INDIA'S BEST COLLEGES, INSTITUTES and UNIVERSITIES
Structural changes in business models are what AMCs now require if they want to sustain profitability.
When viewed from over 25,000 feet above the ground, the pace of change in Indian asset management industry appears almost miniscule. Year after year, it seems, industry turn out the same old products with growth showing no superlative jump. But that's only the bird's eye view. Drill deeper, and a very different picture emerges ' one in which a handful of mighty forces are spurring some dramatic changes, in an industry which is considered dormant till date.
In fact, apart from dramatic stock market performance, the year gone by was the year of reforms for mutual funds (MFs) in India. The key changes included elimination of entry and exit loads on purchase of schemes, the government allowing MFs to be traded on the bourses, et al. While some were in favour of investors, others pampered the industry. Whatever the situation may have been at the start of 2009, most investors definitely seemed relaxed and happy as the year ended. But the question stayed ' how will the year 2010 unfold for this beleaguered industry which is still adjusting to the regulatory changes? Will the promise of growth sustain in future? Well, it's already halfway through 2010, and the questions still remain unanswered.
Despite clocking growth rates that are amongst the highest in the world, Indian MF industry continues to be a very small market comprising just 0.32% share of the global assets under management (AUM) of over $20 trillion. Though the ratio of AUM to India's GDP has gradually increased from 6% in 2005 to 11% in 2009, it's still significantly lower than the ratio in developed countries, where AUM accounts for 20-70% of the GDP. Even a recently released report by PricewaterhouseCoopers (Indian Mutual Fund Industry ' Towards 2015) states that although the Indian mutual fund industry has weathered the financial crisis with AUMs posting a year-on-year growth of 47% in FY2009-10, retail participation has witnessed just a marginal increase to 26.6% from 21.3% posted during the previous corresponding period. In fact, the net sales of Equity and Balanced funds in FY2009-10 have been one of the lowest in recent years. Further, if statistics are something to go by, AUM as a percentage of GDP is still less than 5% in India as compared to 70% in the US, 61% in France and 37% in Brazil. This obviously means that low penetration level is a bottleneck in spurring industry growth. What's more? Since the crisis of October 2008, the domestic fund market has seen the steepest fall. As per a recent data from the Association of Mutual Funds in India (AMFI), the industry's average AUM plunged 15.89%. Further, the dependence on the corporate sector is still pretty pronounced at 51% when compared with economies like US and China where investments channelised through corporates, comprise only around 15% and 30% of the AUM, respectively. This under volatile market conditions sound a note of caution for the industry as high dependence on the corporate sector may result in the fund houses being prone to unexpected redemption pressures. Considering the untapped potential, competition too is all set to gain momentum in the MF industry, which is making dominant desire to progress, a reality, through wealth creation. Can they unravel this funds mystery? As such the regulator now seems to be paying heed to ensure that MF industry sustains its profitability. In fact, Securities and Exchange Board of India (SEBI) has recently issued directions for the mutual fund industry stating that no business houses without five-year financial services experience will be permitted to own stake in an AMC, with an aim to enable only the serious investors to get into the business. 'As MF business has a long gestation period, therefore the regulator is now looking for shareholders who can stay for long and are experienced in the industry,' spokesperson of Edelweiss AMC tells TSI.
With 22 AMCs, including Schroder Investment Management (Singapore) Ltd, Union Bank of India-KBC Asset Management, Global Investment House and Enam Asset Management, seeking regulatory approval to start mutual fund businesses, the fight to sustainability becomes all the more important for the existing players. Not to forget, AMCs are also grappling with other issues including direct tax code, documentation apart from no additional management fees on schemes launched on no loan basis. SEBI's recent instructions to scrap entry loads on all mutual fund schemes launched on or after August 1, 2009, too has increased problems for the fund houses. It now remains to be seen what new ways and means are evaluated by AMCs, channel partners and regulator to sort these issues.
Even the restriction of entry load on existing and new MFs, that marked a turning point in the functioning of the MF industry last year, is spelling out a huge impact on the commission structure of distributors, leading fund houses and distributors to restructure their business and operating models in order to arrive at a profitable solution. In fact, structural changes in business models of AMCs are now required to sustain profitability. Though partnering with banks may be a possible solution to improve distribution as well as profitability, but banks in India still lack the expertise to offer investment advise. As such the only option left with them is to explore open architecture platforms or aggregator models for conducting business.
Further, if AMCs want to establish a sustainable model, which yields profits in the long run, they need to deal with cost management with a firm hand. While restriction on entry loads has already spiraled the cost of sales and marketing, a large portion of the assets too is in debt, which actually tends to erode profits. Though it is assumed that as the size of the corpus (AUMs) increases, the cost incurred on managing the fund comes down (as being shared by a number of investors and thus the expense ratios will get ironed out). This premise has been rendered faulty in the more recent scenario where increase in AUM has actually seen a sharp rise in the expense ratios. In fact, the expense ratios of income funds that stood at 1.4% at the end of September 2008 has already gone past 1.58%.
No doubt, the road ahead for the mutual fund industry in India will be paved by the performance of the capital markets. But, before that, it remains to be seen how fund houses adapt themselves to changes in regulations, thereby shaping growth for the future.
For More IIPM Info, Visit below mentioned IIPM articles.
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Structural changes in business models are what AMCs now require if they want to sustain profitability.
When viewed from over 25,000 feet above the ground, the pace of change in Indian asset management industry appears almost miniscule. Year after year, it seems, industry turn out the same old products with growth showing no superlative jump. But that's only the bird's eye view. Drill deeper, and a very different picture emerges ' one in which a handful of mighty forces are spurring some dramatic changes, in an industry which is considered dormant till date.
In fact, apart from dramatic stock market performance, the year gone by was the year of reforms for mutual funds (MFs) in India. The key changes included elimination of entry and exit loads on purchase of schemes, the government allowing MFs to be traded on the bourses, et al. While some were in favour of investors, others pampered the industry. Whatever the situation may have been at the start of 2009, most investors definitely seemed relaxed and happy as the year ended. But the question stayed ' how will the year 2010 unfold for this beleaguered industry which is still adjusting to the regulatory changes? Will the promise of growth sustain in future? Well, it's already halfway through 2010, and the questions still remain unanswered.
Despite clocking growth rates that are amongst the highest in the world, Indian MF industry continues to be a very small market comprising just 0.32% share of the global assets under management (AUM) of over $20 trillion. Though the ratio of AUM to India's GDP has gradually increased from 6% in 2005 to 11% in 2009, it's still significantly lower than the ratio in developed countries, where AUM accounts for 20-70% of the GDP. Even a recently released report by PricewaterhouseCoopers (Indian Mutual Fund Industry ' Towards 2015) states that although the Indian mutual fund industry has weathered the financial crisis with AUMs posting a year-on-year growth of 47% in FY2009-10, retail participation has witnessed just a marginal increase to 26.6% from 21.3% posted during the previous corresponding period. In fact, the net sales of Equity and Balanced funds in FY2009-10 have been one of the lowest in recent years. Further, if statistics are something to go by, AUM as a percentage of GDP is still less than 5% in India as compared to 70% in the US, 61% in France and 37% in Brazil. This obviously means that low penetration level is a bottleneck in spurring industry growth. What's more? Since the crisis of October 2008, the domestic fund market has seen the steepest fall. As per a recent data from the Association of Mutual Funds in India (AMFI), the industry's average AUM plunged 15.89%. Further, the dependence on the corporate sector is still pretty pronounced at 51% when compared with economies like US and China where investments channelised through corporates, comprise only around 15% and 30% of the AUM, respectively. This under volatile market conditions sound a note of caution for the industry as high dependence on the corporate sector may result in the fund houses being prone to unexpected redemption pressures. Considering the untapped potential, competition too is all set to gain momentum in the MF industry, which is making dominant desire to progress, a reality, through wealth creation. Can they unravel this funds mystery? As such the regulator now seems to be paying heed to ensure that MF industry sustains its profitability. In fact, Securities and Exchange Board of India (SEBI) has recently issued directions for the mutual fund industry stating that no business houses without five-year financial services experience will be permitted to own stake in an AMC, with an aim to enable only the serious investors to get into the business. 'As MF business has a long gestation period, therefore the regulator is now looking for shareholders who can stay for long and are experienced in the industry,' spokesperson of Edelweiss AMC tells TSI.
With 22 AMCs, including Schroder Investment Management (Singapore) Ltd, Union Bank of India-KBC Asset Management, Global Investment House and Enam Asset Management, seeking regulatory approval to start mutual fund businesses, the fight to sustainability becomes all the more important for the existing players. Not to forget, AMCs are also grappling with other issues including direct tax code, documentation apart from no additional management fees on schemes launched on no loan basis. SEBI's recent instructions to scrap entry loads on all mutual fund schemes launched on or after August 1, 2009, too has increased problems for the fund houses. It now remains to be seen what new ways and means are evaluated by AMCs, channel partners and regulator to sort these issues.
Even the restriction of entry load on existing and new MFs, that marked a turning point in the functioning of the MF industry last year, is spelling out a huge impact on the commission structure of distributors, leading fund houses and distributors to restructure their business and operating models in order to arrive at a profitable solution. In fact, structural changes in business models of AMCs are now required to sustain profitability. Though partnering with banks may be a possible solution to improve distribution as well as profitability, but banks in India still lack the expertise to offer investment advise. As such the only option left with them is to explore open architecture platforms or aggregator models for conducting business.
Further, if AMCs want to establish a sustainable model, which yields profits in the long run, they need to deal with cost management with a firm hand. While restriction on entry loads has already spiraled the cost of sales and marketing, a large portion of the assets too is in debt, which actually tends to erode profits. Though it is assumed that as the size of the corpus (AUMs) increases, the cost incurred on managing the fund comes down (as being shared by a number of investors and thus the expense ratios will get ironed out). This premise has been rendered faulty in the more recent scenario where increase in AUM has actually seen a sharp rise in the expense ratios. In fact, the expense ratios of income funds that stood at 1.4% at the end of September 2008 has already gone past 1.58%.
No doubt, the road ahead for the mutual fund industry in India will be paved by the performance of the capital markets. But, before that, it remains to be seen how fund houses adapt themselves to changes in regulations, thereby shaping growth for the future.
For More IIPM Info, Visit below mentioned IIPM articles.
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Indian universities and higher education institutes seem to be caught in a time warp teaching things
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