With only a handful of competitors vying for its burgeoning middle class roughly the size of the entire U.S. population, India could represent one of the most lucrative international markets in the world, according to U.S. fund executives.

Currently there are only 34 mutual fund companies competing for India's investors, according to the Association of Mutual Funds in India, an industry trade group based in Mumbai, India. But fund companies cannot expect to capture even a tiny portion of the market without a significant investment of time, money and resources, executives said.

There are not a lot of competitors in India for several reasons, said Ajai Kaul, CEO of Alliance Capital India of Mumbai. Because funds can only invest in Indian securities, outside fund companies must establish a local presence, which requires a significant investment, he said.

However, the small number of competitors in the market is primarily due to the fact that India's fund market is virtually brand new, according to Kaul. Until 1987, investors in India had one investment option - the Unit Trust in India, a government- sponsored fund that still holds 80 percent of mutual fund assets, according to the mutual fund association. In 1987, the government permitted public sector banks and insurance companies to launch funds but it was not until 1993 that the Securities and Exchange Board of India established a regulatory framework for the country's mutual fund industry, according to the mutual fund association. Most funds were not eager to operate in an unregulated environment, the association said.

Moreover, flat markets in the early to mid- nineties kept many companies from developing funds in India, Kaul said. Alliance Capital, one of the first U.S. firms to establish a business in India, began offering a group of funds in 1995 amidst slumping local markets and high interest rates that made traditional products like bank deposits more attractive than mutual funds, he said.

"Investors wanted the known returns of 17 to 18 percent," he said. Strict regulations that required funds to open with at least $20 million stunted the fund industry's growth even further, he said.

But Alliance's decision to enter when it did has paid off, according to Kurt Schoknecht, CEO of Alliance Capital Management International.

"There aren't a lot of major players in India," said Schoknecht. "We have good relationships with the global banks that are there and the local Indian distributors, so it's a great combination." Currently, Alliance Capital India has approximately $800 million in assets under management, making it the third largest competitor in India's fund industry behind the Unit Trust in India and U.K. Prudential.

"We are continuing to invest in the Indian marketplace and we see a lot of growth there," Schoknecht said.

Alliance's early move into India has allowed it to forge close ties with the Securities and Exchange Board, the Indian equivalent of the Securities and Exchange Commission, Schoknecht said.

"It's an interesting opportunity for us to also get close with the government officials in a marketplace that is just developing," he said. "There's a certain level of first mover advantage in a market like that." Alliance currently offers 10 funds in India.

Its early entrance notwithstanding, Alliance Capital India has only $800 million in assets under management. But Alliance's focus is on the future in India, Schoknecht said.

"It's not a huge marketplace ... but there is a lot of growth potential," he said.

Another factor hampering industry growth is inertia among Indian investors who can not easily be persuaded to move their assets from the Unit Trust in India to private fund companies, said Schoknecht.

"It would take a long time for it to shift radically," he said. "But on the other hand, the pie is big enough and ... it doesn't matter how much is available, as long as your piece of the pie is increasing and as long as the pie itself gets bigger."

Franklin Templeton of San Mateo, Calif. entered the Indian mutual fund market in 1995 based on the country's economic development and the government's moves to privatize and deregulate several industries, including financial services, said Chuck Johnson, president of Franklin Templeton International.

Franklin Templeton Investments India of Mumbai offers eight funds with a variety of investment objectives. It has approximately $600 million in assets under management.

India has used the U.S. as a model in developing regulations for the mutual fund industry and this has been good for the business, Johnson said.

However, weaning investors from traditional bank investments and the Unit Trust in India and making them aware of their various options is a continuing challenge, said Johnson.

"It is a new market and in a lot of ways, we're educating the population just about the concept of savings and educating them about the whole concept of the mutual fund," he said.

Despite the challenges, Franklin Templeton sees a potential windfall of assets in the Indian market, Johnson said.

"Opening an investment management operation outside the U.S. involves a whole host of cultural, geographic and logistical constraints," he said. "Typically, whenever you get into any new market, it takes five years before you see any movement because first you have to understand the nuances, regulation and culture. And then you have to build something in that environment that people can trust."

It appears that Franklin Templeton India is beginning to make some headway. Last year, it attracted nearly $400 million in assets, according to Johnson.

Boosted by strong markets, Alliance Capital India attracted most of its $800 million in assets in late 1998 and 1999, said Kaul. While the markets have started to decline, there is reason to remain optimistic, he said.

And India's distribution networks are maturing and become more effective, he said. Banks are less apt to view private mutual funds as threats to their own products and are more willing to sell them,

he said.

"The thinking has changed dramatically in the private sector banks," he said. "They basically want a product menu that encompasses everything like funds, insurance, credit cards and loans. So there is a lot of willingness on their part to sell funds."

Also, retail networks - small brokerages and financial advisors - that traditionally sold only corporate fixed deposits and Unit Trust of India shares are now selling private funds to retail investors, said Kaul. These channels sell approximately 15 percent of all funds and that number is growing, Kaul said. These are important channels because they are the most popular with the middle class, he said.

"They were really the last distributors to find religion with mutual funds and they have started to push funds only in the past year or so," he said.

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