Sustainability of alpha, alternative investments, growth in B30 (beyond top 30) cities and regulation norms are some of the key trends that will shape the mutual fund industry going ahead, according to CII Mutual Fund Sector report released on Tuesday.
“To be successful in this new market environment, asset management companies (AMCs) need to re-evaluate their existing business models and incrementally build new capabilities to serve the evolving investor base across products and solutions, digital channels and new white spots across geographies," the report said.
The report is framed by McKinsey & Company’s interview of 25 CEOs and CIOs at 22 of Asia’s leading asset managers, probing their views on the market, its prospects, and management approaches.
The report said that mutual funds as a share of bank deposits jumped to around 21% from 10% in the last five years. Mutual Funds are expected to further penetrate the market as per capita income increases and MFs gain wider acceptance amongst investors. Stressing the need to expand mutual fund’s base, the report said that B30 cities may register much faster growth at around 25–30% and could potentially contribute about 25-30% of the overall asset under management (AUM) mix by 2023 compared to 19% in FY 2018.
“The B30 growth effect is expected to be further pronounced with recent regulatory changes capping the TER to AUM and changing the scope of additional total expense ratio (TER) from B15 to B30 cities. Asset managers would need to figure out cost-effective models to reach out to distributors and investors in the new potential growth geographies. The traditional framework of covering geographies through a brick and mortar model will not be appropriate for B30 cities given the cost implication," the report said.
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According to Nilesh Shah, Managing Director, Kotak Mahindra Asset Management Company Ltd while the industry is expected to sustain the current growth trajectory amid secular tailwinds of demographic changes, wealth creation and financial deepening, some challenges will demand a relook at business strategy. “The emergence of new digital channels, new geographies and changing investment orientation of customers cannot be discounted as the industry looks at the new phase of growth. Firms will need to make bold moves to accelerate capability building and deliver operational efficiencies,: he added.
Adoption of the Total Return Index (TRI) is expected to be key challenge for the industry going ahead. In February 2018, markets regulator Securities and Exchange Board of India (SEBI) had mandated that fund companies begin to benchmark their funds against TRI. A TRI takes into account not just the price returns of the stocks but also the dividends paid out on the stocks.
A comparison versus the TRI shows a transparent and more wholesome result when comparing the alpha being generated through active management.
The report said that the Indian market is not yet fully institutionalized and could take another 10 to 15 years while current MF AUM to gross domestic product (GDP) ratio needs to rise to 80% from current 12% which would provide a market landscape for fund managers to generate alpha over the next decade.