High cost of operations is posing a major challenge to the mutual fund industry in the country, a report by leading management consulting firm, PricewaterhouseCoopers and industry body CII, said on Wednesday.

The report released at the `Mutual Fund Summit 2008? said ?one of the biggest challenges for existing and new players is the mounting costs of operations in India.? Lease rentals and staff costs contribute the bulk of operational costs of most asset management companies, the report said.

While on the one hand, spiraling real estate prices are denting operating margins quite severely, on the other, it is difficult for the industry to get talent to man its operations.

?Right from fund management to treasury, compliance and accounting, there are just not enough experienced resources around. To get the best talent is difficult but to retain them is even more daunting,? the report said.

Referring to various regulations governing the industry, the report pointed out there is cost involved in complying with regulations.

?Any non-compliance of a regulation stamps the investor?s mind with an element of doubt about the business house and causes reputational risks. As such, compliance is top on the agenda of every company. The cost of compliance further pushes up the cost of doing business,? the report said.

While pointing out various costs involved and how it is crippling the industry, the report also talks favourably about the earnings potential of the industry.

It said, ?the revenues as a percentage of Assets Under Management for asset management companies in India compare to and in some cases are even higher than other developed markets.?

Many asset managers also offer portfolio management services which result in additional fee income.

Besides, there is a possibility of pension money allowed to be invested in equities and managed by professional managers, which would give a further fillip to the industry.

The report said there is little doubt about the certainty of growth in sales. ?It is the journey from the top- line (sales) to the bottomline (profits) which is most difficult to traverse,? the report said.