When the possible sale of a fund house spooks a market

No. The Indian fund industry will not shut shop, but the news that Fidelity mutual fund may be on the block did burn the financial industry airwaves earlier this week. The possible sale of the almost seven-year-old fund house known for its retail focus, mature industry practices and its stable performance did cause a bit of a panic in the ₹ 6.8 trillion fund-management industry. Fidelity mutual fund has issued a statement saying that there is a global strategic review on, but that it remains committed to managing investors’ money. True or not, the possibility that Fidelity may be packing its bags has brought the issue of mutual fund viability to the front burner again. The quick finger is pointed at regulatory practices in India and the increasing non-viability of managing retail money due to a cost tightening by the regulator. Both these do not stand analysis.

Market leader in assets under management Reliance mutual fund, for example, grew its profits almost 30% to ₹ 236 crore and HDFC mutual fund grew profits 16% to ₹ 242 crore in the year ended March 2011. So, the possible sale of Fidelity’s India business is no indicator of the profitability of the industry, and remember, this is one business where even when investors lose money—either due to markets falling or due to sloppy fund management— since the fund house charges the full asset management fee.

I can think of two reasons why Fidelity is bleeding. One, the mutual fund could not grow the assets after a point and has stagnated at almost ₹ 9,000 crore of AUM. After seven years, the fund house lags behind newcomers like Religare that has more than ₹ 11,000 crore in AUM. One of the reasons for this, as seen by industry insiders, has been the inability of Fidelity to figure out the fixed-income side of the business. Another puts it at missed opportunities to grow the business. Two, Fidelity looks cost-heavy in comparison with other fund houses. Total expenditure at 1.56% of the AUM for Fidelity is three times that of Reliance mutual fund and four times that of HDFC mutual fund. To compare a ₹ 9,000 AUM fund house with fund houses that manage 10 times more money may not be totally fair, so let’s look at Axis mutual fund that manages almost ₹ 8,500 crore of assets. Costs at Fidelity are almost double of the 0.85% of AUM that Axis has. Employee costs at Fidelity make up almost half the total expenditure—these costs are 33% and 26% for Reliance and HDFC, respectively.

Instead of blaming the market or regulation, the possible sale of Fidelity may be due to the fund house not being able to break into the big league despite getting large pieces of the picture correct.

Monika Halan works in the area of financial literacy and financial intermediation policy and is a certified financial planner. She is editor, Mint Money, and Yale World Fellow 2011. She can be reached at expenseaccount@livemint.com

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