Decline in equity flows may push up asset size needed by AMCs to break even

June saw equity inflows taper to Rs 240 crore, while July saw outflows of Rs 2,480 crore, the first time in four years

The recent decline seen in equity flows could push up the asset size required by asset management companies to break even. In June, equity inflows tapered to Rs 240 crore, while July saw outflows of Rs 2,480 crore, the first time in four years. 

The industry’s assets under management (AUM) have grown substantially spurred by retail participation via systematic investment plans (SIPs), especially after demonetisation. The bulk of this growth has been driven by equity funds, which charge higher fees than debt and hybrid schemes. The total expense ratio (TER) for such schemes can be 1.5-1.7 per cent of AUM as against 0.1-1 per cent for liquid or debt schemes.

“The breakeven AUM has inched up gradually in the past 5-7 years due to reduction in maximum TER, growing competition and emergence of large distributors, who are able to capture a greater share of the pie,” said Shishir Mankad, head of financial services at Praxis Global Alliance, a consulting firm. “Any impact on equity flows going forward will make it difficult for AMCs to make money, given the higher fees that such schemes command.”

According to a recent study by Praxis, breakeven AUM has risen to Rs 40,000-50,000 crore from Rs 10,000-15,000 crore, a few years ago. The regulator had mandated an all-trail model of paying commissions to distributors which, according to industry experts, has pushed up costs. 

 

 

Earlier, most AMCs paid a mix of upfront and trail commission. The recurring trail component — paid every year based on the duration the investor stays invested in a scheme — ranges from 70-100 basis points now as against 10-40 bps earlier. 

A sizeable chunk of mutual funds is now distributed by large banks and platforms, according to experts.

“The cost of acquisition went up dramatically after the shift to trail. On average, the operating cost for a fund house comes to 20-25 per cent of the TER, and AMCs that pay more than 60 per cent of TER in distribution fee will find it difficult to manage. Higher distribution cost can push up breakeven AUM to as high as Rs 100,000 crore [Rs 1 trillion],” said a senior fund official. “A profitable AMC should operate with a margin of at least 30-50 bps for non-liquid, non-ETF products.”

He believes the time to break even would depend not just on aggregate AUM but also revenue, operating cost, distribution, asset mix, and the growth strategy adopted by the AMC. Large AMCs contribute over 80 per cent of AUM, leading to low margins and discouraging new entrants. “Industry growth is concentrated with a few players, which could make it difficult for new entrants and smaller AMCs to survive, leading to consolidation going forward," said Dhaval Kapadia, director, investment advisory, Morningstar Investment Adviser (India).