Few who have been tracking the fate of the country?s largest mutual fund institution would have guessed what UTI Mutual Fund had lined up just days after its first birthday as a Sebi-compliant, NAV-driven fund house. By picking up the mutual fund schemes of IL&FS Mutual Fund, UTI MF has set the stage for the next round of consolidation in the industry.
To understand why a Rs 20,000 crore mutual fund, still undoubtedly the largest player in the business, needed to buy IL&FS?s mutual funds business, one would need to understand what the buy-out means for all concerned. If UTI Mutual is to retain that No. 1 slot in a hugely competitive industry, it needs to continue growing aggressively. At the stage where UTI MF is at, size is of particular relevance to its operations and I?ll come to that in just a bit. But first, the issue of growth.
Having decided to grow to remain market leader, UTI Mutual?s options will have be a combination of both, the organic and inorganic. And that?s exactly what chairman M Damodaran said to me after the acquisition. ?It?s not an either-or situation for us. Growth has to be through a mix of the organic and the inorganic. We are India?s biggest mutual fund. We see consolidation taking place, and we will be aiding the process of consolidation in the industry,? he told me.
Let us now understand why this consolidation will accelerate in the coming days. With the big fund houses becoming bigger, competition increasing by the day and the fees dropping dramatically, marginal players would find the going increasingly uneconomical, and hence would forcibly turn sellers and consolidate. And while this may be the driving force for the sellers, consolidation will mean a win-win situation for investors too.
How does size matter for investors? The investor will clearly gain as more funds consolidate to create larger institutions, since that will mean a greater diversification of risk, more schemes and more options within the same fund house. The quality of in-house research would be another aspect which the investor will consider as critical in the coming days, as the quality of such research becomes a major factor in investment decisions.
The other, and perhaps most crucial, factor for investors leading them to opt for larger size institutions will be the number of investors per scheme. This issue, which the Securities and Exchange Board of India too has rightly laid emphasis on, is vital to reduce volatility within schemes. In other words, the larger the schemes, the less will be the volatility as investors enter and exit the scheme.
Schemes with few investors typically will tend to be more affected by investors joining or leaving the scheme. A large fund house also will be less likely to put the bulk of its investments in certain stocks with the number of investments more broadbased. If funds invest heavily in only a few stocks, the investors will tend to find it more risky.
For UTI Mutual, the IL&FS schemes? acquisition was a perfect fit in the sense that it gave UTI MF access to a high net worth investor base. In the coming days, as UTI MF hunts for more acquisitions to grow, it will tend to look carefully at prospective acquisitions to get a better feel of the nature of their investors, the track record of the schemes and naturally, a certain size. And as India?s largest mutual fund chalks out its aggressive growth plan for the future, it will do so through a mix of distributors, agents and bank branches selling mutual fund products. The days when it would depend only on its agents are clearly over. In this dog-eat-dog competition to attract investors, every marketing channel will be vital. And so will be the acquisition of talent. UTI MF has shown its new-found aggression in this aspect too, with Ashutosh Bishnoi of OM Kotak slated to join up.
As the market opens up further, bigger global players come into the Indian market and more options by way of quality paper come up for the investor, mutual funds will increasingly realise that being big is the best way to be beautiful.