BS Number Wise: The increasing dominance of bank-owned mutual funds

Related entities acting as distributors account for a higher share of assets in such fund houses

Around Rs 66 out of every Rs 100 the mutual fund industry manages sits with a bank-owned fund.

The share increased 8.9 percentage points between March 2015 and March 2022, shows a Business Standard analysis of data from the Association of Mutual Funds in India (AMFI). Bank-owned mutual funds account for 66.5 per cent of the Rs 37.7 trillion managed by the industry, as seen in chart 1.

Banks often push their own mutual fund products to customers, according to industry sources. It is said that having a captive client base often determines a mutual fund’s success. Indeed, seven out of the top 10 mutual funds are backed by banks. The Securities and Exchange Board of India (Sebi) is reportedly looking into allegations of mis-selling by banks.

How have banks come to dominate the industry? One reason could be the money they get through associate distributors, which include those related to the asset manager in some way. Banks are associate distributors in the case of bank-owned mutual funds. There is a potential for conflict of interest when an associate distributor is involved, as they have an incentive to sell a group company product compared to one which might be more suitable to the customer’s needs. Mutual funds without bank parentage have 2.3 per cent of their assets coming from associate distributors, shows an analysis of the top 10 fund houses. For bank-owned mutual funds, the share of such assets is at 18.9 per cent (see chart 2).

A look at the data for the entire industry shows that associate distributors account for 7.2 per cent of assets. Those unrelated to a mutual fund, called non-associate distributors, account for 47.2 per cent of assets. Investors dealing directly with a mutual fund without an intermediary comprise 45.6 per cent of the assets.

The share of direct plans is rising. It accounted for 33.8 per cent of assets as of March 2015. It has since increased 11.8 percentage points as of March 2022 (see chart 3).

Non-associate distributors have seen an 11.4 percentage point decline in the same period. Associate distributor share only fell 0.4 per cent.

Debt mutual funds have seen quicker adoption of direct plans. Institutional investors dominate the segment. Direct plans accounted for 43.6 per cent of debt assets in March 2015, according to calculations based on AMFI data. This rose to 66.1 per cent in March 2022. Equity mutual funds are dominated by individual investors. The direct investment share in equity funds rose from 11.2 per cent to 24.4 per cent in the same period.

The share of individual investors investing in mutual funds is increasing. Their share went up from 46.2 per cent in March 2015 to 55.2 per cent in March 2022.

The increased share of individual investors and the adoption of direct plans may well decide if bank-owned mutual funds will continue their reign.