MF profits to fall in FY11: FE study

After a sharp jump in profits for financial year 2009-10,the profits for 2010-11 are expected to see a fall for the mutual fund industry. This is despite the fact that average monthly equity assets of most of the fund houses have increased during the year,finds an FE study.

Written by Chirag Madia

Mumbai | May 10, 2011 08:46 PM IST

4 min read

After a sharp jump in profits for financial year 2009-10,the profits for 2010-11 are expected to see a fall for the mutual fund(MF) industry. This is despite the fact that average monthly equity assets of most of the fund houses have increased during the year,finds an FE study. In the year 2009-10,sharp revival in equity markets had aided growth in profits of top MFs,which earn a bulk of their profits from equity assets. But with the ban of entry loads since August 2009,there has been an increase in redemption of equity fund schemes.

Deepak Chatterjee,MD of SBI MF says,The profits of the few fund houses will take a hit as there has been consistent withdrawals from equity schemes in the last financial year. Apart from that,ban on entry loads also had some impact on the profits of few fund houses. He however added that SBI MF have registered a rise in profit in FY11 without disclosing actual figures. According to industry data,R13,400 crore worth of equity funds were redeemed on a net basis in FY11.

While MF results are yet to be declared for most the financial year 2010-11,PruICICI MF which has declared results showed a 44% fall in profits for the year 2010-11. The asset management business after regulatory changes has seen lower profits of R72 crore in FY11 vs R128 crore in FY10 on account of higher market expenses said the latest report by BankofAmerica Merrill Lynch. Its profit fell despite a 16% increase in its average equity assets for FY 11. After the ban on entry load,MFs have been paying distributors commissions from their own pockets,which in turn has hit profitability.

As per data provided by Value Research,a MF tracker,top MFs have seen a 18% rise in its equity assets in 2010-11; Reliance which tops the industry with most equity assets,saw a 9% jump in its average equity assets to R36,330 crore for FY 11. While HDFCs equity assets grew 41%,it was 15% for UTI and 18% for DSP BlackRock. Equity assets while comprising around 30% of total mutual fund assets are also an important driver of MF profitability since they contribute upto 80% of MF profits,according to industry estimates. This is largely because of higher fees,equity schemes get to charge as compared to debt assets.

Regulatory changes have affected the industry in the last couple of years. In 2009,mutual fund houses spent a lot of time trying to come to terms with the regulatory changes (mainly entry load ban). My suspicion is that in FY11 there is probably an erosion of profitability said Puneet Chaddha,CEO,Asset Management.

As per industry data,equity assets on a point-to-point basis have fallen about 2.5% during FY11,while the overall assets fell even more by 3.5%. The overall asset fall was lesser on a monthly average basis,which was down 1.8% to R7,11,154 crore for FY11 .Equity assets have fallen despite 11% appreciation in Sensex in FY12. In comparison,tighter liquidity conditions in the economy had last year led to heavy redemption from liquid schemes,which in turn had shrunk debt assets. Banks and corporates usually park their short term money into mutual fund liquid schemes. As of 31 March 2011,while equity assets were R1,69,754 crore,the overall MF assets stood at R5,92,250 crore.

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mutual fund industry