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Funds as planners

Over the next 10-12 years the MF industry in India will mushroom to an assets under management level of $1 trillion. This will propel India to the global top five rankings.

Ajay BaggaGlobally, mutual funds (MFs) have been in existence since 1924. Today a high proportion—44%—of assets is in equities, 23% in money markets and 20% in bonds with the remainder in hybrid funds. The Americas account for 57% of these AUMs, with Europe a distant second with 33% and Asia-Pacific at 10%.

However, the last 10 years have seen a strong growth in Asia-Pacific fund assets led by Australia, Singapore, Hong Kong, South Korea, China and India. In India, the 43-year-old industry has leapfrogged in the past three years to a sizeable $110 billion of assets as of 31 July 2007. With 32 fund houses offering over 500 schemes to approximately 2.5 crore investors, it is a vibrant, sunrise industry.

Let’s take a look at what we can expect in the next few years:

Entry of international players: Over the next 10 years, all major international players are expected to enter the Indian market. In addition to the existing 32 players, there are nearly 20 other players in various stages of preparedness for an Indian launch. The industry will hence be marked with a proliferation of offers from a number of players.

Concentration of AUMs: As is the case globally, in India too, the top players will account for a sizeable chunk of the MF industry’s assets. At present the top five AMCs account for 50% of the AUMs, the top 10 AMCs hold 73% and the bottom 17 account for just 11%.

Scheme size: The biggest MF schemes today in India have a size of $4 billion-plus. Over the next 10 years, top-performing Indian schemes will reach the global levels of $20 billion in assets.

Product innovations: Apart from product innovations like capital guaranteed, capital protected and life stage products, new asset classes like real estate MFs, commoditylinked funds, multi-strategy funds as well as affinity-based products like Islamic funds and socially responsible or ethical funds will be introduced and will be significant growth drivers. Potential adjacent spaces will be filled up with managed and wrap accounts. Exchange traded funds (ETFs) and fund of funds will offer customers wider choice and access as well as customisation.

Increasing penetration: The share of mutual funds in the households savings is an abysmal 3%. The average mutual fund investor is Sec A, urban, male, 40 years old with investments in direct stocks and a house ownership. Per capita income has grown 2.6 times in the past 10 years. From the current levels of Rs 29,800, we expect the per capita income to grow at 15% a year in the next five years. This will release a huge investible surplus in the range of $250 billion a year, growing at over 15% a year. It will lead to households investing a larger portion of their savings into MFs. Some segments like software sector employees already have an 18% penetration. This will grow to around a 15% penetration for the entire urban population over the next 20 years, translating into an investor base of 10-crore plus.

Distribution optimisation: Distribution is concentrated, with the top 10 distributors servicing a 42% share of industry AUMs and the top 100 distributors service 80%. The larger share is with national distribution houses (50%), with banks accounting for 26% of AUMs and individual distributors making up the rest 24%. Online distribution, proliferation of ETFs and their distribution through the stock exchange distribution channels, and consolidation will mean that these ratios will remain intact.

But the number of MF distributors will increase from the present 18,000-odd to over 50,000 with different customer acquisition strategies. The largely untapped yet vast distribution network of public sector banks and the post office, as well as the emerging networks of FMCG companies like ITC and HUL in rural India will be key drivers of further MF penetration. Fee-based advice will be the dominant model, as against the present commission-based ones.

Widening presence: MF AUMs are largely concentrated in the top eight cities in India, with a 77% share. In contrast, these cities account for only 30% of savings deposits and 58% of credit offtake. Over the next 10 years, the MF penetration will move to the top 500 cities with owned branches. This will lead to wider dispersion of AUMs in line with other financial products across cities in India.

Open architecture and life cycle solutions: Fund houses will source asset management expertise from best in class providers, not limiting it to in-house fund managers only. Also the product focus will move to a financial planning that will offer life cycle-based financial solutions to key investor goals.

Pension reforms as an inflection point: Over the next 10 years, as pension reforms deepen, the industry AUMs and penetration will increase manifold as it happened in US, where it zoomed from $60 billion to over $10 trillion in 2007.

Global feeders, exchanges and customers: Mutual funds will benefit from three-way flows: domestic investors investing domestically, domestic investors investing abroad and offshore investors investing in domestic assets. This will see huge pools of savings from India move abroad but also a huge offshore saving pool coming into India. In addition, geographical exchanges will be replaced by a limited number of global, virtual, 24X7 exchanges that will offer trades in all asset classes on the same screens.

This aggregation will enable multi-strategy funds that dynamically allocate assets among various asset categories and currencies. Over the next 10-12 years we’ll see these trends fructifying, leading to the growth of the MF industry in India to an AUM level of $1 trillion. This will take India to the ranks of the top five MF AUM countries in the world.

Ajay Bagga, CEO, Lotus India AMC