Why is there a gold rush for new mutual fund licenses?

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A new wave is sweeping the Rs 36 trillion Indian mutual funds (MF) industry at the moment.

As opposed to a decade ago when so many global fund houses and some domestic ones were leaving India, we are now witnessing many new firms entering the mutual funds industry.

Growing awareness about mutual funds

It’s partly evolution. In the late 90s, mutual funds (MF) were considered exotic. There was poor awareness and penetration was low. Firms that entered early on, dominated distributors’ shelves. As a category evolves, awareness grows and penetration improves, brands rule.

The MF industry now seems to have reached a further evolved stage. “Mutual Funds Sahi Hai” resonates with a larger base than before. A large section of new investors still takes up what reaches them first. That said, there is now a critical mass of investors who think they know what to look for. They seem to be favouring product innovation and performance, and the perceived ability to sustain performance.

In the last 10 years, the MF industry has grown 3-10 times, irrespective of the parameter you use to measure – number of unique investors, number of systematic investment plans (SIPs), equity assets under management, and so on.

Smaller fund houses bring competition

Analysts and industry watchers surmise that the top players have gained immensely at the cost of the smaller ones, given industry size exploded and players consolidated. But that is not true!

Given how the industry reports total assets under management (AuM) with institutional ETF money, liquid funds, overnight funds, ultra-short-term funds, FMPs etc., a cursory glance at league tables doesn’t show the real picture. If one dives deeper and looks at the kind of AuM which really manifests the retail MF industry, it is evident that amongst large players there is considerable churn in league tables with sharp gainers at the expense of other large players.

Outside the top of the league tables, at a total industry level, large AMCs have lost market share and the so-called smaller fund houses have gained at their expense. Some of these small and mid-sized AMCs were either non-existent or lost in wilderness for many years and have now got over Rs 30,000 – 1.50 lakh crore of assets. That’s a market share of 2-10 percent in equities alone. That’s quite an achievement even if one would have tried to imagine as recently as 3 years back.

Evolving regulations for a more level-playing filed

Investors and now distributors increasingly now go for merit. The vote is for merit and not for size really.

A lot of credit goes to the capital market regulator, Securities and Exchange Board of India (SEBI). The regulator levelled the playfield by rationalising fees and expenses that gave undue advantage to the spending power that came from scheme expenses as well as AMCs’ deep pockets when it came to IPO (NFO) expenses, entry loads, exit loads etc. and curbing upfronting of commissions, marketing pay-outs from AMCs and other forms of spends. Before these changes were ushered, retail asset management was a capital-intensive industry with big marketing outlays and bigger working capital. The gap between the best and the lowest commission payer was in percentage points!

Today, ensuring right compliance, service infrastructure, operating systems, and controls, and putting the best talent across functions in place is what calls for the most investment. Commissions are nearly standardised within a range of few basis points and the influence of commission on products being sold has shrunk. Distributors must be commended here again for bringing mass adaption of MFs while adapting business models to build higher volumes with much lower earnings per unit.

Today, for a meritorious asset management practice, capital is not a constraint and for a highly capitalised practice with lack of merit there is nowhere to go!

The power of the digital revolution

Around 20 years back, if someone asked when will MFs reach the newly employed young lady who wants to make a Rs 100 per month SIP from that 50,000 people town, 250 kms away from say Rajkot or Ranchi, one would have scratched their and said, “Is it OK if we try collecting those 36 post-dated cheques of Rs 2,000 per month from the IT executive in Andheri East first?”

This has changed. Today, a new AMC that enters the industry can reach and serve the remotest corner of the country almost as well as an incumbent barring of course the brand afficionados.

Gone are the days when only large firms and big brands dominated the Indian MF industry. We will see many more firms entering the industry precisely because MFs have become ubiquitous, and the category is entering maturity with critical mass of discerning participants. Adaption to and need for new products and product segments to fulfil client’s asset allocation and risk-return preferences will result in more product innovation from a greater number of players. Investors and intermediaries alike have become a lot more discerning, and the regulator has levelled the playfield. Perfect competition in markets is a utopian concept, but when it comes to the profession of managing public money, we surely seem to be headed that way.