Small mutual funds (MFs) that fail to provide capital for growth and innovate niche products risk being marginalized or taken over by larger players as fund anagement and marketing costs rise, industry experts said.
Four MF houses that figured at the bottom of the assets list in February 2006 saw their combined assets drop 24% in the following 12 months, data from the Association of Mutual Funds of India showed.
Their fall contrasted with a 71% rise in the assets of the top five funds and a 400% increase in another small fund house with specialized products.
“This trend will only worsen” for those who fail to bring new ideas to the market, Nikhil Johri, managing director of ABN Amro Asset Management, said. “The smaller companies will have no option, but to be merged with the bigger players,” he said.
Among the woes of smaller MF houses is an intense competition to attract and retail talented fund managers, who can cost as much as Rs 90 lakh a year.
Sahara Asset Management Co., one of the bottom five asset managers, lost its chief executive officer Rajiv Shastri to newly started Lotus India Asset Management last year.
High-profile fund managers could raise a small firm’s salary costs by 50% or more, often difficult to sustain.
Some have solved the problem by offering managers a stake in the company. “Otherwise it is very difficult for smaller fund houses to afford salaries, which large fund houses can pay,” Rajan Mehta, executive director and stakeholder at Benchmark Asset Management Co., said.
Also, small funds faced distributors who demand hefty fees, but whose role was often crucial for a fund’s success, experts said.
The sellers, they added, may charge 3.5-5.5% of assets mopped in a close-ended fund and 0.5-0.75% for an open-ended one.
To consider a fund product for recommendation, distributors often insisted on a minimum corpus of Rs1 crore, which schemes from smaller fund houses didn’t have, Johri said. “That eliminates them from their radar” and limits their reach.
However, a fund house that started less than a year ago and remains the country’s smallest for now said it had already achieved breakeven in its equity fund.
“Low cost, innovation and performance is the key of survival and the assets will follow,” said Devendra Negi, chief executive officer of Quantum Asset Management Co. Pvt Ltd, whose assets stand at Rs54 crore.
He said small fund houses may also choose to partner with asset management firms to gain synergies as “inorganic growth is a viable option”.
Quantum reins in its costs by bypassing the distributor channel and directly selling its schemes. It also cuts on advertising spend.
One fund house that rose from the bottom of the assets list last year isBenchmark AMC, which offers exchange-traded funds.
It has seen its assets jump to Rs4,935 crore and ranking improve to19 from 24.