When investors read news items about fund companies in the business press, they often get worried about the fate of various fund companies. Some companies are making losses, others are sometimes said to be too small to survive. Sometimes, someone in the industry is quoted as saying that there's going to be consolidation and some of the players won't survive. Over the last year, one high-profile foreign name (Goldman Sachs, a large American investment bank) has pulled out of the business, as has Shinsei Mutual Fund, which was part owned by the Japanese Shinsei Bank.
Going forward, it is inevitable that there will be a certain amount of upheaval in the mutual fund business. With the abolition of entry load and the unwillingness of the authorities to reign in insurance companies from running mutual funds disguised as ULIPs, the fund business could become inherently less attractive. Globally too, the financial services business is not quite on an even keel.
Does this mean that investors have to worry about the business dynamics of the fund company whose funds they are buying? Could they lose money if a fund shuts down or a company gets acquired?
A look at the history of the Indian fund industry shows that that isn't really the case. Corporate upheavals in the fund management industry are nothing new. Over the last twenty years, as the business started and evolved, plenty of promoters have found it necessary to change their plans for this industry and investors have been fine. In the entire history of the mutual fund industry in India, there have been a total of 56 asset management companies that have operated. Out of these, as many as 19 no longer exist. This means that more than a third of AMCs have actually shut down or have been acquired or have gone out of existence in some other way.
Any AMC which is actually doing any business and has investors will have enough value for someone else to acquire either the corporate entity or the funds. There have been many that have transformed from one to another many times. For example, in the early 1990s, there was a fund company called 20th Century and another one called ITC Threadneedle, which was a joint venture between ITC and Threadneedle. ITC Threadneedle was later acquired by Zurich, which also acquired 20th Century Mutual Fund. Later, in 2003, HDFC Mutual Fund acquired Zurich. Similarly, the erstwhile Kothari Pioneer Mutual Fund became Pioneer-ITI when the Kothari stake was acquired by ITI. The entire outfit was later acquired by Franklin Templeton Investments. Curiously, the same Pioneer is now back in India as a partner of Bank of Baroda in Baroda Pioneer Mutual Fund.
There have also been those cases where a fund company has ceased operations. Shriram, Dundee, and Anagram have been some such cases. In such situations, the funds are wound up and the investors returned their money, the transaction being no different than a normal redemption. However, the way the business dynamics are nowadays, one would expect practically any fund to be acquired by another one.
The basic reason why investors are insulated from such changes is the way the India's mutual fund regulatory setup works. The investors money is completely insulated from the AMC's business. There have been only two cases where investors have had to face actual problems. One was that of the collapse of CRB Mutual Fund back in 1997. CRB's promoter was running a fraudulent operation and the regulatory oversight at the time didn't work as well as it should have. The other was the old Unit Trust of India but that was a unique story which doesn't have any parallel. As things stand today, investors have no reason to bother about these things.
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