Zerodha looks to enter Rs 27-trillion MF industry, applies for licence

Discount broker plans to build a business model around passive funds

The country’s largest broking house Zerodha is looking to enter the Rs 27-trillion mutual fund (MF) industry, with the firm putting in its application for MF license with the Securities and Exchange Board of India (Sebi).

“We want to create a platform that can offer differentiated products. We are most likely to be passive fund-focused asset manager. Within passives, we want to build a suite of innovative products, keeping in mind the interests of investors,” said Nithin Kamath,  founder and chief executive officer of Zerodha. “These products could even take the form of quant-based funds,” Kamath added.

Zerodha already runs an MF distribution platform Coin, which offers direct plans to users.

Kamath says that running Coin has helped his team understand investor behaviour and the kind of products that are suitable for investors.

Passive funds have been gaining investor traction in recent months, with actively-managed funds facing challenges in outperforming benchmarks.

In 2019, half of the actively-managed equity schemes had underperformed returns delivered by their benchmarks.

The overall assets managed by index funds have also seen a steady growth in current financial year. From Rs 5,286 crore of assets managed beginning of the financial year, the asset base has expanded by 50 per cent, close to Rs 8,000 crore in January 2020.

 

Further, market participants say that Sebi’s move to enable a regulatory sandbox can attract more fintech companies looking to build a differentiated product basket.

“While we need to see final details of how the sandbox framework will work, but we could tap it if it allows to fast-track the launch of new products,” Kamath said.

Zerodha applied for the MF license on February 5, 2020. Other players — whose applications are still under process — include Srei Infrastructure Finance and Frontline Capital Services.

More recently, Sebi gave in-principle approval for MF license to broking player Samco Securities and NJ India. The latter is country’s largest MF distributor in terms of commission received. With active clients of over 900,000, Zerodha is the largest broking house in the country.

The capital markets regulator has in the past underlined the need for encouraging competition in the 44-player MF industry.
Currently, MF industry is dominated by top-three fund managers — HDFC MF, ICICI MF and SBI MF —which account for 40 percentage of industry assets.

Meanwhile, industry experts had said that given the high levels of under-penetration, there is a huge scope for growth in the mutual fund industry.

India’s MF penetration is significantly lower to world average of 55 per cent. For India, the assets under management to GDP
stands at 11 per cent.

Industry body Association of Mutual Funds in India (Amfi) in its vision document says that the country’s MF industry has the potential to reach Rs 100 trillion of assets in next ten years. This would entail over three-fold jump from current industry size.
Further, industry participants also say that entering the mutual fund business can help a broking player diversify its business model to mitigate the cyclicality of broking income, which is linked to market sentiments.