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Indian AMCs Go Myriad

The number of AMCs in India is set to almost double in the coming months, but will this benefit investors?

Over the next few months, the number of mutual fund companies operating in India is set to go up sharply. Right now, there are 35 fund companies (or Asset Management Companies--AMCs) that are operating in this country. In another few months, there are as many as 20 new ones that are likely to start, bringing the total up to 55. Let's see what, if anything, does this mean for investors?

There's no doubt that these coming months will see the sharpest ever increase in the choices available to the Indian fund investors. In fact, in practical terms the increase is even more than the bare numbers suggest. Two of the current list of 35 AMCs actually belong to the list of new AMCs as they've barely launched their business. These are Bharti-AXA and Edelweiss. And three, possibly four of the older ones are operating at such a low intensity that they can hardly be said to exist. In real terms, I would say that the number of operational AMCs is likely to go up from 30 to 55, which is almost a doubling of numbers.

Some of the names that are waiting in the wings are well-known ones in either the fund business or other industries. Perhaps the biggest international name is Goldman Sachs, the well-known global investment banking and investment management firm. Other names which may be familiar to the Indian public in one context or another are Axis Bank, Peerless, Jaypee, DLF, Union Bank, India Bulls, and Religare. There's also Nikko, which is a Japanese financial services house owned by Citibank. Incidentally, DLF is planning to enter this business in a joint venture with Primerica, which is also owned by Citibank.

Has the Indian mutual fund business suddenly become much attractive than what it was? It probably has. This business has a long planning stage and many of the new entrants started their planning a year or two ago. Even though the fund industry doesn't look like being in a sharp growth mode for the last few months, there's no doubt that it has a bright future. Less than half a per cent of Indians invest in funds today, a number which is bound to grow to several times what it is today in just a few years.

So what does all this mean for investors? More choice, right? Well, I'm not so sure. While it will definitely mean more choice in terms of the number of funds or AMCs, choice and competition by themselves are not of any benefit to the customers of any product or service. What benefits the customers is the improvement in products and services that competition presumably delivers. There are industries where more players mean more competition which means a better quality of products. Unfortunately, investment management (and other financial services) is not such an industry. If ten AMCs competing with each other leads to 10 per cent of the funds delivering great returns, then it doesn't quite follow that twenty competing AMCs will result in 20 per cent of the funds delivering even greater returns. That's not the way this business works.

In fact, looking at the experience of the last few years, I get the feeling that the frenzied efforts of more and more fund companies to differentiate themselves has produced a worse class of mutual fund. Everyone wants to differentiate their funds, and so everyone comes up with more and more outlandish investment themes whose only goal is to sound different and thus somehow snare some more investors. In reality, there's an increasing sameness about the Indian AMCs and funds.

It would be interesting if we eventually had AMCs that targeted specific niches and built up expertise on serving investors in those particular niches. Perhaps that stage of the development of this industry will eventually come. At the moment, the only winners are fund employees who are being headhunted at higher and higher salaries. Good luck to them.