Why Fidelity wants to call it quits

Many foreign sponsors of Indian mutual funds have called it quits in recent years. Most exits are a result of a global financial firm deciding, after the credit crisis of 2008, to ‘re-focus' on its core business of insurance or banking, by hiving off smaller business interests or exiting regions not key to its operations.

Fidelity's case though is very different. The US-based Fidelity Investments' core business is mutual funds. Its decision to exit the Indian operations therefore seems to be a specific signal that it finds the country's mutual fund industry unattractive.

Lack of scale

Seen in this light, there could two key reasons why Fidelity has decided to call it quits in India. One, the lack of scale. Despite being in India since 2005, Fidelity's Indian arm ranks 15th in a listing of fund houses by asset size. In fact, its assets managed, of Rs 8,800 crore, make it not much bigger than late-comer Axis Mutual Fund (started in 2009).

In fact, the largest Indian asset manager HDFC Mutual Fund manages ten times (Rs 88,000 crore) the assets that Fidelity does. Even if Fidelity were to become the top ranking asset manager in India, it would possibly still suffer from lack of scale, as the size of the equity funds in India is ridiculously small from a global perspective.

Fidelity's largest global equity fund, the Contrafund, for instance manages $60 billion or Rs 3-lakh crore in assets. The entire equity fund industry in India oversees Rs 1.6-lakh crore. The lack of scale makes for poor profitability, evident from Fidelity AMC's losses of Rs.62 crore in 2010-11.

Reach limitations

Two, scaling up in size, which in fact means expanding the entire market for mutual funds, is quite difficult in the Indian context.

In developed markets such as the US, the mutual fund industry has managed to gain scale mainly through pension (401k plans) and other money being routed into funds, via institutions and companies.

In India, the majority of savings or pension money goes into state-managed provident funds or banks. Given that expenses in the fund industry are capped by SEBI (at no more than 2.5 per cent of assets managed), reaching out to millions of retail investors to build scale is not a viable proposition for fund houses.

Commission issue

The ban on upfront commissions on mutual funds in 2009 and falling commissions on other financial products too has put the agent force in disarray, making distribution reach all the more difficult to attain.

As one of the later entrants to the mutual fund scene in India and without a bank sponsor, Fidelity has probably not had as much success in sewing up distribution deals with banks to leverage their wider reach, as have a few other fund houses.

The above reasons in fact explain why fully foreign owned funds (without an Indian bank or financial firm as a joint venture partner) have become a rarity in the Indian mutual fund space.

>akrishnan@thehindu.co.in

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