Fintech to wealthtech

Opening mutual funds for more players will broaden the market

The Securities and Exchange Board of India (Sebi) has made several important changes to the norms governing mutual funds, which should lead to more players entering this space. Previously, any entity wishing to open an asset management company (AMC) had to demonstrate five years of continuous profitability and maintain Rs 50 crore in net worth at the end of each financial year. Sebi has now proposed that firms which can continuously maintain Rs 100 crore of net worth should be allowed to start AMCs, with the higher net worth norm remaining until these entities register five years of continuous profits. 

This opens the door for fintechs, such as Paytm, PhonePe and MobiKwik, to set up AMCs and offer mutual fund schemes. It also opens the door for other tech startups, which could possibly meet the net worth criteria. It is worth noting the fund industry is already crowded with over 40 AMCs. Assets under management have risen from Rs 10 trillion in April 2014 to Rs 30 trillion at the end of November 2020. However, the top five players hold dominant market share, and many AMCs have exited as concentration occurred. There is still space to grow since a relatively low share of household savings are invested in financial products. The bulk of household financial savings are held in low-yield instruments such as cash and bank fixed deposits. As of end-November 2020, individuals held around Rs 15.6 trillion in fund assets, with about Rs 10.45 trillion of this parked in equity-oriented schemes and another Rs 3.7 trillion in debt funds. This is just 8-9 per cent of all household financial savings. There is also a geographical concentration of folios with over 60 per cent of investors drawn from the top 30 cities. The fund distribution model also increases costs since most investors find it hard to deal directly with AMCs and buy through distributors.

Encouraging individual investors to buy into mutual funds should, in the long term, lead to easier access to capital for entrepreneurs as well as better liquidity in debt markets. It would make sense for fintechs, which already have a connection with retail customers and expertise in fund raising, to muscle into the fund industry. The challenge to the top five and other incumbents will be healthy. Moreover, fintechs have far deeper penetration in small towns compared to the current AMCs. Hence, their entry could ensure a more even geographical spread and financial inclusion for the semi-rural.  

One drawback, however, is that a fintech may not necessarily have the expertise to make sound investment decisions. Most of the big fintech players have concentrated on payments so far, and this would be the first foray into “Wealthtech” for Indian fintech majors. Hence, the higher net worth norms make sense. If there are problems, the net worth corpus can be tapped to compensate investors. There is also room for mis-selling, or structuring confusing bundled products, as witnessed in the case of bundled insurance and investment products. Sebi will have to monitor new forays by fintech AMCs to ensure this does not happen. Despite possible risks, this is a good move. The fintechs could potentially service a new class of investors, due to semi-rural penetration. They could also enable direct one-click transactions on their apps, which would lower distribution costs and give them a potential advantage.