SBI Mutual Fund?s recent acquisition of Daiwa Mutual Fund?s India-domiciled mutual fund schemes has once again put the spotlight on the mutual fund industry, which seems poised for yet more consolidation in the year ahead.

Mutual fund houses have been grappling with sustained equity folio closures and outflows in equity schemes. Since the entry load ban in August 2009, equity schemes have seen inflows in only 14 months, thus putting pressure on margins as equity assets generate higher revenues than debt assets.

?With 40-plus fund houses, the Indian MF industry is overcrowded at the moment. The big players are getting bigger and the smaller players are struggling,? says Dhruva Chatterji, senior investment consultant, Morningstar India. ?Besides, the dynamics of the industry have changed since the entry load ban in 2009 and business is not as lucrative as it was in 2006-07. Taking these factors into account, consolidation seems to be the way forward.?

The recent deal between Daiwa MF and SBI MF probably highlights the fact that it is becoming difficult for smaller players to scale up and make profits. According to sources, Daiwa was working on a high-cost structure and had mostly liquid assets, which did not generate much revenue. ?Since Daiwa had paid a high price for buying the MF business from Shinsei (Bank), running the MF business was increasingly becoming unviable,? said a senior official from a fund house.

Daiwa Securities Group had paid about R49 crore in early 2010 to buy the Indian asset management arm of Japan?s Shinsei Bank, valuing Shinsei Asset Management at about 11% of its assets under management of around R458 crore.

The buyout of Daiwa?s schemes is believed to be more relationship-driven rather than strategic, since SBI MF doesn?t stand to gain much from the deal, say experts. ?I don?t see any strategic intent behind this deal. The assets under management (of Daiwa MF) are minuscule and of the R260-odd crore of AUM, more than R230 crore is in liquid funds,? says Dhirendra Kumar, CEO, Value Research, a mutual fund tracker.

SBI is not acquiring a great brand, neither are they getting top-notch fund managers. I don’t understand how this deal will benefit them.?

Sources also point out that N Sethuram Iyer, CEO of Daiwa MF, could have played a major role in pushing the deal through with former employer SBI MF, where he was CIO. There is also the belief that SBI MF’s eight-year-long relationship with Daiwa Asset Management (Japan), wherein it managed the latter’s India-focused funds, may have prompted Daiwa to choose SBI MF over other fund houses in selling its schemes.

The bigger players are not finding the going easy either. This is probably why the industry saw as many as three strategic stake sales by Indian AMCs to foreign players in 2012. Indian AMCs are primarily looking for capital infusion from their foreign partners, say experts. They can also tap the latter’s expertise in selling products to NRIs in regions such as the Gulf and south-east Asia and even launch feeder funds through foreign partners.

Foreign players, on the other hand, are looking to partner Indian players with a wide distribution reach while at the same time tapping Indian players? internal sales force and existing client base. ?Foreign money managers will prefer to enter into JVs with Indian AMCs rather than setting shop on their own,? says Chatterji.

Last year, Invesco, Nippon Life and Schroders bought stakes in Religare AMC, Reliance AMC and Axis AMC, respectively, deals that were valued at around 6% of the Indian AMC’s AUM. Valuations have been high despite the challenging times faced by the industry. The deal that stood out, though, was L&T MF’s buyout of Fidelity MF, which had assets of over R8,000 crore. L&T MF, with a considerably lesser AUM of about R4,600 crore, paid about R550 crore to acquire Fidelity, primarily for its sizeable equity assets. Fidelity MF, however, was forced to sell out despite having sizeable equity assets and schemes that were seen to be performing well.