Last week, Ajay Tyagi, Chairman of the Securities and Exchange Board of India (SEBI), raised concerns over the concentration of assets among top mutual fund houses and said there was a need for more competition in the industry to bring down the cost for investors. Over the last four to five years, mutual funds have seen a significant jump in the pool of money they manage, on account of both a jump in incremental flows from domestic investors as well as a rise in equity markets. Top mutual fund houses (by assets under management) have emerged the biggest beneficiaries of this growth and have consolidated their market share. A look at these trends and the resultant concerns:
How has the industry grown?
Over the last 12 years, the mutual fund industry has grown over 6.5 times from an average asset under management (AUM) of Rs 3.53 lakh crore in March 2007 to Rs 23.05 lakh crore in March 2018. Mutual funds are collective investment schemes run by asset management companies registered with and regulated by SEBI. They collect funds from investors to be invested in specific schemes that aim to invest the fund in stocks of companies, government and private sector bonds, gold and exchange traded funds among others, based on the nature of the scheme. A significant jump in equity markets over the last five years, along with a relatively subdued performance of other asset classes such as debt, real estate and gold, saw a large number of domestic investors diverting their focus towards equity markets through mutual funds, leading to a significant jump in assets managed by mutual funds. Between May 2014 and July 2018, the net inflow into equity schemes was Rs 3.88 lakh crore; as a result, the equity AUM of the mutual fund industry rose from 1.89 lakh crore to Rs 6.84 lakh crore in this period.
What has this meant to fund houses?
The rise in the industry’s assets under management brought significant gains to the fund houses. Data sourced from the Association of Mutual Funds in India show that the top five fund houses in March 2007 accounted for 52% of the industry AUM, and the top five in March 2018 account for 57.1%. Also, the top 10 mutual funds in 2007 accounted for 75% of the industry AUM, and the top 10 in March 2018 has gone up to nearly 81%.
Large fund houses have gained a disproportionate share of the incremental business that came to the industry over the last five years. While this is something the regulator seems to be concerned about, industry experts say it is the natural form of growth and in any growing industry; companies best positioned to take advantage of the growth take the lead. So, even in the mutual fund industry, big fund houses, which had a stable management and good performance and invested in branch expansion and reach, benefited the most from this growth.
It is important to note that after the industry saw the number of players rise from 34 in March 2007 to 46 in March 2013, this came down to 42 by the end of March 2016. While a few foreign fund houses exited the Indian market, the industry also witnessed some consolidation as a result of which some fund houses were taken over by others.
Should this be a cause for concern?
While it is ideal to have a healthy industry with a large number of competitors, which would benefit of the consumer, the 80-20 rule seems to apply across industries where 20% of the individuals or companies account for 80% of the income. Those watching the mutual fund industry say the large fund houses have been able to consolidate their position on the back of investment on expansion across smaller cities over the last six years, and by delivering scheme performance. Industry insiders say this is the trend in developed markets too. In fact, in the $4 trillion global exchange traded fund industry, the top three players (Blackrock, Vanguard and State Street) account for nearly 70% of the market share.
Some say the regulator’s job is to prepare guidelines and regulate the industry; within this framework, if some fund houses are more successful in growing their business on the back of performance and reach, then it should not be a cause for concern. “These are the dynamics of a free market and it should not concern the regulator who has grown, if there is transparency, performance and good governance across companies within the industry,” said an industry insider.
What is the trend in other sectors?
If SEBI’s concern is taken as valid, the situation should be seen as more alarming in the insurance sector, where the LIC alone accounts for close to 70% of the premium collection. While there are 24 players in the life insurance business, the top four players — LIC, HDFC Standard Life, SBI Life and ICICI Prudential Life — account for more than 86% of the industry market share.
Private banks too are growing their market share in the banking business. According to recent report by Nomura, the large private banks have grown their market share in current accounts (CAs) by 5 percentage points between FY16 and FY18 and held nearly 41% of all such deposits at the end of the March 2018. It said private banks have also garnered nearly 65% of all new current account deposits between FY14 and FY18.
Even in the automobile sector, in the passenger vehicle market, just two companies — Maruti Suzuki India and Hyundai Motor India — account for over 67% of domestic sales as per the July 2018 sales figures. So, the mutual fund industry is not a case in isolation.