Thursday, October 23, 2008

Redemptions force MFs to cut costs

Mutual fund houses are on a cost-cutting drive as their profit margins are under pressure following a dip in the assets under their management (AUM). As redemption pressures, following the global credit crisis, is taking a toll on AUMs, fund houses are planning to reduce staff and put off expansion plans. Some fund houses have already terminated their tie-ups with direct sales agents, said sources. AP Kurian, chairman, Association of Mutual Funds in India (Amfi), said the dip in AUMs owes to the global financial crisis. 

Asset management companies, which manage mutual funds, are allowed by the regulator to charge management fees between 2% to 2.5%. And they can amortise up to 6% of the new fund offerings (NFOs) over a period of time. 

Any decline in AUM will thereby force fund houses to rationalise costs. They will hire fewer professionals and open less number of new branches as profits are likely to suffer this year, said market sources. 

The redemption pressure has increased in October due to the liquidity strain in the financial system. However, redemptions are expected to ease. “The Reserve Bank of India's decision to reduce the cash reserve ration and the repo rate will bring liquidity in the financial system and help ease the redemption pressure,” Kurian said. 

The number of new applications to offer new schemes also have come down significantly in the last two months as both equity and debt markets are not conducive for investment. Fund managers are waiting for the cloud of uncertainty in the US financial market to clear. 

The AUM in the mutual fund industry declined 4%, or Rs 21,802 crore, in the period from January to September this calendar year, according to Amfi. 

“Clearly, new recruitments are off. Yes, pay cuts are on the anvil , but not yet implemented as many of the fund houses have kept costs in control by outsourcing a lot of activities,” said a senior HR executive with a leading mutual fund. 

Hence, there has been a churn in service providers and that consequently many fund houses parted with their direct sale agents (DSAs). “In fact, channel rationalisation is the obvious step for existing mutual funds,” he added. 

But the clouds of uncertainty are certainly hovering over fund houses. Retrenching employees, however, is seen as the last option, after rationalising advertising spends and distribution channels.

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