Year 2019 has changed the course of the MF industry in a big way. There were events like TER cut and series of credit events. Despite these changes, many fund houses recorded healthy profits this year (based on data available for select fund houses) and a few new players joined the industry.
As we get in to the New Year 2020, let us quickly recap the key events of 2019.
AUM growth
Over the last one year, the mutual fund industry has witnessed 12% growth in its AUM i.e. from Rs.24.03 lakh crore in November 2018 to Rs.27.04 lakh crore in November 2019.
The growth is largely due to sustained inflows in mutual funds through SIPs. Total SIP AUM rose to an all-time high of Rs 3.12 lakh crore, with the monthly SIP contribution reaching close to Rs.8300 crore and total number of SIP accounts growing to 2.93 crore.
TER cut – the defining event of 2019
While there were many regulatory changes this year, the key development that has changed the course of the Rs.27 lakh crore mutual fund industry was the TER cut.
Most AMCs have shared the burden of this TER cut with their distribution partners. In fact, an analysis of earnings growth of AMCs shows that banning of upfront commission and asking AMCs to pay commission from the scheme instead of AMC book have helped fund houses reduce their expenses incurred on distribution commission.
Series of credit events
2019 was the year when the MF industry witnessed several credit events. In most cases, the possibility of companies not paying their interest or principal on time is the risk that has troubled most debt funds. But what is different this time around is that lenders were caught unaware by top rated (AAA) papers like IL&FS ‘suddenly’ defaulting on their short-term and medium-term papers. This also raises the issue of how effective rating agencies are in anticipating trouble, given that AAA-rate papers slid to default in no time.
Equity fund performance
Most equity funds categories were in the red for most of 2019. However, the recent uptick in the equity market has helped equity fund categories regain some momentum.
Value Research data shows that barring small cap funds, all equity fund categories have delivered positive returns over the last one year. Small cap funds delivered negative returns of 1.10 this year. Among equity funds, sectoral funds, large cap funds and multicap funds have delivered double-digit returns in 2019.
Declining growth in addition of new advisors
AMFI data on status of registration of new ARN shows that while the industry has added 4489 new ARNs under individual category in April-September 2019 as against 10965 IFAs in the corresponding period last year, a massive decline of 60%.
In fact, the industry has been adding a little over 500 IFAs each month since January 2019. The industry saw an addition of at least 1800 new distributors in the corresponding months last year.
This is due to ban in upfront commission and shift to all trail model to compensate mutual fund distributors.
Vision of achieving Rs.100 lakh crore in five years
The mutual fund industry aims for a four-fold rise in its AUM to reach Rs.100 lakh crore from Rs.27 lakh crore in five years. The industry also aims to increase customer base to 10 crore unique investors from 2 crore unique investors in the next 10 years, says a vision document released by AMFI and BCG.
The report has recommended that the industry should increase the distribution force to at least 4 lakh and leverage outreach of existing distribution networks such as regional rural banks and post offices to achieve this target. The report has also recommended that the industry should ease on boarding process of new investors and offer simpler products to investors to increase its penetration.
Consolidation in AMC business
Rationalisation in TER seems to have opened door for AMCs to explore consolidation opportunity to reduce costs and increase profits in the Rs.27 lakh crore mutual fund industry.
Two mid-sized AMCs - Baroda MF and BNP Paribas MF are set to merge. The merged entity hopes for a stronger balance sheet to meet capital needs and have access to a larger network of distributors for future growth.
Entry of new players
Muthoot Finance announced its entry into mutual fund space by acquiring IDBI MF. IDBI MF is one of the profit-making AMCs in the industry with an AUM of approximately more than Rs.5,300 crore with 22 schemes.
In another example, former cofounder of Flipkart Sachin Bansal acquired Essel Finance Mutual Fund subject to SEBI approval. His company ‘BAC Acquisitions Private Limited’ has received the go ahead from the Competition Commission of India (CCI).
Other new players include NJ India and Samco Securities.
