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Business as Usual

In the changing business & regulatory environment, fund houses have had their share of new entrants, mergers and acquisitions…

The mutual fund industry has been beset with net redemptions by investors and a not-so-encouraging domestic stock market conditions. In terms of assets, there was a rise of 5 per cent between September 2011 and 2012 managed by the industry. Blame it on volatile stock markets, frequent regulatory changes and a general mood swing among investors, fact remains that the Indian mutual industry is primarily debt-oriented. Debt funds, including liquid funds account for 67 per cent of the industry’s Rs 7.53 lakh crore AUM as on September 30, 2012. The clamour for financial literacy, retail participation and increasing distribution, especially beyond the top-15 cities, has reached new crescendos.

At an industry body meeting earlier this year, it was left to the stock market regulator to direct industry players to adapt and adopt to changes than seek a parachute to escape from their problems. Against this backdrop, the industry today has 44 players, including Fidelity as an unmerged entity in L&T, a change from the 35 players in 2008, when we featured fund houses for the first time. This eclectic list of players is made from a mix of sponsors including banks, large distributors and players in the financial services industry. The convergence within the financial services domain has all the necessary ingredients for cross-selling several financial products to the same universe of clients. Yet, there is little to prove the success of such a thought.

Since 2010, there have been 5 new entities such as IIFL and IndiaBulls among others that have launched their operation and several new entrants through the joint-venture or acquisition route, which include Nomura, KBC Bank, L&T Finance, Goldman Sachs, T Rowe Price, Nippon Life, Schroder and Invesco. There have been a few exits too including Fidelity, Bharti, Shinsei and few others. Today, there are 1,944 active mutual fund schemes including FMPs in India, which amounts to about 44 schemes per player. The need for such a vast number has initiated fresh debate and the regulator has taken upon himself to make AMCs reassess their existing product suit and reduce redundancies. The rationalisation in offerings, efforts to simplify products and recent regulations will help AMCs take control of directly reaching out to customers. Such a change in approach holds promise, but it will also entail a different way in which fund houses will have to orient themselves.

The worth of AMCs is best reflected in their profitability and this year, we looked at their profitability for our analysis. Of the 39 AMC,s that reported their results for March 2012, 16 earned profits in the past one year, and 29 of them are yet to make any profit. None of the new AMCs that have been in the business for less than three financial years have made any profits. Globally, the best regulatory changes have been initiated during the worst phase of the stock markets. Such regulations have changed the dynamics of the business and have only benefited the common good.

The 2012 regulatory changes provide the necessary impetus to asset management companies as an industry to innovate and improve their functioning and offerings. There is ample scope to create leaner operating structures, backed by technology which will help AMC reach the retail end-user with solutions that cater to their needs than create a one-size-fits-all product. Already the online and mobile platforms are finding feet, which provide for a greater access to investors. Efforts in product and process simplification with better communication about scheme returns and performance on a relative basis to investors will rekindle investor interest and confidence in the industry. The industry leaders we spoke to all are optimistic of future of the business and many have some serious plans to change the way they do business to make mutual funds a really collective investment vehicle that will benefit small investors.