Top fund houses dazzle, but it's a struggle for the rest.

India's top fund houses have posted impressive growth numbers for FY11, despite being hobbled by equity fund outflows and regulatory changes marked by a ban on charging entry fees to investors. But apart from the top eight fund houses, the remaining 33 asset management companies are struggling to stay afloat.

A marginal rise in their equity asset base, coupled with cost control measures and greater reliance on debt fund management, helped leading fund houses to generate profits, according to the chief executives of some of these firms.

The fund house league table is led by HDFC Mutual Fund , the asset management firm promoted by HDFC, which has reported a 16% rise in net profit at 242.18 crore. The profit before tax of Birla Sunlife Mutual Fund - part of the Aditya Birla group has gone up from 85 crore to 120 crore last fiscal. Reliance Mutual Fund , which is the largest in terms of assets managed, logged a profit before tax of 294 crore, up 10% from 2009-10.

Operating profits of ICICI Prudential MF fell 44% to 72 crore last fiscal while Kotak Mutual Fund's profits dipped 3% to 6.7 crore last year. SBI Mutual Fund reported a net profit of 79 crore last year while Religare Mutual Fund reported a loss of 50 crore last year vis-a-vis 3 crore worth of losses the previous year.

"There is some pressure on profitability with regard to the overall industry," said Ajay Srinivasan, chief executive - financial services, Aditya Birla Group.

"Fund houses will have to focus on keeping good product mix; the industry will have to grow its retail asset base and reign in costs to be profitable. In our case, we're trying to increase our equity asset base to increase profitability," Srinivasan said.

Several fund houses are trying to boost their equity assets by pushing systematic investment plans or SIPs aggressively. The difficult part, however, is that it takes time to generate profits. Thanks to higher asset management fees, it is equity AUMs that generate profits for asset management companies. The irony, however, is the fact that equity asset base, as a percentage of overall industry assets, has been shrinking over the past few years. Equity assets formed over 35% of overall assets in calendar 2007 vis-a-vis 31% in 2008, 24% in 2009 and 26% in 2010. Equity mutual funds logged an outflow of over 13,000 crore last fiscal.

"Equity fund outflows were the biggest challenge last year... Promoting long-term investments and expanding retail investor base are the only options to increase mutual fund profitability," said Saurabh Nanavati, CEO of Religare Mutual Fund.

Though investment management fee, as a percentage of AUM, has been in the range of 55 to 58 bps, the money is not reflected on the balance sheets of mutual fund houses as a result of "low-revenue earning" debt schemes targeted at institutional investors. While fund houses charge anywhere between 25% and 2.5% to manage equity assets, the fee component falls to as low as 10 bps (the maximum being 50 bps) in the case of debt and money market schemes. This, in a way, means higher the percentage of debt AUM, the decline in profits is higher.

Analysts reckon only a handful of asset management companies would have generated profits last year.

The gestation time for fund houses -- has gone up from 3.5 years to about six years, they said. "It is a struggle for smaller and newly-established fund houses," said Dhirendra Kumar, managing director of fund research firm Value Research, adding, "profitability of several fund houses has come down mainly because of upfront brokerage commissions paid to distributors." Fund houses pay 75-100 bps as upfront commission to distributors for selling their schemes.

Source: http://economictimes.indiatimes.com/markets/analysis/top-fund-houses-dazzle-but-its-a-struggle-for-the-rest/articleshow/8687933.cms