Smallest MFs fared worst in asset battle even as industry grew rapidly

Share of bottom 10 mutual funds has fallen to 20 bps as a proportion of assets in March 2022 from 62 bps in March 2016

The share of the bottom rung of mutual funds by assets have been the worst affected in terms of market share over the last few years, even as the industry has grown by leaps and bounds and the largest players cornered the bulk of the assets.

The share of the bottom ten players has fallen to 20 basis points as a proportion of assets in March 2022 compared to 62 basis points in March 2016. It has been falling steadily over the last few years, shows the analysis of data from industry body, the Association of Mutual Funds in India.  The share of the top ten players by contrast has continued to remain more or less steady, though the trend has broadly put them higher than they were in 2016. They manage around eight rupees out of every Rs 10 invested in Indian mutual funds (see chart 1).

Bandhan Bank has acquired the ninth largest asset manager in association with a consortium. IDFC Mutual Fund had average assets under management of Rs 1.2 trillion in the three months ending March 2022. This would give the bank a toehold in the asset management space, reportedly part of a larger expansion in financial services for the entity.

The bank is headquartered in Kolkata. It initially operated as a microfinance institution. It got a universal banking license in 2014. The entity serves underpenetrated regions in the eastern part of the country.

“The bank has marked its presence in states where penetration of formal financing is still the lowest. Moreover, most competitors are incremental secondary lenders in the under-penetrated eastern markets, with Bandhan enjoying a dominant market share,” noted a March 2020 Mumbai-based Motilal Oswal Financial Services report, initiating coverage on the stock authored by their research team including analyst Nitin Aggarwal.

An analysis of state-wide numbers shows that the region is also under-penetrated with respect to mutual funds as well.

The eastern region accounts for less a tenth of the total industry’s assets under management. The analysis considered Bihar, Jharkhand, Orissa, Sikkim and West Bengal; based on the ministry of home affairs' eastern zonal council composition.  The region accounted for 6.1 per cent of assets in March 2022. It was higher before the pandemic, at 7.7 per cent of total assets in December 2019 before the pandemic took hold (see chart 2).

While asset management industry concentration in India is not currently high, higher levels can affect investors going by a November 2000 paper from Rutgers University author Guo Ying Luo entitled, ‘Mutual Fund Fee-Setting, Market Structure and Mark-Ups’.

“The empirical evidence shows that the performance, age, size and cash ratio of the fund have statistically significant impacts on the mutual fund fees but, quantitatively, the majority of the fee is explained by mark-ups that funds add to the marginal cost owing to the market power possessed by the funds,” it said.

The United Kingdom’s financial services regulator noted that the top ten asset managers accounted for 55 per cent of assets under management in a November 2016 interim report entitled ‘Asset Management Market Study’.

“Effective competition implies that firms have sufficient incentives to identify and satisfy clients’ demands as efficiently as possible and constantly seek to win the business of clients who use rivals’ services. The benefits of achieving effective competition include lower prices for investors, better quality service and greater innovation,” it said.