At the recently held AMFI Mutual Fund Summit in Mumbai, Deepak Parekh, Chairman, HDFC gave his recipe to achieve AUM of Rs.50 lakh crore in five years.
Starting his address by highlighting the growth of mutual fund industry, he said, “Today AMFI is 23 year old. As an institution, we must give it credit. Fund industry is 55 years old although the private sector is 25 years old. AUM of Rs.12 odd lakhs from March 31, 2016 to 22.9 lakh crore on June 30 is a huge jump of 86% in little over two years, but interestingly the growth has been driven by significantly higher retail participation. Also, larger part of this growth has been in equity mutual funds. Undisputedly FY2017 onwards will always be remembered as the most defining period in the history of mutual fund industry.”
However, to sustain this growth rate, Parekh has shared five key trends that could define the future of the industry.
Doubling of AUM in next 5 years: The average AUM of the industry stands at Rs.24 lakh crore and most asset managers forecast that AUM will get double in the next 5 years i.e. Rs.50 lakh crore.
Growing middle class, larger working force, population and better job opportunities will help increase the pool of investments in mutual funds. Recently, there has been a shift in the saving habit from gold and real estate and from physical assets to financial assets. This trend is unlikely to reverse. More importantly, compared to global standards in India, mutual fund AUM as a percentage of GDP is low at 11 percent, while the global average is 62 percent. So, there is a huge potential to be tapped.
AMCs will have to re-strategize their cost structure: The challenge is to get more business with lower cost. With the growing participation of retail investors, the regulator is right in prodding AMCs to rationalise cost structure. We all know that AUM growth has happened through wider reach and distribution. SEBI is already focussing on B30 cities to ensure increased flow from smaller towns and smaller cities. With a rapid rise of urbanisation, one should not be surprised if mutual funds would be looking at B50 cities very soon. What is critical going forward is how commission structure has evolved. While total expense ratios are capped, there are some concerns on how distributors are being incentivised.
Digital disruption in asset management: Globally, investors are increasingly favouring environment of low cost investment solutions and the digital platform helps to reduce costs. While younger and saviour investors will be more attuned to direct online investing, this may not be the case with many of India’s potential first time investors. So, AMCs will have to simultaneously take their digital strategies while increasing the physical presence also. AMCs will have to give careful attention to growing cyber security risk and understand they too are large depositories of customer data amidst all this concern on protecting customer data.
Investor education and emphasis on long term: People have received AMFI’s campaign mutual fund sahi hai very well. Yet the onus of investor education and investor awareness lies with AMCs and not AMFI. So far, equity has been the flavour of season. The only concern is tides have changed and emerging markets have come under pressure. For the aam aadmi who just sees headline of stock indices saying it is scaling all the time high, the investor is unable to comprehend why his or her equity fund has underperformed. You will have to sensitise the customer that recent scaling up in indices has been because of handful of stocks. This is why it is important for investor to understand different time horizons. Financial product literacy is to keep product simple and easy to understand.
Investors should be able to judge fund manager’s performance by an entire market cycle and not just over one year. It is critical that retail investors understand unless they are ready to commit their capital for longer period of time they should not be investing in equity. It is for AMFI, distributors to educate investors and re-educate investors on what long term investment entails.
Nurturing talent for the future: This is the most critical emerging trend. AMCs will need different skill sets in the future, yet talent will continue to be in acute shortage. Fund managers today have so many other options. Some shift to AIFs and some move in to PMS. There will be a need to focus on human resources on talent management, talent retention and reskilling to keep pace with the customer need that are changing with the reward structures. It will have to change where greater emphasis will be given to steady performances rather than a sporadic performance. One has seen various instances where the AMCs preaches the virtues of long term investing but they do not display the same patience with the results of their CIOs. AMCs risk falling behind the curve if they do not begin to strongly focus on diversity. Women tend to be better savers than men. A more inclusive and participative style of asset management in India will benefit all lin the future. Remember that patience is the key virtue in investing.
