Smaller asset management companies (AMCs) might cash out in the future, particularly the non-profitable AMCs that have been running Indian operations for long. Last week, Shinsei asset management sold its assets to Daiwa securities for an unknown sum. In the past, DBS Chola and Lotus were among the smaller-sized mutual funds to exit the AMC business.

The asset management business is actually a less capital-guzzling business (unlike insurance) and perhaps that?s the reason most new players initially try a hand at the mutual fund business before getting into other financial services. Today, it is possible to kick-start a mutual fund business with a capital as low as Rs 10-20 crore. But then the business viability depends on whether the fund house is able to scale up, within a reasonable time frame. Today, around Rs 4,500 crore is the bare minimal asset size required to break even in AMC operations. And among 38 AMCs in the country, 16 have assets less than the above figure. In fact, eight of the fund houses have assets worth less than Rs 1,000 crore. Shinsei had assets worth Rs 367 crore. Sahara (Rs 635 crore), ING (Rs 1,547 crore) and Taurus (Rs 2,307 crore) are among the smaller AMCs that have been in the business for long.

In fact, it is not just the overall asset size, but also its composition (equity-debt mix) that matters. Why is that so? AMCs get to charge fees as high as 1.25% of equity assets as compared to 0.20-0.40% for debt-based assets. A healthy equity component is 30%, feel the fund experts. But Shinsei, for instance, had only Rs 18 crore as equity assets, which is roughly 5% of its total assets. While equities make up 41% of ING?s assets, Taurus and Sahara have only 14% and 12%, respectively. In the financial year 2010, Escorts (Rs 25 crore), Baroda Pioneer (Rs 56 crore) and Sahara (Rs 64 crore) were among those companies with less than Rs 100 crore of average equity assets for the year. This is despite a huge run in stock prices, which on its own should have boosted assets. Clearly, the Gini coefficient in the AMC business is going to remain higher. While large AMCs will record bumper profits in FY?10, smaller AMCs will continue to bleed and struggle to stay afloat.

muthukumar.k@expressindia.com