New-age disruptors in mutual funds
Recent entrants are leveraging technology and low-cost ‘passive investing’ to attract customers in an industry where market penetration is low
Here is a paradox: Indian asset management companies (AMC) have seen a stupendous rise in their assets under management (AUM) (see chart). However, the penetration of mutual funds (MFS) in India remains far below global averages and emerging market peers such as Brazil and South Korea.
This may change given the rush of new players — those in the financial services business and those diversifying from other industries — entering the business to tap the savings of newgeneration investors (see table).
In the past few months, players such as Bajaj Finserv, Zerodha and Samco, among others, have received in-principle approval to start MF businesses. Recently, NJ India also started its MF operations and is all set to launch its first schemes in October. NJ India is one of the biggest MF distributors in the country. In the last few years, MF industries have seen players such as Trust MF and ITI MF starting operations in the asset management business.
New-age players like Zerodha and Samco are established in stock broking, and they will try to leverage this business to grow their AMCS. Zerodha is among India’s largest discount brokers and has a set of existing investors that it can leverage. Bajaj Finserv is, of course, a decades-old financial behemoth with businesses ranging from insurance to lending.
“Each one of them is different in their core competency,” said Kaustubh Belapurkar, director-manager Research, Morningstar India. “For example, Bajaj Finserv has a well-established insurance business and already has a strong customer base in its lending business. So, it brings to the table not only its investment experience but also a ready investor base.”
But the new players entering the markets are also likely to take different routes to increase assets. Typically, traditional fund houses have focused on active funds and their own banking channels or distributor partners for growth in business. But new players might leverage technology and bring in simple passive products to gain market share.
For instance, Navi MF, led by Flipkart Co-founder Sachin Bansal, recently filed seven offer documents with market regulator Securities and Exchange Board of India (Sebi) on a single day. All those funds are passive in nature, which involves tracking a benchmark index to replicate its performance, such as exchange traded funds (ETFS), index funds and fund of funds (FOF).
Navi group also offers digital personal loans, home loans and health insurance. In June, Navi MF had announced the launch of Navi Nifty 50 Index Fund, an open-ended equity scheme that would replicate the Nifty 50 Index, with a 0.06 per cent expense ratio (the annual percentage a fund charges to manage an investment portfolio) being the lowest in the industry.
“New players have technology-based platforms where they have a large base of retail investors. Most of the new players are well established and offer investors low-cost or no-cost products,” said Vidya Bala, founding partner & head-research and Product at Primeinvestor, an online investing platform. “The passive route gels well with their business model.”
Launching passive funds also helps fund houses to save on costs with the added advantage that they will be excluded from Sebi’s recently announced rule that AMCS will now have to invest between 0.03 per cent and 0.13 per cent of the scheme corpus based on the risk levels of the individual schemes.
The question, however, is the profits that can be generated by such players since they will be selling low-cost passive products. “In terms of profits, it will be all about economies of scale. Some new players will be focusing only on passive funds where margins are lower compared to active funds. But if they can grow their assets and reach a wider audience, they can surely make profits,” Morningstar’s Belapurkar pointed out.
But the competition here could become tougher with existing players expanding into passive funds in the past few months — Mirae Asset Management and Nippon Life India AMC being two examples.
Market participants believe there is scope for new and old players to profitably co-exist because the low penetration in the MF industry points to a high potential for growth. India’s AUM to GDP ratio stands at just 12 per cent against a global average of 63 per cent. Even the share of equity AUM to GDP stands at just 5 per cent as against a global average of 30 per cent.
Despite this, the Indian MF industry scaled an all-time high of ~35.31 trillion of net AUM as on July 2021 against ~31.42 trillion at the end of the last fiscal.
In its report on Indian AMCS, financial services firm Jefferies had stated: “Despite being a traditionally higher savings economy, the saving pool has not been channelised towards MFS and India exhibits amongst the lowest metric when compared with global peers. With greater digitisation, rising awareness and push from fund managers, we see potential for higher penetration for MFS and equities.”
While the past few years have been good for the AMC industry, the factor to track is whether these new cost-light players will be able to penetrate semi-urban and rural areas and add new long-term investors.