzes the potential growth of non-traditional products like ETFs, Portfolio
Management Services, Alternative Investment Funds, retirement solutions and offshore products.
We also have a Paper on Implications of Digital and Analytics across the retail business value
chain, by Mr. V Ganesh, CEO, Karvy Computershare Pvt Ltd. This paper takes a look at how digital
will impact the MF business and the operating model of asset managers and what opportunities exist
to further differentiate in this ‘new normal’ of growth.
Thereafter, we have an article on Deepening penetration – how to drive inclusion contributed by
Ms Monica Halan, Consulting Editor at Mint, HT Media. This article takes a close look at the growth

6. 2 Growth in the Indian asset management industry—Is there a new normal?
potential of India’s smaller towns, given the Government and the Regulatory initiatives as well as
investor education programs.
This report collates these thoughts and recommendations.
We thank our colleagues from various AMCs and RTAs for sharing their views on the industry and the
changes required. We also wish to thank McKinsey Company for being our knowledge partner and
devoting time and resources to this initiative. Finally, we thank the Ministry of Finance and SEBI for
the tremendous support they have extended to us over the years.
Leo Puri
Chairman
CII Mutual Fund Summit

7. 3Growth in the Indian asset management industry—Is there a new normal?
The Asia-Pacific (APAC) region has been a major driver of the global asset management (AM) industry
growth in recent years. The industry is currently confronting a ‘paradox’ with business growing but
profits down. In this article, we review the dynamics at play and look at emerging trends and their
implications on what asset managers can do to sustain profitable growth.
Significant growth in assets under management
In 2016, the global asset management industry had another record year of growth, touching USD 76
trillion in assets under management (AuM). The APAC AM industry performance was similar, with
year-end assets under management at a record USD 13 trillion. The industry enjoyed a healthy
growth of 11 percent in 2016, building upon a strong momentum of 8 percent of average net inflows
over the previous three years. This was driven by strong flows in China money market funds, double
digit growth in emerging Asian countries and strong capital market performance across many
geographies. However, even at record levels, these managed assets translated into only around
11 percent of the total financial assets in the industry, offering significant opportunity to tap into the
unmanaged assets across the region (Exhibit 1).
APAC AuM reached a record USD13 trillion in 2016, and could grow further, especially in the
institutional segment
USD trillion, year-end 2016
SOURCE: McKinsey Performance Lens Global Growth Cube
1 Includes all countries from Developed Asia
Breakdown of APAC1 financial assets
Percentage of
total financial
assets
Retail
13
Total
financial
assets
5
Institutional/
DC
8
Institutional
unmanaged
assets
Managed
by asset
managers
69
Retail/HNW
unmanaged
assets
113
31
+11% AuM growth in 2016;
+85% AuM growth since 2007
Exhibit 1
7%11%89% 4%100%
Profit pools under pressure
The strong growth in AuM did not translate into a similar increase in profits as traditional managers
came under pressure on revenue margins and did not address costs vigorously. Several factors
impacted revenue margins, including fee pressure, renegotiation of existing contracts, intensified
price competition and a shift of the product mix towards fixed-income and multi-asset solutions at
the expense of equity. Given these factors, profits in APAC AM fell by 4 percent in 2016. (Exhibit 2)
Asia Pacific asset management –
Is the growth sustainable?

8. 4 Growth in the Indian asset management industry—Is there a new normal?
Asian profit pools are under pressure
SOURCE: McKinsey Performance Lens Global Growth Cube
164146111100
181
181188157
116100
224213189
151
100
2007 1511 201614
1 Includes countries contributing to 97% of global AuM
8.9
-4%
40.5 54.9 52.5 52.4 50.1
xx Average AuM, traditional assets – USD tn
x% Profit pools growth (2015–16)
X Profit margins
xx Absolute profit pools – USD bn X Revenue margins
▪ Fee pressure and
renegotiation in
current volatile
landscape
▪ Intensified price/
fee competition for
net flows
▪ Accelerated flows
through lower fee
direct channels
▪ Product mix shift from
active equity to fixed
income and multi asset
▪ Increased cost
spending on IT,
compliance and Risk
Profit
pools
Average
AuM
Revenue
pools
~19.1
21.2 22.2 22.8 24.3 21.2
Exhibit 2
Profit pools indexed to 20071; Traditional AuM (ex-alternatives)
This made 2016 a watershed year for the APAC AM industry. Historically, profits have almost
always grown with AuM. For the first time, APAC AM seemed to not benefit from economies of scale.
The evolving regulatory landscape and changes in customer behaviour may put further pressure on
profitable growth.
Three predominant dynamics observed across the industry
APAC driving global flows
Although APAC accounts for only about 17 percent of global AuM, it has been the dominant driver of
the industry’s net flows. Over the past five years, APAC has provided 44 percent of global net flows
(Exhibit 3).

9. 5Growth in the Indian asset management industry—Is there a new normal?
38,062 298 Developed
Asia3
21,948
Emerging
Asia2
1,748
SOURCE: McKinsey Performance Lens Global Growth Cube
Asia accounted for 17% of global AuM but 44% of global net flows over the past 5 years
1 Includes all countries from North America, Western Europe, CEE, GCC, Developed and Emerging Asia, Africa and LATAM
2 Emerging Asia: high inflows in 2012–15 driven by money market funds in China; 3 Developed Asia includes Japan and Australia
4 Emerging markets include CEE, LATAM, GCC, Africa and Emerging Asia; Note: Any differences in sums due to rounding
-162
1,451
471
2,306
464
362
1,849
184 66
35
-1
346
1,321
2016 AuM, USD bnxX 2012–16 net flows X 2016 net flows
7,212
1,085
430
2,133
Exhibit 3
76,461
10,033
2012–2016 net flows by region1, USD bn, includes money market
Central/
Eastern Europe
Latin
America
Middle East/
Africa
North America W. Europe Global
Emerging
markets4
6,419
6,422
1,564
While global flows were positive, growth varied significantly across and within regions (Exhibit 4).
Within APAC, emerging Asia registered higher positive net flows, compared to developed Asia.
Significant differences also showed up between retail and institutional AM, and across products.
Retail saw strong flows in fixed income (60–70 percent of fixed income flows were driven primarily by
global fixed-income products such as investment-grade bonds), and also in alternatives and multi-
assets (driven by private banking mandates). With concerns about low yields and increasing market
volatility, investors pulled out of active equities. Institutional AM also saw capital flowing into fixed
income and an increased demand for passive equities.

10. 6 Growth in the Indian asset management industry—Is there a new normal?
Flows stronger out of emerging Asia
SOURCE: McKinsey Performance Lens Global Growth Cube
10
-2-1
72 7
14
3
15
7 5
27
03
36
51013
11711 915 12
0
18911814
Net flows as percent of BoY AuM x 2016 AuM, USD bn
1,783Australia
4,489Japan
3151China
233Malaysia
42
Indonesia
412
India1 3
17
8863
142013 InstitutionalRetail201615
1 Includes pension investments
Exhibit 4
Barbell shift of portfolios (active/passive rebalancing)
A second dynamic observed globally is the barbell shift of portfolios from active to passive offerings
and solutions/alternatives at the two ends of the spectrum. This trend is starting to emerge in APAC
as well, but is not as dominant, given the existing opportunities to generate alpha from traditional
active portfolios. While passives have not yet gained a substantial share in the APAC landscape,
there is a shift towards multi-assets and alternatives as investors look for higher yielding solutions
(Exhibit 5). In APAC today, traditional active managers can still differentiate themselves if they can
generate true alpha across portfolios.

11. 7Growth in the Indian asset management industry—Is there a new normal?
Passives are growing in APAC, but actives still dominate the landscape
SOURCE: McKinsey Performance Lens Global Growth Cube
Western Europe North America
2.7 6.9 4.1
11.6 21.5 5.9
6.0 9.3 2.8
APAC
Multi-asset
and
alternative
0.6
1.1
Passive
total
0.3
Traditional
active1 -2.0
1.9
1.5
2.0
0.4
0.7
1 Includes Equity, FI and money market
AuM 2016xx
Total net flows as share of AuM
Strong Medium Limited Negative
Exhibit 5
Cumulative net flows by region, 2012–16, USD trillion
Rising cost pools across the region
A third dynamic that is playing into the trade-off between growth and profit is the cost factor. Despite
strong growth in AuM, operating cost margins actually rose from 28.1 bps in 2015 to 28.9 bps in
2016, while total costs grew by 14 percent year-on-year. Portfolio management and research were
more effective at controlling costs than other functions—their cost margins declined (Exhibit 6),
as did their total costs (Exhibit 7). The question this raises for AMs today is whether we are
underinvesting in our investment management engine which is the key to our success. Technology
and operations costs rose as firms spent more on application development and infrastructure,
in part, to keep up with increasing compliance and regulatory requirements. Management and
administration costs also rose, as AMs added staff in legal and compliance.

12. 8 Growth in the Indian asset management industry—Is there a new normal?
Cost margins rose in most firm functions
SOURCE: 2017 McKinsey Asia Asset Management Survey
Bps of Average AAuM
5 6
2
8
9
12
10
2
2
1
28
Asia – 2015 Asia – 2016
29
Operations
Management and Admin and OtherInvestment Management Technology
Sales and Marketing
Change in operating cost
BPS of AAuM
2.7
0.8
1.3
0.2
1.2
Asia Pacific operating cost
Exhibit 6
Increase in cost driven by
“legal compliance” and
“management executives”
Increase in cost due to
increased expenditure on
“application development
and infrastructure”
Decrease in cost across
Portfolio Management and
Research driven by the
base effect
Absolute costs rose considerably, as firms search for efficiency of scale
SOURCE: 2017 McKinsey Asia Asset Management Survey
17
24
9
28
34
44
38
8
9
Asia – 2016
114
14% p.a.
Asia – 2015
100
3
Investment Management Management and Admin and OtherTechnology
OperationsSales and Marketing
Asia Pacific operating cost pools
Growth in cost
pools, Percent
13
22
172
21
38
Exhibit 7
Indexed to 100

13. 9Growth in the Indian asset management industry—Is there a new normal?
A positive outlook, with downside risk
Despite pressure on economics, the next few years still look positive, with growth momentum
continuing in AuM. Two growing asset pools offer significant opportunity—the accelerating shift of
personal financial assets into investment products and increased outsourcing from institutional
investors. Personal investment is primarily driven by a new generation of entrepreneurs and first
generation family offices. Institutional investment is benefiting from pension funds and insurance
companies outsourcing to third party asset managers in search of higher yields.
However, changing client demands, including a push for a solutions-oriented platform, and
regulatory volatility present dark clouds on the rosy outlook. More specifically, five secular trends are
shaping the APAC AM industry and challenging the sustainable growth momentum, with significant
implications for winning or losing out in this space.
ƒƒ End of the era of supernormal returns. Gone are the days when alpha generation was a given.
Asset managers find it increasingly challenging to match their previous performance and beat the
benchmarks. Research from McKinsey Global Institute (MGI) indicates that developed market
returns of the past three decades have been a historical anomaly and that the macro trends
fueling these returns are all fading to some degree. The result will be a decline in average returns
for equities of 150 to 400 basis points and of 300 to 500 basis points for fixed-income assets.
ƒƒ A new product ‘barbell’. Passives are attracting more attention globally due to the lack of
significant alpha production by higher-cost active strategies. At the other end of the spectrum,
demand for alpha to meet the increasing yield and asset liability gap is redirecting institutional
flows into non-traditional asset classes. Alternatives and multi-asset solutions will likely benefit
most from this trend, as private banks and institutional investors allocate more to these assets
and issue mandates to third-party asset managers due to a shortage of in-house capability and
scale advantage of external managers.
ƒƒ Greater complexity in distribution. Omni-channel access is becoming a reality, both globally, as
well as in APAC. Traditional channels are ceding some space to more fragmented direct and digital
channels. Regulators across APAC have been loosening restrictions on digital distribution and
coming up with new guidelines on digital advisory services, e.g., Malaysia has a digital investment
framework and Singapore has proposed easing regulations to facilitate digital advisory offerings.
In both cases, regulators want to act in the best interest of customers, as they seek to lower the
intermediary industry’s reliance on commissions and increase fee transparency for investors.
ƒƒ A shift to a solutions mindset. Almost gone are the days of the ‘flavour of the month’ product
pitch. Investors now desire thought partnerships with their managers to help identify gaps in
their investment portfolio returns and liability matching while keeping Value at Risk (VaRs) in line.
To that end, it is about bringing together capabilities from within the AM line-up to create solutions
to fill these gaps. It is imperative for asset managers to shift from a ‘relative return’ approach to
‘outcomes’ and build a consultative mindset.
ƒƒ Mainstreaming of data, digital and analytics. Applying advanced analytics to collated traditional
and alternative datasets is proving to be a key source of new insights into investor behaviour, and
allows managers to target investors with relevant investment ideas. This ‘front-end’ application is

14. 10 Growth in the Indian asset management industry—Is there a new normal?
one of the most prominent uses of analytics, but there are many more. Analytics and digital can
be usefully applied across the value chain of the business to reduce costs and improve decision
making.
Implications for AMCS
As these five trends take root, APAC’s asset managers may find the industry landscape materially
reshaped. To ensure sustainable and profitable growth, asset managers can consider some pressing
questions and come up with a clear agenda for growth:
ƒƒ What is our true source of competitive advantage? How resilient will it be in the face of significant
change, and is it unique compared to our peers?
ƒƒ Are we identifying pockets of growth within the APAC landscape? Emerging markets (including
China) are becoming more prominent. To succeed, managers will need a thorough understanding
of local nuances coupled with strong brand identification.
ƒƒ Do we have a solution-oriented mindset? Managers need to build specialized capabilities to
deliver solutions to all sort of problems like liability-matching and risk overlays. Do we have the
right capabilities in alternative asset classes or do we need to acquire these? A ‘one solution’
approach does not work given the differentiated needs across client segments.
ƒƒ Do we have the digital proposition needed for omni-channel distribution? Asset managers need
compelling digital marketing skills, efficiency enabling advisory tools, dynamic pricing skills, and a
robust operations architecture.
ƒƒ Have we fully realized economies of scale and managed costs in an environment where revenue
is under pressure? Firms need to manage costs across the business while producing operating
leverage on the investments required to step up to the new demands on the industry.
  
Asset managers in APAC must be cognizant of the short-term dynamics currently at play in the AM
industry and emerging trends and their implications. Preparing now can lead to a win in the longer
term.
The authors thank Gunashrit Nag and Vidushi Sathoo from our McKinsey India office for their
invaluable contribution to this report.
The authors will like to acknowledge Punita Singh for editorial contribution and Pradeep Rawat for
design support.
Peeyush Dalmia
Partner
McKinsey Company
Vishal Kaushik
Expert
McKinsey Company
Anu Sahai
Senior Expert
McKinsey Company

15. 11Growth in the Indian asset management industry—Is there a new normal?
The Indian asset management industry has registered strong growth, driven by robust capital
markets and record equity flows in the industry. This impressive AuM growth has also translated
into surge in profitability over the last three years, with record levels of profit pools in FY 17. Is this a
new normal of profitable growth, or this is a short-term phenomenon which will be challenged by the
evolving industry landscape?
Record growth of assets under management and profits
The Indian mutual fund market witnessed a substantive asset growth of 113 percent in the last
three years (FY 14 to FY 17), driven by a combination of strong inflows (62 percent) and market
performance (50 percent) (Exhibit 8). This is unheard of in other global markets and is primarily
driven by strong equity markets and positive alpha generation in the industry. This also highlights
a very important difference in the Indian industry versus other global markets where passives have
been gaining significant share in the AuM mix, given the challenges associated with sustainable
alpha generation.
AuM growth driven by positive flows across both retail and institutional segments;
strong performance effect in institutional segment
23051221342
70
100
Net
inflows1
Mar 17 Sept 17Perfor-
mance
effect2
Net
inflows2
Perfor-
mance
effect1
Mar 14
218
100
Net
inflows
Perfor-
mance
effect
Mar 17
+38
+80
Mar 14
208
100
+61
Mar 14 Mar 17Perfor-
mance
effect
Net
inflows
+46
Overall AuM
Retail AuM
Institutional AuM
Indexed to Mar 14 Institutional AuM
Indexed to Mar 14 retail AuM
1: Indexed to Mar 14 total AuM
2: Indexed to Mar 17 total AuM
SOURCE: McKinsey India Asset Management Survey
Exhibit 8
Mutual fund assets have grown at a much faster rate of 26 percent (CAGR 2013–17) outpacing the
growth associated with bank deposits and life insurance assets (Exhibit 9). Despite this, mutual
funds still make up only 5 percent of personal financial assets (Exhibit 10) offering ample opportunity
for growth.
Growth in the Indian asset manage-
ment industry – Is there a new normal?

16. 12 Growth in the Indian asset management industry—Is there a new normal?
Mutual fund asset growth outpacing other financial segments
SOURCE: AMFI; IRDA; RBI
45
20
Bank
deposit
Life insurance
AuM
24
MF AuM
17
7
18
26
13
11 100,927
25,021
17,546
Absolute value
(INR bn)
xx
2003–08 2008–13 2013–17
Exhibit 9
Growth CAGR; Percent
Low MF AuM in total personal financial assets compared to pension, insurance and bank
deposits, but improving over time
SOURCE: AMFI; IRDA; RBI; Global banking pools
53.2
MF AuM 3.2
Discretionary
pensions
10.4
Life insurance 15.0
Bank deposit
8.6
14.7
3.3
55.8
12.9
8.4
4.0
55.6
8.0
4.3
57.0
12.9
2011 2013 2014 2015 2016
13.3
8.3
55.3
5.0
Share of assets over personal financial assets; Percent
Exhibit 10

17. 13Growth in the Indian asset management industry—Is there a new normal?
Unlike APAC, strong growth in assets has resulted in growth in profits as well. The industry profit
pools are at an all-time high of around INR 64 billion as of FY17. Over the last three years, the industry
has registered profit margins at 35 bps of Average Assets under Management (AAuM) compared to
2o bps in FY 13 (Exhibit 11).
The Indian mutual funds industry continues to grow at high profit margins
SOURCE: McKinsey India Asset Management survey
Cost 41 33 31 28 -1331 -3
Profit 20 25 35 35 1537 -2
61 58 66 62 168 -6
FY 13 FY 14 FY 15 FY 17
Change
in margins
(FY 13–17)FY 16
Revenue
Change
in margins
(FY 16–17)
Exhibit 11
Basis points based on average AuM
The increase in profitability is driven by a combination of increase in revenue margin (driven by higher
equity in the mix) as well as a decline in cost margins, given scale benefits. (Exhibit 12)

18. 14 Growth in the Indian asset management industry—Is there a new normal?
34.9
29.6
25.1
Profitability
– FY 14
Change in
revenue
+4.4
Fund mgmt
cost change
0.32.6
MBO/IT
cost change
Sales
Marketing
cost change
Profitability
– FY 17
2.5
Profitability
with no
change
in cost
The increase is driven by decline in cost margins and supported by
increased revenue margins
SOURCE: McKinsey AM benchmarking
19.6 36.7
xx Corresponding
values for
previous year
▪ Increase in revenue primarily driven by
uptick in equity share in the AuM mix
– Equity and balanced share up by ~11%
▪ The uptick in revenue was contained by
– Drop in retail share by 2.4% to ~50%
– Pressure on fees
▪ Decline in cost margins by ~5 bps
primarily driven by reduction in sales and
marketing (2.5 bps) MBO/IT (2.6 bps)
▪ Fund management cost remained stable
with a marginal decline of ~0.3bps
Exhibit 12
Basis points
Can this new normal of profitable growth be sustained?
The outlook for the industry is positive, but there are challenges that need to be addressed to
ensure sustained profitability. The magnitude of changes underway in Indian asset management will
demand a prompt response from the industry. To win in this new environment asset managers will
need to revisit their business models and reimagine their value proposition amidst six key structural
trends. These trends and challenges that are shaping the market are discussed below, with potential
implications for players and asset managers.
Six key trends
Maturing wealth pools
With low penetration of mutual funds in personal financial assets (PFA), there is tremendous
opportunity to educate investors and move financial deposits into investment products as financial
wealth grows, with a significant increase in the number of high net worth individuals (HNI). The HNI
and Ultra HNI segments constitute nearly 35 percent of the total wealth in the country as of 2016, up
by 12 percent from 2013 to 2016. The growth in HNI and Ultra HNI is expected to exceed historical
growth, with a forecast of nearly 17 percent (CAGR 2016–2021), reaching USD 1,500–1,800 billion
in wealth (Exhibit 13).
It is imperative for asset managers to have multi-channel accessibility for investors with higher
face-time for UHNI and HNI investors, specifically through private banking mandates. Strategic tie-
ups with top private banks and wealth brokerage houses are the key to success in this segment

19. 15Growth in the Indian asset management industry—Is there a new normal?
with differentiating products. The retail segment with increasing share of ‘DIY’ investors will need
a direct/digital model which is easy to access and understand with clear and simple investment
language and targeted communication to enhance trust.
HNI+ segment in India contributes to ~35% of total wealth (USD 700–800 billion), and is
expected to grow to nearly USD 1,500–1,800 billion by 2021
SOURCE: Global banking pools; team analysis; Industry wealth reports; EIU interviews
1 Estimated on the basis of liquid onshore PFA (including NRI money, excluding life insurance and pension, real estate, commodities, share-holding)
2 Expert conversations
530
17%
12%
1500–1800
20212013 2016
700–800
Mass affluent
and below
Affluent
HNI
UHNI
1,900
~300
~550
~150
Total
5
1, 5
0.1, 1
0.1
230K
~1,500
~900~229K
~15
~100
USD mn
Wealth1
‘000 USD bn
# of HH
Total wealth,
2016
USD bn
HNI+ UHNI wealth market
Exhibit 13
Strong alpha generation
Active equity has been one of the key factors for strong AuM growth. The percentage of MF AuM
beating the benchmark in excess of 5 percentage points over ten year period is around 62 percent
compared to around 46 percentage over a one year period (Exhibit 14). The share of equity in
the overall AuM mix has increased by 13 percent from FY 13 to 37 percent in September 2017.
The positive mood is likely to continue into FY 18, with the equity market attracting continued inflows
driven by the strong market performance in the first half of FY 18. The equity segment already has
record flows of INR 76 billion in the first half of FY 18, higher than the total net flows of INR 60 billion
in FY 17. The key question to address is if this alpha generation is sustainable over the longer term
and if consumer sentiment towards equity will hold up as the market inevitably corrects.

20. 16 Growth in the Indian asset management industry—Is there a new normal?
Mutual funds in India have historically been able to generate sustainable alpha
46
95 96
62
38
54
10 year5 year
5
3 year1 year
4
% MF AuM with returns equal to/less than Sensex+5%
% MF AuM with returns Sensex+5%
11% 13% 8% 9%
xx% Sensex returns1
Sep 20161, %
1 Returns as of 23rd September, 2016
2 Alpha returns assumed as Sensex + 5%
SOURCE: AMFI; team analysis; Value Research; Simfund Database
Exhibit 14
Equity MF AuM – proportion of alpha2 funds vs. others
SIPs becoming a sustainable vehicle for investments showcasing continued growth
Systematic Investment Plans (SIPs) have become a primary vehicle for equity investments as they
gain a larger share in the overall industry net flows. Indian mutual funds have currently about 1.73
crore (17.3 million) SIP accounts through which investors regularly invest in Indian mutual fund
schemes, primarily equity funds (Exhibit 15). During FY 16–17, a total amount of INR 43,921 crore
was collected through SIPs, accounting for nearly 13 percent of total industry net flows. Data from
the Association of Mutual Funds in India (AMFI) shows that the MF industry had added about 8.86
lakh SIP accounts each month on an average during the FY 2017–18, with an average SIP size of
about INR 3,250 per SIP account.
This momentum in SIP growth is primarily driven by three factors: a) increased focus and coverage
on investor education coupled with robust performance of equity markets, b) Regulator promoting
SIPs; allowed upfront commission of up to 1 percent for 3 years versus monthly commissions, and
c) increasing push by AMCs on SIP as a vehicle of investment. The key question however is availability
of enough product variety to drive the same growth momentum for SIPs, particularly if and when
equity markets underperform?

21. 17Growth in the Indian asset management industry—Is there a new normal?
High growth in SIPs driven by regulatory push, equity market performance
as well an expanding distribution landscape
SOURCE: AMFI
173.0
128.0
98.5
75.068.0
FY14 FY17FY16
+23% p.a.
FY15
+35% p.a.
Oct 17
Number of SIP accounts, # lakh
~3k ~5.5k
xx SIP value added
every month, INR cr
~4k
Exhibit 15
Digital and analytics going mainstream
As disruptive challenges reshape asset management, distribution success is increasingly important
for generating sustainable growth of revenues and profit. Distribution channels for the MF industry
have evolved considerably over the last five years. The direct channel of investment in mutual funds
has grown from around 7 percent of the retail AuM mix in FY 12 to around 13 percent in FY 17,
however direct digital, i.e., purchases made directly from an asset management company’s website
still restricted to only 2 percent of the overall retail AuM mix (Exhibit 16).

22. 18 Growth in the Indian asset management industry—Is there a new normal?
Direct digital share is still restricted to ~2% while direct channel has gained ~6% share in the
last 5 years; overall direct share at ~13% of retail AuM at the expense of traditional channels
1 Note: Numbers revised based on revised data from participants; 2 Includes prop digital direct and direct physical; 3 Includes prop and third-party banks;
4 Includes prop and third-party NDs
37.2 37.0 30.3 30.8
33.4 30.6 32.6 32.2
6.8 9.6 11.8 12.8
ND4
Others
IFA
FY 16
22.2
Bank3
Direct2
19.3
3.1 4.8
FY 17
21.5
FY 12
21.3
1.3
FY 14
1.4
Direct digital (directly through AMC website) represents ~2% of the retail AuM mix
SOURCE: McKinsey India Asset Management Survey
Retail AuM by channel1, Percent
89%
17%
FY17
11%
Offline
FY 16
Online
83%
53%
-7%
Significant decline in IFA share
in the retail channel mix primarily
driven by the increasing
pressure on economics
Exhibit 16
Growth
Percent
In a bid to promote digitalization in mutual funds, the Securities and Exchange Board of India (SEBI)
has allowed investments of up to INR 50,000 per mutual fund per financial year through e-wallets.
In addition, payments banks like the India Post Payments Bank (IPPB) will start selling mutual funds
and insurance products of other companies by early 2018 through ‘non-exclusive’ tie-ups. This
regulatory push offers mutual funds more penetration to cities beyond the top 15 (B-15) by leveraging
the expansive distribution setup of payment banks and digital distribution channels, a trend that is
likely to grow in the future.
Imminent need for product innovation
The Indian asset management market has been growing consistently, driven primarily by the equity
segment, with limited growth in alternative segments. There is a need to expand the range of
offerings to cater to evolving customer demands based on demographic and personal needs:
ƒƒ India’s population is expected to double in the next 20 years, with a rising life expectancy, making
retirement savings really important. However, the retirement portfolio in India is restricted to
employee pension funds and the recently growing National Pension System (NPS) funds. The
retirement market offers a great opportunity for asset managers to manage the large potential
corpus, making it an important segment to tap into.
ƒƒ Alternative Investment Funds (AIFs) offer another great opportunity for growth. As of June 30,
2017, AIFs had raised INR 48,128 crore, compared to INR 26,003 crore in the previous year and
INR 7,013 crores three years earlier. Assets under management by India-focused AIFs have grown
by 90 percent over the past year, thanks to the increasing interest of high net worth investors in

23. 19Growth in the Indian asset management industry—Is there a new normal?
the unique structures and themes of these funds. They also face fewer regulations than other
instruments, presenting a great opportunity to maintain the growth trajectory.
ƒƒ The discretionary Portfolio Management Services (PMS) market has witnessed tremendous
growth over the last few years. PMS AuM has increased by 85 percent (CAGR FY 13 to FY 15) and
by 31 percent (CAGR FY 15 to Sep 2017), indicating an increase in the demand for PMS products
(Exhibit 17). The share of discretionary PMS in the total industry AuM has also increased from
5.3 percent in FY 13 to around 7 percent in September 2017. The popularity of this investment
product is supported by the rising earnings for AMCs from PMS, with upfront commissions
for portfolios as high as 4.5 to 5 percent in the first year (of a 3-year lock-in strategy) for the
distributor. Many NBFCs have also started introducing PMS products to tap into the growing
market. Asset managers can also benefit from the buoyant PMS market and overcome the
competition faced from NBFCs.
The Indian PMS market has witnessed accelerated growth, with a rising share in total
industry AuM
SOURCE: SEBI; team analysis; expert interviews; press search
1 Includes debt, derivatives, MF, equity, others
+31% p.a.
Sep–17
141.1
111.1
68.2
FY16
+85%
FY17
76.1
FY13 FY15
36.9
▪ ~7% of the industry AuM is in PMS
products
▪ Strong growth over the last 4 years
driven by
– Regulatory push: Mutual fund
commissions regulated by SEBI;
push towards direct MFs
– Strong market sentiment and
significant alpha generation
– Rising earning for AMCs from
PMS, wherein, out of the top 5 asset
managers in terms of fees from
PMS, four have seen earnings
increase by at least 50% in FY16;
out of which two have seen an
increase of more than 100%
Exhibit 17
Discretionary PMS AuM1
INR ‘000 cr
Cost optimization to achieve efficiency of scale
Cost margins have substantially declined in the industry over the last 5 years, from 41.6 bps in FY 12
to 27.5 bps in FY 17 (Exhibit 18)

24. 20 Growth in the Indian asset management industry—Is there a new normal?
The industry has witnessed significant reduction in cost margins across all the functions
16.4
11.3 10.4 8.7
4.9
4.0
18.4
17.2 15.7
14.8
4.3
6.8
32.9
FY 12 FY 14
31.0
41.6
FY 16
Fund
management
27.5
IT Middle/back
office
FY 17
Sales and
marketing
Operating cost1, basis points of AuM, FY12–FY17
SOURCE: McKinsey India Asset Management Survey
1 Numbers may not add up due to rounding differences
-7.7
-3.6
-2.8
-14.1
-0.9
-0.9
-1.7
-3.5
▪ Decline in cost margins primarily driven by the scale effect
▪ Absolute cost has increased across all the function but given the significant AuM growth in
FY 17 the industry registered decline in cost margins
Exhibit 18
Difference in
cost margins
FY12–FY17
Bps
Difference in
cost margins
FY16–FY17
Bps
The reduction in cost margins did not translate into reduction in absolute cost pools implying
lack of efficiency of scale; cost pools up by 26% in FY 17
47 55
44 51
70
94
39 34
26
22
138
FY 14FY 12 FY 16
13
98
16
100
FY 17
Sales and
marketing
175+20% p.a.
IT Middle/back
office
Fund
management
SOURCE: McKinsey India Asset Management Survey
1 Numbers may not add up due to rounding differences
Cost margins
bps
41.6 32.9 31.0 27.5
Exhibit 19
▪ ~40-50% of industry cost pools are attributed to personnel cost; SM (~54%) and IT/MBO
(~32%) being the biggest components
▪ Salaries comprise of ~75% of personnel costs and rest of the 25% are going into
commission, bonus and options
Operating cost pools1, indexed to FY12
40%
113%
56%
75%
34%
17%
19%
26%
FY 12–17 FY 16–17
Growth in cost, %

25. 21Growth in the Indian asset management industry—Is there a new normal?
However, if we look at the absolute cost pools for the industry, there has been a 20 percent annual
growth in the same period (Exhibit 19). The largest growth in cost pools has been across Sales and
Marketing, followed by Fund Management. Interestingly, the increase in cost across MBO/IT has been
contained, compared to other sub-functions, despite the substantial interest in digital channels and
upgrading of platforms to align with new risk and compliance measures. Continued cost discipline will
be key to sustained profitable growth.
  
The mutual fund industry in India has grown exponentially and has the potential for significant
growth going forward. Improving market sentiments, customer awareness, penetration and record
inflows into equity and ETF segments present a positive outlook for growth. With digital payments
made easier in the effort to create a cashless economy, and rural and semi-urban populations more
included financially, there is potential to create specific products to suit the needs of new investors
while catering to the changing needs of incumbent investors as well. A few challenges remain, but
through concerted action across stakeholders (players, distributors and regulators) a new normal can
be created in the industry.
The authors thank Gunashrit Nag and Vidushi Sathoo from our McKinsey India office for their
invaluable contribution to this report.
The authors also acknowledge Punita Singh for editorial contribution and Pradeep Rawat for
design support.
Peeyush Dalmia
Partner
McKinsey Company
Vishal Kaushik
Expert
McKinsey Company

26. 22 Growth in the Indian asset management industry—Is there a new normal?

27. 23Growth in the Indian asset management industry—Is there a new normal?
The Indian asset management industry appears to be witnessing a historic inflection point. There has
been a perceptible shift in investor preference from real estate and bank fixed deposits towards
mutual funds, starkly evident post demonetization. From November 2016 to October 2017, equity
funds have received inflows of INR 1.35 lakh crore and balanced funds have received INR 74,000 crore.
While the Indian investor is moving in the right direction, there is a lot more ground that needs to be
covered. A recent report on household savings by the central bank reveals that the average Indian
household holds 77 percent of its total assets in real estate, 7 percent in durable goods, 11 percent
in gold, and a minuscule 5 percent in financial assets. In contrast, households in advanced economies
favour financial assets, particularly retirement savings. Compare the Indian scenario with Australia
and the UK where retirement assets account for 23 percent and 25 percent of wealth, respectively.
Distribution of household savings across different asset classes in 2016
100%
60%
80%
0%
20%
40%
Australia GermanyUS UKChina ThailandIndia
Durable goods
Real estateRetirement accounts Gold
Financial assets
Assets
SOURCE: RBI report of the household finance committee
Exhibit 20
Another interesting trend is the gradual emergence and acceptance of specialized products such as
exchange-traded funds (ETFs), portfolio management schemes (PMS) and alternate investment funds
(AIFs), tailored for high net-worth individuals (HNIs) who possess an above-average risk appetite and
look for diversification beyond plain vanilla equity and fixed income products.
Getting active in passive — a global trend
John Bogle, founder of Vanguard Asset Management, faced serious criticism when he launched the
first passive fund in 1975. Decades later, he stands vindicated.
In 2016, index funds in the U.S. pulled in USD 220 billion and passive ETFs USD 280 billion in net
flows. During 2012–16 and 2007–16, index funds generated annual organic growth of assets under
Product classes – Is the market
ready for alternatives and passives?

28. 24 Growth in the Indian asset management industry—Is there a new normal?
management (AuM) at an 8.9 percent and 8.6 percent CAGR, while passive ETFs produced 14.1
percent and 17.7 percent annual rates of organic growth, respectively.
From USD 417 billion in 2005, Global ETF assets touched USD 4.4 trillion in September 2017,
a growth of 21 percent CAGR. Going ahead, estimates suggest that global ETF assets are set to
touch USD 7.20 trillion by 2020.
There could be many explanations for this global trend. The shift towards self-directed retirement
savings, low yields, regulatory efforts around suitability and value for money, and digital disruption all
contribute. But the prime causes fueling this trajectory are cost effectiveness of ETFs and shrinking
alpha by active funds.
It is a well-documented fact that costs eat into returns. As on 2016, the expense ratio of actively
managed U.S. funds was 0.63 percent, whereas index funds charged a meagre 0.09 percent.
Morningstar research shows that failure of performance tended to be positively correlated with
fees—that is, higher-cost funds were more likely to underperform or merged away, and lower-cost
funds were more likely to survive and enjoyed greater odds of success.
Actively managed US large-cap equity funds, which represent 75 percent of the AuM invested in
active US equity funds and make up most of asset managers’ equity AuM, have struggled to beat
their benchmarks over the past decade. At the end of June 2016, less than 10 percent and 15
percent of active large-cap managers were outperforming their benchmarks over the previous 5- and
10-year time horizons, respectively.
Further, new strategies like factor-based investing or smart beta ETFs as they are called, are giving
active funds a run for their money. These new-age ETFs combine both active and passive methods
of investing by looking at factors such as earnings, low volatility, return on equity and dividend yield
through custom-built indices. To latch on to this trend, active managers are increasingly employing
passive funds in constructing their portfolios. Since 2006, the number of actively managed
US-domiciled mutual funds (mostly asset allocation funds) that hold at least one ETF has more than
doubled. From the launch of the first generation of these ETFs in 2000, their collective AuM had
grown to USD 636 billion in 2017.
We foresee that performance and fees will dictate future distribution. The US Department of Labor’s
fiduciary rule has put fees and performance under greater scrutiny. Broker-dealer and advisory
networks are already culling platforms of poorer-performing (and higher-costing) products, and fees
have come under pressure.
In India, active managers continue to shine
While passive funds/ETFs are growing at the cost of active funds globally, in India active managers
continue to shine. For a long while, Indian active funds have continued to outperform their
benchmarks with a healthy margin. Actively managed equity funds received net inflows of INR 96,358
crore in the current fiscal up to October 2017. The corresponding figure for ETFs is INR 8,893 crore
and they manage merely INR 65,123 crore.

29. 25Growth in the Indian asset management industry—Is there a new normal?
Are ETFs in India cost effective? Of course. ETFs which track the broader indices like the Sensex and
Nifty, charge 0.05–0.10 percent annual total expense ratio (TER) whereas that of actively managed
equity funds can go up to 3.0 percent. Yet, they fail to attract investors, because of the alpha
generated by active fund managers.
Looking ahead, what would work for the ETF market?
As the stock market matures and develops, the alpha-generating capabilities of large-cap funds could
diminish. In such a situation, the cost-effective ETF would score. Neither can we underestimate the
impact of changing benchmarks. Morningstar compared the alpha generated by large-cap funds over
the broader market benchmark, both on Price Return Index (PRI) as well as Total Return Index (TRI).
Over a 5-year basis, the TR of the SP BSE 100 is 165 bps p.a. higher than the PR. As expected, the
number of funds beating the benchmark dropped from 85 to 58 percent after making a comparison
with the TRI instead of the PRI.
The popularity of ETFs will also grow as the government divests its holdings in public sector
institutions through this route. Reliance CPSE ETF mopped up INR 11,500 crore over three tranches.
ICICI Prudential Bharat 22 ETF received bids of INR 32,000 crore on an issue size of just INR 8,000
crore with a green shoe option.
Worth noting is that since 2015, the Employees’ Provident Fund Organization (EPFO) has started
investing a part of its incremental corpus in ETFs, which totals over INR 32,000 crore thus far. This
gives the category a boost.
Offering tax benefits to ETFs, on the similar lines as the equity linked savings schemes (ELSS), would
definitely make this product attractive.
Portfolio Management Schemes (PMS)
With a minimum ticket size of INR 25 lakh, this is targeted solely at HNIs. While SEBI came up with
regulations in this area way back in 1993, the growth in PMS assets has been gradual. According
to SEBI data, PMS assets (excluding EFPO corpus) have grown from INR 1.36 lakh crore in 2010
to INR 4.34 lakh crore as on October 2017. Compare that with the US, where industry estimates
suggest that separately managed accounts are worth USD 4.6 trillion.
In the Union Budget 2015-16, Section 9A was inserted in the Income Tax Act, 1961 to provide a
‘safe harbour’ to overseas funds availing fund management services from Indian-based managers.
Subsequently, SEBI relaxed certain provisions of the PMS regulations: high-water mark principle
regarding calculation of fees, reporting, disclosure of fees, etc. This made it easier for foreign fund
managers to enter India.
The PMS structure offers HNIs flexibility and customization to suit their investment preferences, such
as investing in highly concentrated portfolios or structured products, among others. SEBI regulations
do not prescribe any scale of fee to be charged by the portfolio manager to clients. Unlike mutual
funds, this gives a leeway to managers to charge a fixed fee or a return-based fee, or a combination
of both, by entering into an agreement with clients.

30. 26 Growth in the Indian asset management industry—Is there a new normal?
PMS providers can take a free call on the quantum of commissions paid to distributors. We don’t
doubt the need to incentivize distributors, but believe that it’s equally important to bring in checks
and balances (perhaps a cap on commissions) to prevent mis-selling.
Operational ease would also go a long way in helping the segment to grow. For instance, investors
today need to open separate bank and demat accounts to avail the services of a particular PMS
provider, thus having to open as many bank/demat accounts as the number of schemes invested.
Removing these operational bottlenecks would help investors as well as service providers.
It is worth noting that obtaining a PMS license is far easier compared to setting up a mutual fund.
The net worth requirement for PMS is INR 2 crore whereas mutual funds need INR 50 crore to start
their business.
Alternate investment funds (AIF)
With a minimum ticket size of INR 1 crore, AIF regulations came into existence five years ago,
replacing the SEBI (Venture Capital Fund) Regulations, 1996.
AIFs are spread across three categories.
Category I: Infrastructure funds, social venture funds, venture capital fund, small and medium
enterprises (SME) funds.
Category II: Real estate funds, private equity funds (PE funds), funds for distressed assets.
Category III: Private investment in public equity (PIPE) and hedge funds.
Flexibility and an opportunity to tap unlisted companies and high-yielding real estate through venture
capital funds or the private equity route is attracting HNIs towards these instruments.
Tailored for HNI investors looking for differentiated strategies, AIFs are growing in number and size.
In the past year, commitments raised by AIFs have increased by almost 80 percent from INR 65,013
crore to INR 1.16 lakh crore. Pass-through status accorded to categories I and II have helped AIF
players raise a significant amount of funds. Pass-through status means capital gains are taxed at the
hand of investors and not the funds.
There were 288 players in the AIF space who had raised commitments worth INR 1.16 lakh crore as
on September 2017. Of this, Category I and Category II AIFs together collected INR 93,428 crore or
80 percent of total commitments.
While HNI’s overall allocation towards AIFs continues to be in single digits, far lower than the global
average of 20 percent, it is expected to increase going further as the wealth creation story unfolds
in India.
We believe the emergence of institutionalized investment opportunity in the form of Real Estate
Investment Trusts (REITs) could be an ideal alternative for retail investors wanting to invest in real
estate. REITs can offer investors liquidity as well as diversification through participating in different
assets like commercial office, shopping malls, office buildings, warehouses and hotels. A recent

31. 27Growth in the Indian asset management industry—Is there a new normal?
report shows that REITs in Japan, Australia and Singapore are yielding 370–450 bps above their
10-year government bonds.
Retirement funds
Households in advanced economies have substantial investments in retirement products.
Retirement assets account for 23 percent and 25 percent of wealth in Australia and the UK
respectively, while in India it forms a minuscule portion of wealth.
Indian households need to be educated to save for retirement from an early stage. Salaried
individuals are made to compulsorily save a portion of their income towards building a retirement
corpus which is done through either the Employees Provident Fund (EPF) or the National Pension
System (NPS). However, self-employed and workers in the unorganized sector hardly save for their
retirement.
Investor education, simpler products and additional tax incentives for investing in retirement plans
would play a significant role in channelizing household savings to capital markets. The 401(k)
in the US is the most common defined-contribution retirement plan where employees can make
contributions on a pre-tax basis (before taxes are deducted from paychecks). Around 65 percent of
first-time mutual fund investors in the US have invested through retirement plans such as 401(k).
Equities should form the core of a retirement corpus and the EPFO has taken the right step of
investing 15 percent of its incremental corpus in ETFs. The Pension Fund Regulatory Authority
(PFRDA) is also reportedly looking to provide more aggressive options within NPS, such as life-
cycle funds, and increasing the equity exposure limit from the current 15 percent to 50 percent for
government employees. Private sector NPS subscribers can invest up to 50 percent in equities.
While these initiatives are laudable, we have an uphill task to make retirement funds popular in India.
According to data provided by Investment Company Institute, retirement account assets invested
in mutual funds in the US stood at USD 4.20 trillion (June 2017). On the other hand, EPFO and NPS
collectively manage less than USD 200 billion, which suggests that our country is still underinvested
in retirement funds.
The draft document of Budget 2014 mentioned uniform tax treatment for pension funds and mutual
fund-linked retirement plans. However, the Central Board of Direct Taxes is yet to give details on the
tax treatment of these plans.
Offshore funds
The easiest route for average Indian households to diversify geographically is through global funds
offered by mutual funds. According to AMFI data, this category manages assets worth INR 1,586
crore as on October 2017. These funds have witnessed continuous outflows for several years.
While the performance has been mixed, the debt fund tax status has hampered the popularity of
these funds. Bringing the tax status of these funds on par with equity funds would help re-energize
this category.

32. 28 Growth in the Indian asset management industry—Is there a new normal?
The future
The India Wealth Report, December 2016 from Karvy Private Wealth predicts that India would
have over 600,000 HNIs by the year 2025, which would mean more individuals are bound to look
at products to diversify beyond mutual funds. The market is ripe for ETFs, PMS, AIFs and offshore
products.
A thrust towards unambiguous tax rules, increased participation of institutional players in AIFs,
REITs, Infrastructure Investment Trusts, and residential and commercial mortgage-based securities,
and regulatory certainty coupled with awareness, would bode well for non-traditional products.
Aditya Agarwal, Managing Director, Morningstar India
Unless mentioned otherwise, all data is sourced from Morningstar Direct.

33. 29Growth in the Indian asset management industry—Is there a new normal?
Digital Darwinism
The digital journey has perhaps been one of the most eventful for people living in today’s world.
The kind of revolution that we see reminds us of similar and parallel revolutions that the world went
through over the last century or so.
One of the simplest ways of understanding the world we are in would be to ask ourselves a few
questions like:
ƒƒ When did we last visit the bank?
ƒƒ How many groceries, apparels, utilities and travel bookings have we ordered online in the last one
year alone?
ƒƒ When was the last time we stood in a queue for a movie ticket?
What has been the main reason for us to go online?
The answer is very simple. The single biggest factor brought in by the digital age is convenience.
The ability to understand customers and their needs and translate that into convenience through a
digital platform has propelled us to transact online.
Every sector is quickly adopting the digital platform, and certainly, the mutual funds industry is not far
behind. In fact, India has one of the highest FinTech adoption rates in the world at 52 percent, with
the largest Millennial population of over 40 crore.
Digital is the need of the hour as more and more people are exploring options that lead to convenience.
What has been achieved so far?
The mutual funds industry has opened up lot of digital options, from website-based transacting to
mobile app-based. Investors can invest in mutual funds using multiple platforms and even transact
via telephone or SMS. Today, for investors, even debit cards linked to their mutual fund holdings act
as transacting tools.
At a very young age, this industry has witnessed a lot of transformation in the digital space.
So much so that it now offers more options in the digital space than in the traditional financial
services space, like:
ƒƒ Account opening and transacting – completely online, instant and paperless
ƒƒ Aadhaar-based KYC authentication – completely online
ƒƒ FATCA/Aadhaar updation – completely online
ƒƒ Online mandates – SIP and lumpsum investments
ƒƒ Online profile changes, etc.
Apart from Mutual funds, even in the financial services space, quite a lot has happened in the recent
past. Some experts claim that demonetization has fast-tracked ‘digital’ by at least four years for
Technology and Digitization – How will it
impact the asset management industry?

34. 30 Growth in the Indian asset management industry—Is there a new normal?
India. Very clearly, post demonetization, UPI-based payments have shot up significantly. In less than
a year, both in volumes and value, these have jumped up from ‘near nil’ to 16 million transactions and
INR 4,000 crore in value per month (as on August 2017).
Aadhaar-based KYC authentication has been made easy (be it OTP-based or biometric-based).
This makes the KYC process quite simple, thus onboarding and transacting easier.
A single mandate form has helped in avoiding multiple form filling for multiple SIPs. Even this has
moved on from one physical form to a single electronic mandate.
Today, an MF investor can get his redemption payout instantly. It works just like a bank account from
which we can instantly withdraw cash.
With so many options and enhanced convenience in the MF Industry, ‘digital’ adoption has gone up.
However, the growth in the MF digital space has not been at the same pace at which this industry has
been offering new digital options. In the last one year, in terms of volume, digital transactions have
gone up from 23 to 33 percent.
What we need to do
Digital options in vernacular
Most of the current digital options seem to be available only in the English language. A large chunk of
the ‘retail’ population may not be very comfortable in filling up details in English without assistance.
The need of the hour is creating apps and websites in vernacular languages.
If investors are able to transact in their preferred language, penetration success would certainly be
higher.
Light weight, low bandwidth sites and apps
We all know that the majority of the Indian population accesses internet using their smartphones
which are 3G, 4G-dependent. One of the major deterrents to digital is the regular availability of such
services, especially in semi-urban and rural areas and the fear that transactions may not go through
successfully.
Low bandwidth and light-weight websites and mobile apps can boost investor confidence and help
digital in a big way.
Incentivize digital
To go digital, it is noticed that a push helps. Be it mandatory demat for a digital push in equity and
bond trading, or penalty levied by banks for ‘branch banking’ that forced people to explore options
online or app-based banking or demonetization to improve cashless options of making payments.
Can we explore an option of lower load to investors for digital transactions? There has to be some
motivation to investors to go the digital way.

35. 31Growth in the Indian asset management industry—Is there a new normal?
Robo advisory
This is expected to become another game changer. If an electronic tool can guide the investor
on when to invest, were to invest, how long to stay invested, etc., it can help investors take their
investing decisions easily and quickly, and that too without revealing any details about their income,
surplus funds, or risk appetite to another human being (distributor).
Robo-advisory services may play a greater role in the future, but it will take some time before
machine-based advice can replace the trust and advice currently provided by human distributors.
Ease of account opening and transacting
A survey revealed that the investing community worldwide finds related regulations to be one of the
biggest barriers in the financial sector.
Many feel that KYC is a cumbersome process and there are other regulatory requirements that keep
changing from time to time. In India itself, in the last few years, we have moved from CVL KYC, to KYC
through KRA, to CERSAI and now Aadhaar.
Many are also worried about confidentiality of their personal information and identity theft on
digital usage.
The industry should explore options to further simplify the MF account opening process. Having given
all the details to KYC once, does the investor need to provide the same details for MF investment
again and again?
In conclusion
Thinking of digital and digital growth, a few questions quickly come to mind
ƒƒ Are investors aware of all the available options?
ƒƒ If aware, do they know how these options work and how to use them?
ƒƒ Are the options really offering them the convenience they are looking for?
Finding the correct answers to these questions is very important for successful digital growth in the
MF space.
The age of Digital Darwinism is clearly here and manufacturers and distributors will need to adapt or
perish. The paradigm is being completely redefined with innovations ranging from cloud computing to
edge computing, IoT to BoT, software as a service to failure as a service, AI to cognitive computing,
and so on.
Organizations that survive the digital revolution will be the ones that invest in product and service
innovation, adopt TechFin versus FinTech, and most importantly, focus on ‘convenience’.
V Ganesh, CEO, Karvy Computershare Pvt Ltd

36. 32 Growth in the Indian asset management industry—Is there a new normal?

37. 33Growth in the Indian asset management industry—Is there a new normal?
B15 no different — the same set of rules must apply to the entire market
The spread and use of commercial products and services is usually not part of a national political
agenda. We do not see the prime minister of a country push the drinking of a cola, eating of biscuits,
driving of cars, or even the use of telephones. There has been no national mission to get people
to use toothpaste—people get to it on their own. What, then, is special about financial products
and services that the government of India has made it a mission to get Indians access to financial
products and services? The ‘Jan Dhan’ suite of products includes not just a bank account, but basic
insurances and a pension plan.
The government wants to achieve financialization of a predominantly cash, gold and real-estate
nation as part of its attack on corruption, and to release resources stuck in non-productive assets
into the system for use by industry to build more businesses. That may be good for the government,
but is it good for people? If it is better on the metrics of efficiency, cost and returns, why is it so
difficult to get people to switch from real to financial assets?
For those who use financial products like banks, digital payments systems, mutual funds, insurances
and pension products, assets like cash, gold and real estate look clunky and inefficient. But it is
important to remember that the products, both real and financial, serve the same needs. When a
person uses a medical cover to protect himself and his family against a future medical emergency
financially, he is reducing the amount of cash, bank deposit or gold he needs to hold to take care of
that emergency. For the price of a premium, which is a fraction of what the sum assured is, you can
take care of a future cash need. This frees up the rest of the money that can then be put to more
efficient use through investments, rather than being hoarded. This transition from hoarding cash,
deposits and gold to purchasing a health cover is the leap of faith that the government is trying to
facilitate.
A leap of faith is needed because finance is different. Financial products are invisible. The transition
from tree twig to toothpaste is a function of awareness, access and tangibility. The new user of a
toothpaste can see the tube, taste the paste and then, once used, feel the mouth fresh, all in a
matter of a few minutes. A mutual fund or insurance product is invisible. It exists in the mind of the
potential user when it is described. This description is both through documents and through the
verbal communication of the people selling these products. Unlike a toothpaste, the moment of
truth of a financial product can be far into the future. A pension plan, for instance, can be evaluated
fully only after 30 or 40 years. An equity mutual fund begins to build a performance history only after
about three years. A life insurance product is useful only if the policy pays in the future when there is
an untimely death.
So we have a set of products that are invisible, that get created in the minds of the buyer when
described by the seller, and whose taste or goodness will be evaluated in the future. With cash or
gold, the certainty of meeting a future emergency is 100 percent, even though inflation will reduce
the purchasing power and there is a chance that the cash or gold could be stolen or damaged. With
financial products, that sort of control over your own future is gone and you have to trust that the
company that is promising to deliver the service will indeed do so.
That is the central challenge of retail finance—convincing buyers that a product will do what it says
it will and that the company will honour its mandate. Retail finance has fallen short of building this
Financial inclusion the mutual
fund way

38. 34 Growth in the Indian asset management industry—Is there a new normal?
confidence in the minds of consumers, globally. Regulators have struggled to stay ahead of financial
‘innovations’ brought to the market by a much better-paid and qualified financial sector.
Why is this so difficult? What is so complicated that consumers struggle to select and purchase the
products they need? We don’t see massive regulatory efforts in the selling of a toothpaste or a car
or the rise of an industry that advises people on what car to buy. Other than the two factors (invisible
and faraway moment of truth) mentioned above, it is the difference in the levels of information about
the product that makes a mutual fund or insurance product different in terms of buyer behaviour. The
manufacturer and seller will always know more about the product than the buyer, and as good utility
maximizing economic agents, will talk up the features that attract the customer and talk down or hide
features like costs, impact of an early exit from the product and the tax liabilities, to name just a few.
Regulators globally understood this information asymmetry and have mandated that full disclosure
be made of all material information to help customers decide on what they want to buy. There are two
problems with this approach. One, on the ground disclosure regulations are disregarded at the point
of sale. In a paper (http://ifrogs.org/releases/HalanSane2016_financialMisbehaviourRetailBanks.
html) published in the Journal of Comparative Economics, economist Renuka Sane and I found that
disclosures were mostly wrong when bank branches were audited for a mystery shopping exercise.
When bank managers were asked about returns offered by ELSS mutual funds, 93 percent of the
bankers overstated returns. When asked about what an optimal holding period of such a fund was,
all the bank managers misunderstood optimal holding period as three years for an equity fund.
Sixty percent of the bankers did not know or lied about costs in a mutual fund. An internal mystery
shopping exercise carried out by SEBI revealed similar data on the lack of proper disclosure at the
point of sale.
Two, there is increasing academic evidence that disclosures actually don’t change investor behaviour
much. Renuka and I carried out a household survey to map how differing levels of disclosure change
investor behaviour. We found that investors don’t seem to understand disclosures at all. The working
paper can be read here: http://www.nipfp.org.in/media/medialibrary/2017/11/WP_2017_212.pdf.
Regulators globally have leaned on a mix of disclosures and financial literacy to make consumers of
financial products responsible for what they buy. But that model has clearly not worked. What we do
know is that incentives matter, and when used properly, have the ability to change the behaviour of
manufacturers and sellers so that the interest of the consumers get aligned with theirs.
In a submission to RBI’s Report of the Household Finance Committee (https://rbi.org.in/Scripts/BS_
PressReleaseDisplay.aspx?prid=41471), I looked at the evidence of mutual funds and life insurance
firms responding to the change in product structure, incentive quantum and their placement. The set
of tables below show this clearly.
A brief summary of the paper can be read in this column I wrote in Mint: http://www.livemint.com/
Money/V9wrPtplToWpuGVcVvqdmL/Why-we-stick-with-SIPs-and-not-endowmentplans.html.
I found that a cleaner product structure with costs sitting under one head and no upfront costs in
a mutual fund has helped the industry in many ways. The removal of the conflict of interest in the
upfront commission forced a whole new industry to develop that is focussed on advice and consumer
interest. One has to just look at the innovations in investor education, FinTech platforms and

39. 35Growth in the Indian asset management industry—Is there a new normal?
consumer-centric behaviour of many firms in this space to see what good regulation can do. The life
insurance industry remains a hard product push with terrible consequences for investors and a
general lack of confidence in the word ‘insurance’.
Changing mutual fund flows responding to sales incentives
Exhibit 21
Regulatory change
2002–03
2003–04
2004–05
2005–06
2006–07
2007–08
2008–09
2009–10
2010–11
2011–12
2012–13
2013–14
2014–15
2015–16
2016–17
No. of equity
open ended
NFOs
17
10
36
51
18
27
31
20
23
8
11
9
27
17
8
No. of equity
closed end
NFOs
0
0
0
3
21
31
3
1
0
1
19
20
61
25
21
Year
Equity NFO inflow
as % of gross
equity inflow
8.86
4.36
31.57
44.19
24.45
34.67
7.58
9.39
4.95
0.82
1.63
7.20
10.50
2.99
2.03
6% NFO charge causes launch of NFOs
and churning
4 April 2006. Open ended funds cannot
charge the 6% “marketing expense” on
NFOs
31 January 2008. Closed end funds too
can’t charge 6%
1 August 2009. front loads banned for
Indian mutual funds
Upfronting of trial commission begins
Closed end funds begin to upfront 3 year
trial
Upfronting restricted to 1% on 26 march
2015
SOURCE: Amfy and Mint research

40. 36 Growth in the Indian asset management industry—Is there a new normal?
Persistency as a measure of right selling
% of policies alive after one year % of policies alive after five years
Birla Sun Life
SBI Life
Bajaj Allianz Life
ICICI Prudential Life
Reliance Nippon Life
LIC
HDFC Standard Life
FY16
FY10
SOURCE: IRDAI Handbook
Note: Companies that form more than 90% of the market
Exhibit 22
Gross and net inflows into equity funds and sensex return
SOURCE: Amfy and Mint research
300,000
50,000
150,000
-60-50,000
250,000
100
100,000
-20
0
80
0
200,000
60
-40
20
40
2002–
03
2004–
05
2003–
04
2006–
07
2010–
11
2012–
13
2013–
14
2014–
15
2015–
16
2016–
17
2005–
06
2009–
10
2007–
08
2008–
09
2011–
12
Gross inflows into equity oriented mutual funds (INR cr)
Sensex return (%, right hand scale)
Net inflows into equity oriented mutual funds (INR cr)
Exhibit 23

41. 37Growth in the Indian asset management industry—Is there a new normal?
Policy flip
SOURCE: IRDAI Handbook and Mint research
100
0
100
80
-40
-20
40
20
60
80
0
-20
-40
40
60
20
2015–
16
2010–
11
2009–
10
2008–
09
2007–
08
2006–
07
2012–
13
2014–
15
2013–
14
2011–
12
2003–
04
2005–
06
2004–
05
Annual Sensex return (%)TraditionalULP
Market share in terms of % of first year premiums
September 2010.
ULP rules changed
Exhibit 24
Source: Mint, HT Media. http://www.livemint.com/Money/V9wrPtplToWpuGVcVvqdmL/Why-we-stick-
with-SIPs-and-not-endowmentplans.html
There is global academic evidence that shows that incentives play a large role in how a financial
market develops. Over a decade of regulatory work on the structure and costs of the mutual fund
product has made it difficult to mis-sell the product, but an innovative financial firm can always find
ways to do that. But mis-selling as a systemic problem is no longer an issue for the mutual fund
industry. We cannot say the same for the Indian life insurance industry. No wonder that mutual fund
assets under management are now within sniffing distance of a much older, better capitalized and
more aggressive industry with regulations that work on distributor and manufacturer benefit rather
than that of investors.
The Mutual Fund Sahi Hai campaign has built a huge wave of awareness about the product across
the country. A rising market has given a good first impression about the product to a large number of
first-time mutual fund investors. It is up to the industry to not drop the ball by constructing and selling
poor products. A concern today is the extra incentive that distributors and advisors get in cities
‘beyond the top 15’ (B15).
The decision to give extra incentives in selling to B15 is misguided and will result in a loss of trust
of the entire industry when the greed of rotating investor money to harvest higher commissions gets
too high for distributors. The mutual fund product is now robust enough and sits on a long enough
track record for the product to not need the higher commission in B15. We do not have persistency
data from B15 to evaluate the behaviour of B15 inflows versus T15 to establish that the higher front
incentive is resulting in churning of investors. However, looking at past experience within the mutual

42. 38 Growth in the Indian asset management industry—Is there a new normal?
fund industry, it is hard to argue that churning would magically disappear in B15. The drop in NFOs
post 2006, the open versus closed-end arbitrage in 2007 and the launch of closed-end funds to
harvest upfronting in 2014 show that a part of the industry will move to benefit from loopholes that
aid sales.
What then will work for B15? What works for T15. Investors are no different. There is no magic
transformation that makes a big city resident more aware or literate than a small city or town
resident. We know that what works is the aligning of interest of the seller with that of the customer
and then letting the market do its work.
Monika Halan is Consulting Editor at Mint, HT Media

44. Confederation of Indian Industry
The Confederation of Indian Industry (CII) works to create and sustain an environment conducive to
the development of India, partnering industry, Government, and civil society, through advisory and
consultative processes.
CII is a non-government, not-for-profit, industry-led and industry-managed organization, playing a
proactive role in India’s development process. Founded in 1895, India’s premier business association
has over 8,500 members, from the private as well as public sectors, including SMEs and MNCs, and
an indirect membership of over 200,000 enterprises from around 250 national and regional sectoral
industry bodies.
CII charts change by working closely with Government on policy issues, interfacing with thought leaders,
and enhancing efficiency, competitiveness and business opportunities for industry through a range of
specialized services and strategic global linkages. It also provides a platform for consensus-building
and networking on key issues.
Extending its agenda beyond business, CII assists industry to identify and execute corporate citizenship
programmes. Partnerships with civil society organizations carry forward corporate initiatives for
integrated and inclusive development across diverse domains including affirmative action, healthcare,
education, livelihood, diversity management, skill development, empowerment of women, and water, to
name a few.
As a developmental institution working towards India’s overall growth with a special focus on India@75
in 2022, the CII theme for 2017-18, India@75: Inclusive. Ahead. Responsible emphasizes Industry’s
role in partnering Government to accelerate India’s growth and development. The focus will be on key
enablers such as job creation; skill development and training; affirmative action; women parity; new
models of development; sustainability; corporate social responsibility, governance and transparency.
With 67 offices, including 9 Centres of Excellence, in India, and 11 overseas offices in Australia,
Bahrain, China, Egypt, France, Germany, Iran, Singapore, South Africa, UK, and USA, as well as
institutional partnerships with 344 counterpart organizations in 129 countries, CII serves as a
reference point for Indian industry and the international business community.
Confederation of Indian Industry (Western Region Headquarters)
105, Kakad Chambers, 132, Dr. Annie Besant Road, Worli, Mumbai – 400 018, India
Phone: +91 22 2493 1790 Fax: +91 22 24939463 / 24945831
E: ciiwr@cii.in W: www.cii.in
Follow us on:
facebook.com/followcii twitter.com/followcii www.mycii.in