25 years of private sector MF:The 3 crucial pillars!

The Indian MF industry’s assets under management (AUM) has grown from Rs 246 million as on March 31, 1965 to Rs 22.60 trillion as on May 31, 2018.

Illustration: Uttam Ghosh/Rediff.com

Over the past 25 years, the savings environment in India has witnessed several changes.

From an era of fixed income products such as fixed deposits, we have seen a steady increase in retail investor participation in the capital markets and in Indian mutual funds (MFs).

The Indian MF industry’s assets under management (AUM) has grown from Rs 24.6 crore (Rs 246 million) as on March 31, 1965 to Rs 22.60 trillion as on May 31, 2018.

The AUM of the industry has grown from Rs 5.05 trillion as on March 31, 2008 to Rs 22.60 trillion as on May 31, 2018, about four- and-a- half fold increase in a span of 10 years!

The strong growth can be attributed to concerted efforts across three crucial pillars – products, access and literacy. Product offerings like dynamic equity allocation funds and equity savings funds have lowered risks associated with purely equity-oriented products.

Process improvements like instant know your customer, instant redemption and increased transparency of returns and portfolios, have also contributed to improved trust and ease in investing.

In terms of access, while fund houses have traditionally relied on brick-and-mortar business, the increasing focus on digital channels has made access easier and more inclusive.

Lastly, the effort in creating customer awareness through targeted campaigns such as ‘Mutual fund sahi hai’ has also significantly aided the adoption of mutual funds among retail investors, especially from smaller cities.

A large part of the credit for this goes to the distributors such as banks and independent financial advisors.

The introduction of systematic investment plans (SIPs), and the subsequent sharp rise in SIP investments, have ensured sustainable growth for the industry as more people move away from large lumpsum investments to regular investments.

Over the past 25 years the MF industry has come a long way. Geographic reach has increased, many more customers have been added, more channels have been opened up and the product basket is full.

Ajay Srinivasan is chief executive, Aditya Birla Capital

Many foreign players bite the dust in India

At a time when the private sector mutual fund industry is celebrating its 25 years, it is surprising that there are few foreign players who have made the cut.

The first player in the private sector - Kothari Pioneer - was sold to Franklin Templeton within the first few years.

While Pioneer has re-entered the Indian market by buying a stake in Bank of Baroda’s mutual fund arm, there are other illustrious names such as BlackRock, Goldman Sachs, Fidelity, JP Morgan, ING, etc, who came into India lured by its growth prospects, found the going tough and pulled the plug on their India business.

The foreign players ran into several problems. For example: Fidelity, despite having a strong equity base, exited after it found the business unsustainable due to the ban on entry load in 2009. When it exited in 2013, it had accumulated losses of Rs 3 billion till FY11.

Some entrants also tried to bulldoze the system by asking distributors to only sell their products. There was a revolt of sorts, and the fund houses suffered.

There were other problems too. While UTI had been around since the 1960s, it ran a fixed-return product.

Once private players were allowed entry, they were not permitted to promise fixed returns.

“Time was needed to educate the investor about a product where market risk had to be borne by him, and for per capita incomes to grow,” says KN Sivasubrmanian, former chief investment officer at Franklin Templeton Asset Management (India).

Developing distribution strength was another hurdle. “The fund industry was still in a nascent phase and required distribution strength more than it needed asset management skills.

Foreign players who did not have a strong distribution presence found the going extremely tough,” says Sanjay Sinha, founder, Citrus Advisors (and former chief executive officer of L&T Mutual Fund).

The distribution channel in India was also different. The banking channel predominates in developed economies, while in India they had to deal with independent financial advisors (IFAs). Building a network of IFAs requires time and effort.

Asset management was not the primary business of many of the foreign players who entered it here in India.

Banking and investment banking were their forte. They lacked the single-minded, long-term focus required to succeed here.

The inability to scale up and the insignificant size of the India business compared to their global operations at times led to exits.

“The board would one day decide that the India business was not worth the trouble,” says R Balakrishnan, an industry veteran who is now an independent analyst. Short-term focus too played a part.

“If the results didn’t come fast, they lost patience. If there was a change in management, the new person wanted to do something different,” adds Balakrishnan.

A study in contrast is Franklin Templeton, which has thrived in India.

“The decision to be in India had buy-in right at the top in the case of Franklin,” says Sivasubramanian.

Besides looking for growth in the Indian market, the parent also treated India as a source of managerial (like Lever) talent.

Franklin took an early lead in setting up a large back office in Hyderabad to cut costs globally.

“The parent realised that India was a local market, so they gave the management and investment teams here a free hand to come up with strategies that would suit this market,” adds Sivasubramanian. Asset management is Franklin’s only business.

Company-specific factors, too, played a part. Goldman Sachs was hawking passive funds at a time when there were few takers for them. JP Morgan’s decision to pull out may have been a part of its global restructuring exercise, with the debt default debacle acting as the last straw.

Sanjay Kumar Singh

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