Morgan Stanley's exit from the Indian mutual fund industry has revived the debate on the existence of smaller, loss-making asset management companies. The global financial giant - the first foreign mutual fund in India, launched in 1994 - sold its local schemes with assets worth around Rs 3,290 crore to HDFC Mutual Fund for approximately Rs 170 crore, about five per cent of its assets under management (AUM). Its corpus is less than 0.5 per cent of the 44-member industry's total AUM of over Rs 8 lakh crore. HDFC's price was in line with earlier deals in the industry, as more than 40 per cent of Morgan Stanley's AUM was equity - usually retail money, considered "sticky".
The step raises a larger question: how long can many other funds with moderate assets and small marketing networks stay in business? They may not be as lucky as Morgan Stanley. Reportedly, many promoters of mutual funds outside the top 15 are entertaining prospective buyers. Perhaps six or seven mutual funds, both foreign and domestic, are actively looking for a buyer but are unable to find one. This is partly because most smaller mutual funds predominantly manage debt - institutional money, susceptible to sharp exits. This highlights the woes of the domestic mutual fund industry, where the share of the top 10 funds in the industry's total AUM has risen to almost 80 per cent, and 70 per cent of funds are still loss-making. Over the last four years, the strong players in the business have become stronger, while the weak got weaker. Industry officials say the ban on entry load - an upfront fee that funds charged investors to pay distributors - by the regulator in August 2009 was a turning point. Weak market conditions only hastened the slide. Without entry load, many mutual funds could not convince distributors to sell their products. That may have reduced mis-selling, but it meant large funds with deep pockets could market their schemes better. The mutual funds that have lost out in the race are the ones without strong products and a good investment team.
Promoters of most mutual fund houses are unwilling to invest more in their ventures owing to uncertainty over growth. US-headquartered Fidelity Mutual Fund's sell-off of its Indian mutual fund business to L&T in 2012 may have triggered a panic among promoters. Fidelity's India operations were reeling from losses, but its schemes were on the buy list of most distributors because of their superior performance. Promoters of loss-making mutual funds asked: if Fidelity could not survive, how will they? That has aggravated the situation for foreign funds that do not see India as part of their core business strategy, especially in challenging times such as these. Some local fund houses - especially those that started after 2007 - are not in a hurry to exit but have trimmed their operations to the minimum. Their logic is that the business can be revived once market conditions improve.
