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42 INDIAN WEALTH MANAGEMENT - ISSUE 2, 2017
THOUGHT-LEADERSHIP
Why Indian fund houses must
rethink business models
Rising costs in India’s mutual funds sector means that asset management companies
need to be able to manage margins and boost profitability – if they expect to see
continued success, believe investment leaders in India.
Despite the boom in asset growth in
recent years within India’s mutual fund
industry, the rising costs and moderat-
ing margins mean that future profit-
ability for asset management companies
depends on them improving efficiencies
and driving product innovation.
This is made even more important given
the competitive nature of the industry,
with 40-plus fund houses operating in
the country.
These were among the views of senior
industry executives as well as top
product gatekeepers at a recent round-
table organised by Hubbis in Mumbai.
Despite the five-fold growth in assets
already over the past decade, to
INR17.6 trillion (USD270 billion) – and
the total number of folios in at the end
of March at 55.4 million – some prac-
titioners expect the investor base could
double over the next three years.
Plans industry-wide to step up investor
awareness campaigns will play their part
in this. However, the fight for greater
market share has seen many fund
houses increasingly handing over higher
commissions to distributors.
And as some investment leaders believe,
each asset management firm has a
choice about howmuch profit it wants
to retain.
MOUNTING CONCERNS
From the common 50:50 split in fees in
India in years gone by between the
distributor and asset management
company, the balance has shifted in
favour of the wealth managers.
This is creating a new dynamic among
product providers. While the larger fund
houses are more likely to be able to
operate on wafer-thin margins due to
their sheer scale, the fee tactics put
immense pressure on smaller players.
Overall, this is forcing many firms to
rethink their business models in order
to remain viable.
For example, investment leaders believe
that the industry remains (overly) reliant
on third-party distributors.
Nevertheless, it is also a fact that mutual
fund agents in India generally earn far
less than their counterparts selling in-
surance. According to a PwC report
entitled ‘Mutual Funds 2.0: Expanding
into NewHorizons’, the first-year com-
mission for insurance agents in India
can be as high as 35%, and around 7.5%
in the second and third years.
By contrast, mutual fund agents may
earn around 0% to 0.4% as a one-time
brokerage fee, and 0.5% to 0.75% as
trail commission.
Further, with compliance requirements
and salary expenses rising significantly