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Concentrated Profits

Profitability in the mutual fund industry is getting concentrated with big AMCs

The big boys are making more and more money while the small ones are struggling. That''s the big takeaway from a study of how much profits India''s mutual funds are making. A comparison of asset management companies'' net profits for the 2013-14 and 2012-13 financial years and found that on the whole, industry profits had shot up by 56.8 per cent over the previous year. In FY13, they were Rs 806 crore, and this increased to Rs 1,264 crore in FY14. One large AMC, Franklin Templeton, (FY13 profits Rs 135 Cr) was excluded from the study because it has a non-comparable September year ending.

However, while the growth is interesting, the most important takeaway is that the rich are getting richer. The 21 profit makers in industry made Rs 1,567 crore while the 20 loss makers lost Rs 303 crore. The growth in profits is equally skewed. In the previous year, this year''s profitable AMCs made Rs 1093 crore. The rest made a loss of Rs 287 crore. Therefore, not only is there a large gap between the haves and the have nots, the gap has widened rapidly. However, it is notable that the a large chunk (Rs 70 cr) of the loss came from L&T Mutual Fund, which is in the process of amortising what it paid as part of the Fidelity acquisition. This isn''t hugely relevant to the trend because even minus L&T, the industry aggregates would have looked better but the remaining loss-makers would still be in the same boat.

The most important takeaway from the study is that the larger, richer AMCs are able to leverage their existing size and strength to pull even further ahead of the rest. HDFC Mutual Fund made a profit of Rs 358 crore, up 12.2 per cent over last year. Reliance Mutual Fund''s profits shot up 33 per cent to Rs 304 crore while ICICI-Prudential Mutual Fund made Rs 182 crore, up a huge 66 per cent from last year. Other big profit makers in the industry were UTI Mutual Fund, SBI Mutual Fund and Birla Sun Life. Of the relatively larger outfits, the biggest imcrease was IDFC Mutual Fund.

The exceptions this are quite interesting. IIFL, JP Morgan and Principal posted profits this financial year after suffering losses during the last financial year. PPFAS, a new entrant in the industry also posted a profit of Rs.1.68 crore., and small AMCs like Miraex Asset and Quantum also managed to clock profits despite their smaller asset base.

However, the broad trend cannot be denied. Of course, this is the case with many industries but so far, it wasn''t so with the Indian fund industry. There were always large AMCs which made a lot of money, but it was perfectly possible to provide a good product and be a reasonably profitable midsize fund company. The current situation, where half the industry is making losses in a time when there is overall growth is unusual. It points to an eventual situation where we are going to end up with a mutual fund industry which is smaller and more concentrated. The bigger AMCs will probably say that consolidation is inevitable, but I''m not so sure. In any case, it reduces diversity and competition in fund management. Many smaller AMCs run funds that generate better returns for investors than those from bigger ones. If a number of AMCs eventually have to go out of business because they are not viable, then the reduction of competition will not be in investors'' interest.