A nimble size that gives greater flexibility, evolving customer preferences and increasing digital penetration to aid greater reach
For many years, the word that has gripped us in the mutual fund industry is “consolidation.” Increasingly, a large market share will shift towards a select five to ten players, making it difficult for younger entrants to make a mark in this space. This belief is not surprising in the mutual funds space, where a wide distribution network has power, massive marketing budgets have might, and longevity has value. Even as the new entrants join the business, many emerging AMCs (asset management companies) have been absorbed through M&As (mergers and acquisitions) by larger players, adding to this belief.
I do believe, however, that times have changed. This trend too will change. Increasing competition is not just healthy for the mutual fund industry, as the regulator has often mentioned, but is now inevitable.
The core of the mutual fund business involves managing money; the quality of products and the consistency of performance, given the mandate, are important too. Market regulator SEBI’s moves around mutual fund schemes’ re-categorisation have now created a level playing field for products across AMCs. The advantages derived from legacy approvals in schemes are no longer there and mandates are now much more sharply defined, especially in equity funds, resulting in a product universe that is much more “true-to-label.”
In this context, younger AMCs enjoy the advantage of having relatively smaller sized schemes. A mid-cap scheme with a corpus of Rs 1000 crores offers far more flexibility to the fund manager than an equivalent scheme of Rs 10,000 crores. Additionally, there is the advantage of a much better liquidity profile, which matters in the mid and small cap space. A smaller multi-cap fund, can truly be dynamic and shift between small, mid and large caps, depending on market conditions, compared to a Rs 20,000 crore multi-cap behemoth that is expected to generate alpha. Also, younger AMCs usually run fewer schemes, as they aren’t constrained by past baggage. Every additional product consumes bandwidth, and a smaller basket lets the fund manager focus on doing a good job in the few funds that really count.Evolving ecosystem
Strong Marketing and distribution networks have always given an edge to large AMCs. Building a brand and distribution network across India involves huge budgets and decades of investment. However, in a digitally savvy world, where the social media has become more powerful and quality content finds traction very quickly, brands can easily establish themselves quickly, both in the eyes of the distribution community and the investor, especially if they find a new niches to dominate in. The Indian advisor and investor have also evolved and will continue to progress on what they want from a brand – quality products, consistent performance and excellent service. Globally, consumers have embraced the idea of high-quality boutiques in many spheres – food, hospitality, travel, services, and thus asset management will be no different. The new regulatory framework around expense ratios will also give younger AMCs commercial competitiveness with advisors, increasing their reach.Digital tools expand reachIt is no secret that asset management margins are shrinking, in India and across the globe. The cost structures of the past may not be sustainable in the new regime. Younger AMCs do not carry the legacy of a large headcount and branch presence and can effectively use digital tools and technology to attain a large part of the reach. The lack of legacy will also encourage innovation, which is indispensable in the asset management space. For instance, a younger AMC can choose to experiment with a different pricing structure in the large-cap space, while a large AMC cannot because of its large existing investor and distribution base. Innovation and quicker execution of ideas will increasingly become competitive advantages, which younger AMCs can capitalise on.
For many years, younger AMCs have waited in the wings, while building up very high-quality teams and track records, for the winds to shift in their favour. Today, the evolution of the investor, improvements in technology and social media, and significant regulatory developments, have made that shift happen. From a world of consolidation, we now move to more competition, a breakout moment for younger AMCs, who may just be able to say, “Hamara Time Aa Gaya (our time has come).”The writer is the Chief Executive Officer of Edelweiss Asset Management (EAML) and the views expressed above are her ownNot sure which mutual funds to buy? Download moneycontrol transact app to get personalised investment recommendations.