The trend is clear. India’s Asset Management Companies (AMC) are poised to gain enormously as hordes of savers move money from low-yielding bank deposits to high-return stocks. Monthly inflows of Rs 35,000–Rs 40,000 crore, across asset classes, are now par for the course as are average inflows of Rs 25,000 crore into Systematic Investment Plans (SIPs). And while there are 500 million Indians who have linked their PAN with Aadhar numbers, only 50 million invest in mutual funds.
If the penetration of mutual fund units is low, the entry barriers are lower. The minimum capital required to float an AMC is only Rs 50 crore and is one reason why the queue for AMC licences is getting longer. Never mind that there are already 47 players in the game and that US giant Blackrock is stepping into the market.
The new entrants are convinced they will eke out their shares. Some are leveraging their brands, others their digital franchises. And some like Aashish Somaiyaa, CEO, WhiteOak Capital AMC believe they can play the changing mindsets. “Earlier people may not have been so familiar with the category so they would buy the brand. But now it is about performance. The market today is more meritocratic,” he says. White Oak has been able to mop up about Rs 15,000 crore of equity assets in a little over two years.
Indeed, technology today is important. While Ganesh Mohan, MD& CEO, Bajaj Finserv AMC may have inherited a good brand, he also plans to use top-class technology for both investors and distributors. “We will also offer differentiated products,” Mohan says.
Ankit Bihani and Param Subramanian at Nomura estimate the industry AUM (assets under management) can grow by a compound 18% over FY24-30. They expect the top ten players to hold on to their combined share of close to 78%.
The reality, as Somaiyaa points out, is that the top players have been losing share. For instance, in the active equity and hybrid schemes (excluding arbitrage schemes) the share of the top ten AMCs has come down from 80% to 70% in the ten years to September, 2024. For the top five players, the share has fallen to 50% from 56%. Again, the share of the top 10 in the total AUM has fallen to 76% from 87%. For the top five players, this has dropped to 55% from 61% in September 2014.
Also, some part of the AUM of the bigger players comes from wholesale investors like pension players. But the good news for newer players is that retail investments have grown at a much faster compound rate of 24% over FY14-FY24 than the industry AUM growth rate of 20%.
It is this fast-growing retail catchment—a possible 200 million new investors —- that players like Bajaj’s Mohan and Vishal Jain, CEO at Zerodha Fund House are targetting. The idea, Jain says is to cater for households across income levels, even lower-middle income families. His fund has started off with a few purely passive schemes that are both easy to explain and cost-effective. “We are launching simple debt products –ETFs or passive products—so that investors can create a portfolio for themselves,” he says, adding a basket of solutions with combinations of gold and equity is also on the cards. On the other hand, White Oak has set up a 33-member research team “to generate alpha”. Somaiyaa says passive schemes are not on his radar.
Bajaj’s Mohan observes that while intermediation is critical, good quality advice is equally critical. “We have seen that the gap between fund returns and folio returns can be 2.5-5% because investors traded in and out. There’s value in a good advisor,” he says.
The going has been good. Zerodha Fund House is working with a purely digital channel and has acquired 3.5 lakh investors and assets of around Rs 3,600 crore with the bulk of it in liquid schemes and about Rs 1,000 crore in equities. NJ Fund, part of the group which is a leading national distributor, has managed an AUM of close to Rs 7,000 crore across five schemes.
However, as Saurabh Joshi, Partner EY, says, the success of new entrants would depend on how quickly they scale, adding that building a distribution network in an open architecture isn’t easy. “While digital channels are gaining importance and are cost-effective, its adoption in tier-2, 3, and 4 cities may take time,” he says. Joshi feels a hybrid approach to both acquire and retain customers might work.
In the absence of scale, the costs —investments in technology, manpower and distributions fees—mount. The increasing competition, according to EY’s Joshi, may have further stretched the break-even period for traditional AMC models by a year or two. Typically an AMC should break even in 5-6 years but it could take a little longer now.
To be sure, investors today are more tech savvy and smart but building a sustainable business won’t be easy. Today, just about 50% of AMCs are profitable and many of them are backed by big brands. The profitability of the top 10 players, FY24, was in the range of 20-40 basis points of their AUMs. The newcomers are unfazed.
Zerodha Fund House’s Jain says he is hoping to accumulate an AUM of Rs 20,000–Rs 30,000 crore anytime between the third and fifth year while Somaiyaa reckons an AUM of anywhere between Rs 10,000 – Rs 30,000 crore can support a sustainable business. As they say, fortune favours the bold.