MF industry shows exuberance, but financials lag macroeconomic tailwinds

The mutual fund industry is experiencing an exuberant phase, with assets under management (AUM) surging to ₹65.7 trillion by March 2025 from ₹12.3 trillion in April 2014. This decade of strong growth has pushed AUMs to 31 per cent of bank deposits, bringing the industry closer to the financial sector’s high table. Yet, the asset management industry is a classic case where strong macroeconomic tailwinds have not necessarily translated into robust financials.

 

Why is the industry’s glass appearing half full? First, companies find it hard — but not impossible, to make money. An educated guess optimistically puts the industry profits at ₹25,000 crore, with the 10 largest players taking in 60 per cent of this pool. 

 

The reasons are well documented. First, asset management companies (AMCs) come under strict regulatory oversight from the Securities and Exchange Board of India (Sebi), which enforces transparency and stringent compliance norms. The regulator also caps management fees through the total expense ratio, which follows a sliding scale and has seen periodic downward revisions over the years, with deleterious consequences for the industry.

 

While these measures protect investors, they also increase operational costs and limit the ability of AMCs to charge higher fees, squeezing profit margins. For global entities, a higher minimum capitalisation requirement further locks up capital and lowers returns. Second, the industry suffers from limited product differentiation. Sebi’s categorisation framework — segregating funds into largecap, midcap, and smallcap segments — aimed to ensure “truth in labelling” so investors clearly understand what they’re buying. However, an unintended consequence has been a similarity in product offerings across AMCs. Larger funds, with greater economies of scale, are better positioned to manage costs and earn higher relative returns — further widening the gap between large and small players. 

 

Three, fund performance has been mixed. Over the past one, three, and five years, many Indian equity mutual funds have underperformed their benchmark indices. As of March 2025, only about 38.6 per cent of equity mutual funds managed to beat their respective benchmarks, with largecap funds showing the highest rate of outperformance at 71.9 per cent for that month, while smallcap funds significantly lagged at just 10 per cent. Over longer periods, such as three and five years, consistent outperformance has been limited to a select group of funds. For example, only around 31 equity mutual funds consistently outperformed their benchmarks across three-, five-, and seven-year periods, with just a handful of largecap, contra, focused, large & midcap, and midcap funds achieving this feat. This has accelerated the investor shift towards passive products like index funds and exchange-traded funds, further driving fee compression. The two reasons cited above have led to an excessive reliance on distributors, who have benefitted enormously from the industry’s growth.

 

What has kept fund flows strong so far is the high absolute returns delivered over the last few years — especially when compared to traditional banking products. What stands out in this landscape is the changing profile of market participants. As several global financial giants exit the Indian asset management space, a new generation of domestic fund managers is stepping in to fill the gap. While firms like JP Morgan, Goldman Sachs, Principal Group, Zurich Insurance, Deutsche, Allianz, and Fidelity have exited or sold their Indian businesses, homegrown names such as Old Bridge, Unifi Capital, WhiteOak, Marcellus, Alpha Alternatives, AngelOne, CapitalMind, Pantomath, ASK, and Zerodha are entering or expanding their presence — while some, like BlackRock, are re-entering in partnership with Jio.

 

Unlike their global counterparts — many of whom were deterred by India’s fee caps and regulatory constraints — these domestic players are taking a long-term view, seeing the glass as half full. They have focused on the burgeoning AUM: Over the past decade, the industry’s AUM has grown at a robust compound annual growth rate of around 20 per cent, largely driven by strong retail investor participation. Monthly SIP inflows have surged from around ₹8,000 crore in FY21 to over ₹24,000 crore in FY25. To put this in perspective, domestic retail investors contributed over $72 billion (₹6.1 trillion) in net inflows during this period, even as foreign institutional investors pulled out $14.6 billion. These savers need to be serviced.

 

The new domestic players in the asset management industry are willing to expand beyond metro cities, capturing growth from India’s smaller towns and cities (B30 locations), where financial penetration continues to deepen. Unencumbered by legacy systems and outdated technologies, these fund houses are leveraging fintech solutions to roll out investor-friendly products such as direct plans, index funds, and thematic schemes. Their digital-first approach is particularly effective in attracting younger, tech-savvy investors. Additionally, the relatively low returns offered by traditional banking products have further driven retail investors towards mutual funds. 

 

Much like the new India they operate in, this emerging generation of domestic fund managers is showing growing confidence in the Indian asset management industry — broadening their reach, embracing innovation, and playing a pivotal role in driving the long-awaited equitisation of the Indian financial sector.

 

The author is with Institutional Investor Advisory Services India Limited. The views are personal. X: @AmitTandon_In