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Business of Managing Funds

As the fund management business grows, mutual fund companies begin to make profits. Had they been publicly listed, investors could have also benefited

Fund management is good business, like any business should be. Most asset management companies (AMCs) are reaping benefits after the initial pains of setting up the essential range of products and distribution network.

The low earnings in equities and bank fixed deposit rates led more money to shift to debt and gilt funds, which fuelled the growth in the assets under management.

The asset management business provides high return on capital and good profit margins of over 30 per cent, which are often hidden by the huge launch expenses of new schemes being charged off in a single year. This business has attracted many players. A lot depends on the size of assets under management and the number of schemes across the major categories of equity, debt and balanced funds. The size also helps justify the synergies of the massive brand-building exercise required.

Zurich, which understood the size strategy early, grew from Rs 812 crore to Rs 2,095 crore in just one year by aggressively selling its bond fund. HDFC AMC capitalised on the distribution network and the brand equity of its parent to mop up huge amount of funds within two years of operation (Rs 5,929 crore). Its initiative was well supported by successive rate cuts, providing it high returns on the bond funds and a bottomline to Rs 8.32 crore — a commendable feat in just two years.

The picture is not completely rosy, while some AMCs have been making profit, there are also lossmaking AMCs like Kotak (Rs 3.3 crore), Zurich (Rs 5.98 crore) and Dundee (Rs 2.8 crore) as well. Like any fast moving consumer goods business, mutual funds also require a big and expensive brand- building exercise, and thus have a high breakeven level. The other drawback is a highly regulated environment, which necessitates big, expensive back office operations. Longer gestation period is also a dampener for small firms and in the end, this business is only for companies with deep pockets. Many smaller funds like the Jardine Fleming, BoI Mutual and IndBank have been acquired by other AMCs. And some more are in the offing.

While the business is attractive, you as an investor cannot have a share in it as all the asset management companies are privately owned. The only publicly traded AMC, Shriram Mutual, is closed. Another way of owning an AMC would be to invest in their publicly traded parents like ICICI, HDFC, SBI, Kotak Mahindra and few others, but this is not a good idea as the AMCs form a minuscule part of the parents' business.