MUMBAI: The asset management business in India is not as unprofitable as the mutual fund industry has sought to project, with fund houses nearly tripling their profits in fiscal 2010 - a year in which fund flows were impacted after distributors stopped selling some schemes.
Total earnings of the 41 fund houses in India rose 284% to a record high of Rs 935.6 crore in the fiscal year ended March 2010, according to data from the Securities & Exchange Board of India (SEBI). Indian fund houses managed to boost their earnings by focusing more on a good mix of equity and debt assets and limiting costs, in a period that was marked by major regulatory changes. The securities market regulator had, last year, eliminated some marketing practices, including a ban on entry load which it believed was inimical to investor interest. In some cases, the regulatory hurdle on commissions has turned out to be a boon, as it brought down costs.
In fiscal 2009, Indian asset management companies reported a profit of Rs 243.5 crore. The list of the most-profitable fund houses was led by Reliance Asset Management Company , followed by HDFC AMC, UTI AMC, ICICI Prudential AMC and Birla Sunlife AMC in that order.
"Profitability improvement is on asset mix change, fixed income volume and the focus on cost," says A Balasubramanian, CEO, Birla Sunlife Asset Management . "Increased volume on the fixed income side combined with every basis point improvement will increase the absolute profit."
The data prove that the profits of mutual funds have not been impacted by the regulator's ban on entry loads as claimed by some. SEBI, last August, banned such loads on the argument that they are quite high and erodes investor returns.
Moreover, it believes that the cost structure does not justify such loads as flows into some schemes that were doling out high commission to distributors have slowed, leading to a chorus that it is hurting the industry. Asset management firms need to have a right proportion of fixed income and equity assets and should not be over dependent on one segment for their profits if global data is any indication, says Harshendu Bindal, president, Franklin Templeton Investments (India) which manages Rs 40,000 crore.
"This reflects in our asset mix that is largely focused towards long-term assets on the equity and fixed income side," says Mr Bindal. "While trying to maintain competitive distribution fees, we also consider product profitability as a key element." But this does not mean that all mutual funds are earning profits. Nearly 85% of the industry profits are accounted for by the top-10 players, the SEBI data show. Though many fund houses are still bleeding, their sponsors, including some of the biggest names in the global fund management business, have not wound up operations since India is one of the fastest-growing markets.
India's 8.5% economic growth, which is the second-highest among major developing nations behind China, is expected to throw up many millionaires, according to a recent Capgemini-Bank of America Merrill Lynch report.
The past year's profitability may not continue if the assets don't increase at a fast clip. "There will be a loss of revenue," says Sundeep Sikka, CEO, Reliance Mutual Fund . "However, this will be compensated, only if the assets under management increase."
According to Mr Balasubramanian, from the perspective of a fund house , each basis point is important to maintain and improve profitability. "Increased volume on the fixed income side combined with every basis point improvement will increase the absolute profit," he says.
Harshendu Bindal, on the other hand, is of the view that the regulatory changes carried out by SEBI are in line with the global trend of increased efforts to enhance investor focus and, like in many markets, could lead to lower margins in India as well.
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