At a time when the growth trajectory of the mutual fund industry is at its best with assets under management (AUM) hitting new highs, it is natural for their promoters to want to unlock value.

Anil Ambani-promoted Reliance Nippon Life Asset Management Co. Ltd is first off the block. The third largest asset management company with AUM of Rs3.62 trillion as of September-end plans to raise Rs1,542 crore by offering 36.72 million shares to investors and dilute close to 10% equity in the process.

The big picture outlook for mutual funds is a factor in the company’s favour. The penetration of mutual funds among households is a measly 2.9% of financial savings and, therefore, the potential is there. Reliance Nippon Life AMC’s prospectus states that the industry is expected to grow at a compounded annual growth rate of 20% over the next four years of which the growth of equity AUM would be faster.

This growth has come along with regulatory clean-ups. Over the past eight years, market regulator Securities and Exchange Board of India and Association of Mutual Funds in India have abolished the entry load of mutual fund schemes, improved the incentive structure and directed fund houses to adopt investor friendly systems such as direct plans.

How does Reliance Nippon Life AMC fare?

For starters, it is an established entity with 22 years of track record. More than 45% of its investors buy into its funds directly while 33% are through branches of banks that the company has tie-ups with. Its AUM grew 39% while its revenue through fees rose 9% for fiscal year 2017 (FY17). The company has been able to maintain its expenses at around 0.5% of AUM.

Considering the fact that there is no peer comparison available, there is no domestic benchmark to compare its price. An asset management company’s business is to gather assets and the pace of its growth depends on how fast the value of financial assets grows in the economy.

By that logic, the valuation of around 4.25% (at the higher end of the initial public offering or IPO price band of Rs247-252 a share) for Reliance Nippon Life’s AUM for FY17 looks reasonable to analysts. But any asset management company’s valuations will remain sensitive to fluctuations in its AUM, and a downturn in market valuations is one main risk to watch for. A reversal in investor appetite for investing in mutual funds is another.

Also, a lot will depend on whether Reliance Nippon Life AMC continues to deliver. And here investors would do good to keep a mutual fund scheme’s disclaimer in mind: Past performance is no guarantee of future growth.

Reliance Group companies have sued HT Media Ltd, Mint’s publisher, and nine others in the Bombay high court over a 2 October 2014 front-page story that they have disputed. HT Media is contesting the case.

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