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India’s equity indices have defied the pandemic, making retail investors grab stocks with both hands. The major beneficiaries have been fund houses whose assets under management (AUM) have grown. But there is more here than meets the eye.

Total AUM of fund houses grew by 3.4% month-on-month in August, according to Amfi data. Within that, equity mutual funds reported a faster 5.4% increase in AUM. This includes equity-linked savings schemes that give tax benefits, and index funds. Since the coronavirus pandemic struck last year, fund houses have seen their equity AUM increase by more than 20% and total AUM has grown by 11%.

Fund houses make money through distribution of mutual fund schemes that enable individuals to make both large- and byte-sized investments in the capital markets. Ergo, AUM growth is critical for fund houses to increase profitability.

Going with the flow
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Going with the flow

In the wake of the pandemic, growth has not been a problem and profitability, thus, has more than met investors’ expectations. Moreover, net fund offers have grown sharply and fund managers have been able to attract more retail customers.

What has stood out is the systematic investment plan (SIP) flows. A growing share of SIP flows in overall inflows is a sign of stability for mutual fund houses. Analysts note that SIP flows are at a record high and are likely to continue to climb. This buttresses the retail participation in markets through fund houses.

“This has resulted in a strong possibility of earnings upgrades in FY22," wrote analysts at ICICI Securities Ltd in a note.

No wonder, shares of listed fund houses such as HDFC Asset Management Company Ltd, Nippon Life Asset Management Company Ltd and UTI Asset Management Company Ltd have shown big gains since the pandemic. Shares of Nippon are up 81% from 2020 lows and that of HDFC AMC have gained more than 50%. UTI AMC that listed in October last year is trading at 114% premium to its issue price. ICICI Securities analysts have upgraded the earnings estimates for these fund houses for FY22 and FY23.

But what also matters is the mix of schemes that get the most inflows and how fund houses are able to keep costs under check. An increase in the share of equity inflows augurs well for the yield of a fund house. To that extent, August may not be an entirely good month as redemptions in equity schemes also grew.

That said, the growth in equities AUM is encouraging for the sector. HDFC AMC’s erosion in market share in equities AUM has been a drag on its valuations.

Another element is costs. This will be clear when fund houses declare their September quarter results later on. HDFC AMC has the heft of distribution when it comes to costs but Nippon has been able to keep it under check as demonstrated in the June quarter.

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