Mumbai: International and domestic financial firms are queueing up to launch mutual funds in India, lured by attractive fees and rising valuations in Asia’s third-biggest economy, and to counter the impact of a sharp fall in broking fees.
At least six brokerages are awaiting regulatory approval to break into the 33-member Indian funds industry, assets of which are forecast to more than triple to $520 billion (Rs20.8 trillion) by 2015, according to the Boston Consulting Group.
Players are tapping into rising savings as the economy booms and where double-digit salary hikes are common in sectors such as real estate, information technology and financial services.
Waiting in the wings: UBS AG’s headquarters in Zurich, Switzerland. UBS and Japan’s Shinsei Bank are among companies planning to enter the mutual funds business in India.
For many local brokerages which already offer portfolio management to wealthy clients, and have nation-wide networks, diversifying into the funds business is a natural move.
“I see this move into asset management as a way to get hold of (a) stable source of earnings,” said Naveen Tahilyani, partner at McKinsey and Co.
The Indian fund industry, worth $141 billion, expanded more than 60% last year, attracting global players such as South Korea’s Mirae Asset, American International Group and JPMorgan Chase and Co.
Local brokers including Edelweiss Capital Ltd, Geojit Financial Services Ltd and India Infoline Ltd, as well as UBS AG and Japan’s Shinsei Bank are among those financial firms waiting in the wings to jump into the field.
Firms command higher margins in India’s nascent funds industry, in which investors ploughed 4.85% of their household savings in 2006-07, up from 0.4% two years ago, central bank data show.
“Industry operating profit, as a percentage of average asset under management, is 32 basis points (bps) in India compared with 12 bps in the UK and 18 bps in the United States,” McKinsey said in a report last month.
One basis point is one-hundredth of a percentage point.
Despite sliding stock markets, Indian equity funds collected a net Rs21,210 crore in January-February this year, nearly two-thirds of net monthly inflows mopped up in calendar year 2007 and more than three times the corresponding period the previous year, data from the trade body, Association of Mutual Funds in India, show.
This followed a five-year-old bull run in Indian equity markets, fuelled by record fund inflows and strong corporate earnings, though markets have taken a beating this year.
“The broking business has its ups and downs,” said Saurabh Nanavati, chief executive of Religare Aegon Asset Management, which plans to launch its first fund by September. “Asset management helps to smoothen the earnings curve.”
Religare Aegon is an equally owned joint venture between India’s Religare Enterprises Ltd and Dutch insurance company Aegon NV.
Indian stocks rose 47% in 2007, recording their sixth straight year of increase and strongest growth in four years on record fund inflows and strong corporate earnings. But, the main index of the Bombay Stock Exchange, the Sensex, gave back 23% of that gain in the first quarter this year as part of a global market rout.
Valuations of asset management companies are increasing. In March, UK-based Standard Chartered Plc sold its Indian asset management business to Infrastructure Development Finance Co. for $205 million. This valued the firm at about 6% of its assets, higher than the 4% struck by Swiss bank UBS last year in a deal with Standard Chartered that was later called off.
“The valuation game is, I think, playing out very strongly in India,” said Ashvin Arora, director of the OptiMix division of ING Investment Management.
But, he noted, barriers to entry were increasingly high. Boston Consulting Group estimates a company would need at least $2.5 billion under management to break even, twice as much as was needed two or three years ago.
Of India’s 33 fund firms, only 17 were managing assets in excess of $2.5 billion at the end of February, data from fund tracker Icra show.
South Korea’s biggest mutual fund firm, Mirae Asset, launched its first Indian fund on 11 February, the day the local fund unit of Morgan Stanley launched a fund after a gap of 14 years.
The rampant poaching and soaring pay in a sector where talent is scarce has, however, delayed the launch of new operations.
Distribution is seen as key to India’s fund industry, which is led by a unit of Reliance Capital Ltd, and ICICI Prudential Asset Management Co. Both firms have branches in more than 100 cities.
McKinsey estimates that the top eight Indian cities account for three-quarters of retail mutual fund assets, and local brokerages with a greater reach could bring in more investors.
“The retail segment will be the largest contributor to the growth of the asset management industry in India,” McKinsey said, adding it expected 35-42% compounded annual growth for the sector over the next five years.